Seminar: Exchange rates, domestic credit and macroprudential policy

Central Bank of Iceland

A seminar about Exchange rates, domestic credit and macroprudential policy was held at the Central Bank of Iceland 7 October.

Speaker: Thorvardur Tjorvi Olafsson, Senior Financial Sector Expert at the IMF, PhD

Abstract: This paper examines the role of exchange rates as drivers of domestic credit developments and asks to what extent macroprudential policy may attenuate the effects of currency movements on domestic credit cycles. We investigate the link between real exchange rates and domestic credit in a sample of 62 economies over the period of 2000: Q1–2016: Q4. Dynamic panel regressions show that an appreciation of the local exchange rate is strongly associated with a subsequent expansion in domestic credit, while a prior tightening of macroprudential policies dampens this effect. We also examine a feedback effect where strong domestic credit pulls in additional cross-border funding, potentially further increasing systemic risk, and find that capital controls can play a complementarity role in alleviating this feedback effect.

The presentation is based on a working paper by Dr. Olafsson, Erlend Walter Nier and Yuan Gao Rollinson which will be published by the IMF.

Slides from the seminar can be accessed here.