International Reserve Management and Firm Investment in Emerging Market Economies
We examine the effects of active international reserve management (IRM) conducted by central banks of emerging market economies (EMEs) on firm investment in the presence of global financial shocks. Using firm-level data from 46 EMEs from 2000 to 2018, we document four findings. First, active IRM is found to affect firm investment positively. The effect strengthens when the size of adverse external financial shocks increases. Second, financially constrained firms, compared to unconstrained ones, are less responsive to active IRM. Third, we quantify the causal effect of IRM on firm investment and find that 30% of it is mediated through the country spread channel. Fourth, capital controls and exchange rate management complement the IRM.
We thank Eric Girardin, Yannick Kalantzis, Hisahiro Naito, Andreas Steiner, Martin Uribe, Wei Xiong, and seminar participants at Aix-Marseille School of Economics, Bank-Al-Maghrib, and the University of Tsukuba for very helpful comments. We thank Woo Jin Chio for sharing the data. Joshua Aizenman is grateful for the support provided by the Dockson Chair in Economics and International Relations, USC. Yin-Wong Cheung gratefully acknowledges the support provided by the Hung Hing Ying and Leung Hau Ling Charitable Foundation. Xingwang Qian thanks for the support provided by the Department of Economics and Finance at Buffalo State University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- Analysis of the behavior of 21,447 firms in 46 emerging economies finds active central bank management of international reserves...