International Reserve Management, Global Financial Shocks, and Firms’ 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 positively affects firm investment - the effect strengthens with the magnitude of adverse external financial shocks. Second, financially constrained firms, compared with unconstrained ones, are less responsive to active IRM. Third, our results suggest that the country credit spread is a plausible causal channel of the positive IRM effect on firm investment. Fourth, the policies of capital controls and exchange rate managements are complementary to the IRM – it is beneficial to form a macro policy mix including active IRM to safeguard firm investment against global financial shocks. Further, our results indicate the IRM effect on firm investment is both statistical and economical significance and is relevant to the aggregate economy.
Joshua Aizenman is grateful for the support provided by the Dockson Chair in Economics and International Relations, USC. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Yin-Wong Cheung gratefully acknowledges the support provided by the Hung Hing Ying and Leung Hau Ling Charitable Foundation. And, part of the article was written when I was with City University of Hong Kong.