DP14928 The Rise in Foreign Currency Bonds: The Role of US Monetary Policy and Capital Controls

Author(s): Philippe Bacchetta, Rachel Cordonier, Ouarda Merrouche
Publication Date: June 2020
Keyword(s): capital controls, corporate bonds, currency risk, emerging markets, foreign currency
JEL(s): E44, G21, G30
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14928

An unintended consequence of loose US monetary policy is the increase in currency risk exposure abroad. Using firm-level data on corporate bond issuances in 17 emerging market economies (EME) between 2003 and 2015, we find that EME companies are more likely to issue bonds in foreign currency when US interest rates are low. This increase occurs across the board, including for firms more vulnerable to foreign exchange exposure, and is particularly strong for bonds issued in local markets. Interestingly, capital controls on bond inflows significantly decrease the likelihood of issuing in foreign currency and can even eliminate the adverse impact of low US interest rates. In contrast, macroprudential foreign exchange regulations tend to increase foreign currency issuances of non-financial corporates, although this effect can be significantly reduced using capital controls.