Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/311303 
Year of Publication: 
2024
Series/Report no.: 
Ruhr Economic Papers No. 1132
Publisher: 
RWI - Leibniz-Institut für Wirtschaftsforschung, Essen
Abstract: 
We empirically test Gabaix and Maggiori (2015)'s prediction that currencies are repriced by the country's external capital dependence when financial constraints of FX intermediaries change. Using solvency indicators, we develop a novel intermediary constraints index capturing riskbearing capacity. We find that constraints are a priced risk factor in currency portfolios sorted by countries' net foreign assets. Portfolios of external debtors (creditors) have higher (lower) intermediary risk premia, but pay lower (higher) returns when constraints tighten. Tightening constraints are associated with a depreciation of countries with low net foreign assets, particularly emerging markets with high net debt and low FX reserves.
Subjects: 
Foreign exchange
financial intermediation
net foreign assets
JEL: 
E44
F31
F32
F37
G12
G15
Persistent Identifier of the first edition: 
ISBN: 
978-3-96973-314-1
Document Type: 
Working Paper

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