We would like to thank Enrique Alberola, Joshua Aizenman, Erik Berglöf, Guillermo Calvo, Jin Han, Andrea Ichino, Jean Imbs, Maurizio Mazzocco, Joe Ostroy, Amine Ouazad and Romain Wacziarg as well as participants at the Economic Policy panel meeting for helpful comments, and the following people for sharing their data sets with us: Reza Baqir (IMF Vulnerability Exercise for Emerging Economies); Herman Kamil (foreign currency borrowing by sector in Latin America); Stephanie Prat (foreign currency foreign assets and liabilities for various emerging economies); and Christoph Rosenberg and Marcel Tirpak (direct borrowing in East Europe from abroad). The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy.
Currency mismatch, systemic risk and growth in emerging Europe
Article first published online: 8 OCT 2010
© CEPR, CES, MSH, 2010
Volume 25, Issue 64, pages 597–658, October 2010
How to Cite
Ranciere, R., Tornell, A. and Vamvakidis, A. (2010), Currency mismatch, systemic risk and growth in emerging Europe. Economic Policy, 25: 597–658. doi: 10.1111/j.1468-0327.2010.00251.x
The Managing Editor in charge of this paper was Tullio Jappelli.
- Issue published online: 8 OCT 2010
- Article first published online: 8 OCT 2010
Currency mismatch is a vehicle that exposes the economy to systemic risk, but it is also an engine of growth. We analyse this dual role at the macro and the micro levels. At the aggregate level, we construct a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers – that is, those with no foreign currency income. Using our measure, we find that across emerging European economies, increases in currency mismatch are associated with higher growth in tranquil times, but also with more severe crises. On net, after taking into account the crisis period, we find a positive link between currency mismatch and growth. These results are also confirmed for a broader sample of emerging economies. In our firm-level analysis, we find that in emerging Europe, currency mismatch relaxes borrowing constraints, reduces interest rates and enhances growth across sets of firms that arguably are the most credit constrained – that is, small firms in non-tradables sectors – but not across large firms. An advantage of our approach is that it considers both listed and non-listed firms, and so we are able to effectively capture the effects of currency mismatch across the entire economy, not just the financially privileged stock market listed firms.
— Romain Ranciere, Aaron Tornell and Athanasios Vamvakidis