1. Stefanie Walter IPES 2009 1/9 Stefanie Walter University of Heidelberg IPES Conference 2009 College Station TX The Distributional Effects of Exchange-Rate Policy Evidence from a Firm-Level Survey

2. Stefanie Walter IPES 2009 2/9 Motivation Effects of international financial integration: – Exchange rate and monetary policy become tightly linked. – Firms can accumulate foreign-currency debt and assets. How does this affect exchange-rate politics? – Extensively studied for exchange-rate regime choice. – Less well understood for exchange rate valuation.

3. Stefanie Walter IPES 2009 3/9 Determinants of Exchange-Rate and Monetary Policy Preferences Overall Policy Preferences Competitiveness + relative price considerations Exposure to foreign-currency denominated liabilities Vulnerability to Exchange Rate Changes (External Adjustment) Vulnerability to Interest Rate Changes (Internal Adjustment) Vulnerability to tight monetary policy

4. Stefanie Walter IPES 2009 4/9 Data World Bank‘s „World Business Environment Survey“ – 5467 firms in 49 countries Research Strategy – Combination of firm-level and country-level characteristics – Dependent Variables: Exchange rate as „obstacle to business“ (Ordinal, 1-4) Interest rate as „obstacle to business“(Ordinal, 1-4) Combined variable (neither an obstacle / only XR / only IR / both are obstacles) – Independet Variables: Concern about competitiveness: Export share (% of output) Exposure to foreign debt: % of a firm‘s financing from foreign banks Vulnerability to monetary tightening: Total Debt/Total Assets (log)

5. Stefanie Walter IPES 2009 5/9 A lot of variation exists: Source: World Bank Business Environment Survey

6. Stefanie Walter IPES 2009 6/9 Concern about the Exchange Rate I BaselineAppreciation/XR StabilityDepreciationInteracted Exports in %0.004*0.013***0.0030.009*** (0.00) % Foreign Financing0.011***-0.0010.012***0.008* (0.00)(0.01)(0.00) Exports*For.Financing-0.000***-0.000-0.000**-0.000*** (0.00) Avg. XR Change in past 3 yrs-2.326***35.870**-2.099***-2.629*** (0.61)(17.86)(0.66)(0.59) Debts/Assets (log)0.0070.023**0.0000.007 (0.01) Public Firm-0.391***-0.229-0.361**-0.377*** (0.13)(0.20)(0.15)(0.13) Foreign firm0.211**0.0860.229**0.205** (0.10)(0.17)(0.11)(0.10) Small firm-0.084-0.220-0.021-0.087 (0.12)(0.21)(0.14)(0.12) Medium-sized firm0.035-0.1760.0740.031 (0.09)(0.21)(0.10)(0.09) Nominal Interest Rate in past 3 yrs0.0060.1290.0010.006 (0.01)(0.12)(0.01) de facto XR regime-0.176**-0.240-0.144*-0.174** (higher values = more fix)(0.07)(0.19)(0.08)(0.07) Real DGP/Capita (log)-0.768***-0.483-0.967***-0.774*** (0.16)(0.37)(0.19)(0.16) Recent Crisis0.417**-1.422*0.402**0.415** (0.17)(0.79)(0.17) XR change* for. Financing-0.026 (0.03) XR change * % exports0.043** (0.02) N527166746045271 Countries4984149 Notes: Unstandardized coefficients, standard errors in parantheses (clustered on country) * p<.1 ** p<.05 *** p<.001

7. Stefanie Walter IPES 2009 7/9 Concern about the Exchange Rate II Export OrientationForeign Financing Depreciation XR Stability

8. Stefanie Walter IPES 2009 8/9 Concern about the Interest Rate I BaselineAppreciation/XR StabilityDepreciationInteracted Exports in %-0.000-0.002-0.000 (0.00) % Foreign Financing0.004-0.0040.0020.004 (0.00)(0.01)(0.00) Exports*For.Financing-0.0000.000-0.000 (0.00) Avg. XR Change in past 3 yrs0.52475.662***0.5970.486 (1.08)(17.83)(1.13)(1.02) Debts/Assets (log)0.023**0.024***0.0080.067*** (0.01) Public Firm-0.1530.226-0.082-0.141 (0.19)(0.37)(0.22)(0.19) Foreign firm-0.436***-0.632***-0.423***-0.436*** (0.07)(0.19)(0.07) Small firm0.0160.085-0.0110.044 (0.13)(0.34)(0.15)(0.13) Medium-sized firm0.178*-0.1050.189*0.178* (0.10)(0.30)(0.11)(0.09) Nominal Interest Rate in past 3 yrs0.024**0.350***0.018**0.022** (0.01)(0.12)(0.01) de facto XR regime-0.0691.255***-0.083-0.072 (higher values = more fix)(0.08)(0.21)(0.09)(0.08) Real DGP/Capita (log)-0.612***1.962***-0.854***-0.614*** (0.21)(0.32)(0.20) Recent Crisis0.1340.6820.1850.095 (0.21)(0.76)(0.19)(0.20) Leverage*interest rate-0.004*** (0.00) N545368347705453 Countries4984149 Notes: Unstandardized coefficients, standard errors in parantheses (clustered on country) * p<.1 ** p<.05 *** p<.001

9. Stefanie Walter IPES 2009 9/9 Concern about the Interest Rate II Depreciation XR Stability

10. Stefanie Walter IPES 2009 10/9 Combining XR and IR Concerns Example: Effect of Foreign Financing Stable Exchange Rate10% Depreciation

11. Stefanie Walter IPES 2009 11/9 Why do we care? Understanding the distributional conflicts involved helps us understand how policymakers handle economic shocks. When constituents are vulnerable to both exchange-rate and interest-rate adjustment, delay and subsequent crash become more likely.

12. Stefanie Walter IPES 2009 12/9 „Joint vulnerabilities“ are associated with higher risk of crisis

13. Stefanie Walter IPES 2009 13/9 Conclusion In a financially integrated world – exchange rate and monetary policy preferences are tightly linked. – international financial integration has created new vulnerabilities. – these vulnerabilities can create incentives to delay adjustment.