The influence of foreign exchange market interventions on firms

• Applicant: Professor Dr. Lukas Menkhoff
• Subject Area: Economic Policy, Applied Economics
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 572088320

Foreign exchange interventions (FXI) are a frequently used instrument for the external stabilization of national economies. Their effect on the exchange rate is well documented both theoretically and empirically. However, there have been few studies on the effects on the real economy. In particular, the consequences of FXI for firms have hardly been investigated. Existing studies are very selective in terms of FXI (often very specific circumstances or not identified), firms considered (almost only large ones) or channels of impact (either trade or balance sheet channel). There is much room for more comprehensive systematic studies. This proposal aims to contribute to this by conducting three empirical studies, each with its own focus and specific data: Firstly, the effect of FXI on listed (i.e. large) firms in an emerging country (Colombia) will be analyzed. FXI are frequently used here, they are well documented and their impact can be easily identified in many cases. These firms are often export-oriented and indebted in foreign currency, so that FXI-induced changes in the exchange rate are relevant. At the same time, the data situation is comparatively good for analyzing not only the strength of the effect but also the possible channels of FXI (trade and balance sheet channel). Small and medium-sized companies are also of great importance for the economic impact of FXI. However, it is unclear which of these firms may be affected by FXI and in what form. Again, monthly data from the credit registry is available for Colombia, which is less detailed than information on listed companies, but at least allows an analysis of the most important transmission channels of FXI. Thirdly and finally, FXI effects on firms in an advanced economy are to be examined. Japan, with its relatively frequent FXI, is an obvious choice here. The identification of FXI can build on previous work and generates a monthly time series of latent FXI shocks. This is aggregated in order to be compatible with the annual data on firms. Panel regressions can then be used to examine how FXI-induced macroeconomic changes are reflected in the economic situation of firms. On the one hand, this is of interest for firms on average, but on the other hand also for firms with certain industry or other relevant firm characteristics in order to capture heterogeneous effects.

• DFG Programme: Research Grants