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Mitigating Systemic Spillovers from Currency Hedging

Published online by Cambridge University Press:  26 March 2020

Kyuil Chung ,
Hail Park  and
Hyun Song Shin
Kyuil Chung
Affiliation:
Economic Research Institute, Bank of Korea
Hail Park
Affiliation:
Economic Research Institute, Bank of Korea
Hyun Song Shin*
Affiliation:
Princeton University
*
E-mail: hsshin@princeton.edu.
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Abstract

Korea has been a forerunner in incorporating macroprudential policies to mitigate the vulnerabilities from currency crises that can turn into a more generalised liquidity crisis. This paper examines longer-term design issues for a more resilient and stable financial system that could be expected to complement the existing macroprudential measures in achieving a more stable financial system. In particular, the paper examines the rationale and mechanics of a new public financial institution, provisionally called the Exchange Stabilisation and Guarantee Corporation (ESGC) whose main role is to buy dollar forward positions from Korean exporting companies who wish to hedge the currency exposure from long-term export orders. The ESGC is intended to mitigate the risks arising from the reliance on the role of the banking sector in providing currency hedging services to exporters. Rapid growth of short-term foreign currency denominated debt has been the result of banks receiving forward dollar sales by exporters, and then hedging the long dollar position by borrowing short in dollars. A public institution that can buy dollars forward, but which is designed so that there is no need to hedge by taking short dollar debt, can mitigate the rapid increase in short-term dollar debt in booms.

Keywords

Currency hedgingbanking stabilityexchange rate overshootingF31F33
Type
Research Articles
Information
National Institute Economic Review , Volume 221 , July 2012 , pp. R44 - R56
Copyright
Copyright © 2012 National Institute of Economic and Social Research

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Footnotes

The views expressed here are those of the authors and not necessarily the official views of the Bank of Korea. The authors are grateful to Philip Davis for comments on an earlier version of this paper.

References

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