Authors: Hosung Jung, Woo Joon Myung(BOK)

Abstract

This paper examines whether foreign currency deposits help to mitigate the negative impacts of external shocks coming from major advanced economies, such as the global financial crisis. Our empirical analysis focuses on 17 emerging market economies, with quarterly data covering the period from September 2005 to September 2013, using dynamic panel model.
The results show that the shock-absorption effects of foreign currency deposits depend upon countries’ foreign exchange soundness. Specifically, countries having strong foreign exchange soundness can utilize foreign currency deposits to alleviate the rises in sovereign credit swap spreads caused by external shocks. For countries with weak foreign exchange soundness, however, the impacts of external shocks on their sovereign credit swap spreads do not decrease with the holding of foreign currency deposits.
This is the first paper to analyse the effectiveness of foreign currency deposits in absorbing external shocks using country-level panel data. Its findings can provide useful implications for EME policy authorities in their utilizations of various policies to address external shocks.