Essays on International Finance

This dissertation is a collection of three essays that explore the transmission channels through which the monetary and the exchange rate policy affect the economy. Chapter 1 proposes and investigates the transmission channels through which the ECB's corporate sector purchase program (CSPP) exerted influences on the economy using a data set on the bond issuance and the syndicated loan in European countries. I find the direct effect of the ECB's bond purchase by substantially reducing the issuance spread of the CSPP-eligible bond by 21%. The direct effect led to an increase in the amount of bond issuance by 25% and a reduction in the bank loan demand by the bond issuers by 36% after the CSPP announcement. Moreover, I find the spillover effect following the debt substitution by bond issuers. The banks in closer relationships with the CSPP-eligible bond issuers received more early loan repayment and lost more lending opportunities from the bond-issuer clients. In turn, the banks that have one-standard-deviation more exposure to the CSPP-eligible bond issuers are found to redirect additional loan supply towards the non-bond-issuer corporations by 3%. Chapter 2 stems from the debate on the optimal exchange rate regime for emerging market, which is far from conclusive. In the presence of nominal rigidity, the conventional wisdom for small open economies is that flexible exchange rate regime insulates countries from the adverse effects of external shocks. I develop a small open economy general equilibrium framework that features nominal price rigidity, external debt and the financial accelerator mechanism. The goal is to explore the interaction between exchange rate regimes and external shocks. The counterfactual exercises suggest that the relative strength between financial channel and trade channel plays a crucial role in determining the cost and the benefit of a specific exchange rate regime in an open country. Chapter 3 studies a novel transmission channel for exchange rate policy in emerging markets that acts through financial institutions. According to this “credit-supply channel,” banks in emerging markets fund themselves in U.S. dollars, lend in the local currency, and bear foreign exchange risk if hedging is imperfect. This currency mismatch exposes banks to exchange rate fluctuations and makes economies vulnerable to adverse global financial conditions. Using loan level data in Taiwan during 2012-15, I provide evidence that the effect of depreciation on credit supply is contractionary. Banks with higher net USD liabilities cut lending more and were less likely to renew loans to firms with which they had pre-existing relationships. In turn, firms with greater dependence on exposed banks hardly switched to alternative funding sources and disproportionately decreased investment and employment as compared to other firms that relied less on these banks. I find that the credit-supply effects of depreciation on investment and employment are both economically and statistically significant