Mohd Zin, Mohd Taufiq
(2025)
Essays on exchange rates and optimal policy responses.
PhD thesis, University of Nottingham.
Abstract
This thesis is a compilation of three different but related papers within the areas of exchange rates and optimal policy responses.
The first paper entitled The Interplay Between Domestic Bank Lending, Foreign Interest Rates, and Exchange Rates examines the impact of exchange rate depreciation on bank loans using data from 16 emerging economies. Based on panel data analysis and the local projection method, I find that depreciation leads to a reduction in bank loans. I also find that the impact is state and shock-dependent. A greater reliance on foreign funding and depreciation caused by tighter financial conditions in the US leads to a much severe impact on bank loans. Then, I built a dynamic stochastic general equilibrium (DSGE) model with a banking system to explain the amplification mechanism of exchange rate fluctuations on bank loans. First, it occurs when the share of foreign funding by banks is significant, as it directly affects bank lending capacity. Second, in situations where banks face restrictions in obtaining external funding. Third, when banks’ profitability is more sensitive to the exchange rate movements. The finding also indicates that the foreign exchange intervention and the countercyclical capital-to-loan ratio can be considered to mitigate the impact, but they come at the expense of some trade-offs.
The second paper, LTV, External position, and Exchange rate studies the effectiveness of macroprudential policy, specifically the loan-to-value (LTV) ratio, for countries with different external positions. Using data from 62 countries and measuring volatility in house prices in terms of their absolute annual growth values, the paper documents three novel stylised facts. First, property prices are more volatile for countries with a looser LTV ratio, second, property prices are more stable among countries with net external assets, and third, exchange rates are more volatile for countries with net external liabilities. Motivated by these facts, I develop a DSGE model with a housing sector and a collateral constraint for borrowers. The model captures two situations, one with net external assets and the other with net external liabilities. The model shows that a looser LTV ratio will lead to much greater volatility in macroeconomic variables when hit by shocks, particularly for a country with net external liabilities. Unsurprisingly, a country with net external liabilities will suffer a larger welfare reduction by deviating from the optimal LTV ratio. In addition, when dealing with external shocks, the exchange rate is not an effective instrument to augment the LTV rule to stabilise macroeconomic variables.
The final paper, The Impact of Exchange Rate Movements, Volatility, and Intervention: Evidence from Malaysia attempts to uncover both the trade and the financial channel of the exchange rate. The effectiveness of exchange rate fluctuations in insulating the economy from shocks has been well debated, but remains inconclusive. This paper contributes to this debate by analysing the impact of exchange rate fluctuations on production and bank credit, using micro- and macro-level data from Malaysia. Analysing the data using the local projection method, I show that the effect of exchange rate depreciation on production is expansionary, and production is more responsive when the share of tradable sector is relatively large. In contrast, consistent with the financial channel of the exchange rate, using bank-level data, domestic bank credit reacts negatively to exchange rate depreciation. In addition, I find that bank credit responds differently depending on the volatility level and the initial shock that caused the movement of the exchange rate. Finally, I show that a targeted foreign exchange intervention in reducing the exchange rate volatility is more effective compared to a non-targeted one.
| Item Type: |
Thesis (University of Nottingham only)
(PhD)
|
| Supervisors: |
Rubio, Margarita
Mukherjee, Rahul |
| Keywords: |
Exchange rates, policy responses, domestic bank lending, foreign interest rates, loan-to-value, LTV, Malaysia |
| Subjects: |
H Social sciences > HG Finance
H Social sciences > HJ Public finance |
| Faculties/Schools: |
UK Campuses > Faculty of Social Sciences, Law and Education > School of Economics |
| Item ID: |
82293 |
| Depositing User: |
Bin Mohd Zin, Mohd
|
| Date Deposited: |
11 Dec 2025 04:40 |
| Last Modified: |
11 Dec 2025 04:40 |
| URI: |
https://eprints.nottingham.ac.uk/id/eprint/82293 |
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