International reserves and firm investment: Identification through bank credit reallocation

초록

A central bank's accumulation of foreign reserves can reallocate domestic credit and influence investments among firms. Exploiting institutional features in Korea and connecting firms with their lending banks from 2004 to 2019, we examine how reserve accumulation and sterilization affect credit allocation and firm investment. We track the issuance of sterilization bonds by the central bank to finance reserve purchases and identify heterogeneous exposure across banks. Banks more responsive to sterilization absorb larger quantities of these bonds and adjust their loans accordingly. We find that firms–particularly those with higher liabilities to such banks–reduce investment during periods of reserve accumulation. The impact of reserve-induced credit reallocation on firm investment is centered primarily on non-listed firms, non-exporters, and firms with low productivity.

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