The risk-taking channel of currency appreciation: A structural VAR investigation of Asian emerging market economies

In this study, we analyze the impact of currency appreciation on sovereign spread and economic activities in Asian emerging market economies (EMEs) using a structural vector autoregression model. The key issue under scrutiny is the presence of a risk-taking financial channel and its strength against the conventional trade channel. The underlying structural shocks are identified by a mix of sign, size, and zero restrictions. Based on the various measures of country risk, we find empirical evidence that a currency appreciation is expansionary for Asian EMEs through the financial channel, compressing the sovereign spread and offsetting the trade channel. We provide the policy implications of these results.