Nonlinear effects of exchange rate variations on exchange rate-credit risk: empirical evidence for Peru

The aim is to assess the impact of exchange rate fluctuations on banks’ foreign exchange and credit risk using a threshold model, which considers two regimes: the first is a scenario of low exchange rate volatility, and the second is one of high volatility. This model makes it possible to analyze whether exchange rate volatility affects debtors’ ability to pay and to estimate the magnitude of depreciation beyond which debtors experience difficulties in meeting their financial obligations, which results in increases in delinquency on foreign-currency loans (a proxy variable for foreign exchange and credit risk). (Audio: Department of Economic Publications)