Non-performing Loans in Foreign Currency and the Real Exchange Rate: Evidence for Peru, 2003–2018

The aim of this paper is to assess the effect of unexpected changes in the real exchange on the dynamics of non-performing loans in foreign currency. We estimate the dynamic relationship between non-performing loans and real exchange rate using a vector autoregressive model. Exogenous real exchange rate shocks are identified using both recursive and a structural assumptions. The results indicate that an exogenous increase in the real exchange increases non-performing loans both by type of credit (business, households consumption and mortgages) and overall, reaching its maximum effect between 7 and 10 months after the occurrence of the shock. In addition, we find that the business's non-performing loans is the one that registers the greatest increase. (Audio: Department of Economic Publications)