Currency appreciation boosts bank lending, spurring investment and offsetting export decline.
Currency depreciations don't always boost the economy as expected. A study on Switzerland found that when the Swiss Franc increased in value unexpectedly, banks with foreign currency debts increased lending to businesses. This led to more investments by firms, offsetting the negative impact of the stronger currency on exports. This pattern was seen in historical data from 43 countries, suggesting that the bank lending channel plays a crucial role in how exchange rates affect the economy.