nep-ifn New Economics Papers
on International Finance
Issue of 2015‒06‒13
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Financial Flows and the International Monetary System By Passari, Evgenia; Rey, Hélène
  2. Large Capital Inflows, Sectoral Allocation, and Economic Performance By Gianluca Benigno; Nathan Converse; Luca Fornaro
  3. Assessing Asset Pricing Models Using Revealed Preference By Berk, Jonathan B.; van Binsbergen, Jules H.
  4. Who is Internationally Diversified? Evidence from 296 401(k) By Geert Bekaert; Kenton Hoyem; Wei-Yin Hu; Enrichetta Ravina
  5. A Model of the Reserve Asset By He, Zhiguo; Krishnamurthy, Arvind; Milbradt, Konstantin

  1. By: Passari, Evgenia; Rey, Hélène
    Abstract: We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross-border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
    Keywords: Monetary policy autonomy; Financial Flows; International Monetary System;
    JEL: E42 E52 G15
    Date: 2015–05
  2. By: Gianluca Benigno (London School of Economics (LSE); Centre for Macroeconomics (CFM)); Nathan Converse (International Finance Division, Federal Reserve Board); Luca Fornaro (Centre de Recerca en Economia Internacional (CREI) Barcelona Graduate School of Economics (Barcelona GSE))
    Abstract: This paper describes the stylized facts characterizing periods of exceptionally large capital inflows in a sample of 70 middle- and high-income countries over the last 35 years. We identify 155 episodes of large capital inflows and find that these events are typically accompanied by an economic boom and followed by a slump. Moreover, during episodes of large capital inflows capital and labor shift out of the manufacturing sector, especially if the inflows begin during a period of low international interest rates. However, accumulating reserves during the period in which capital inflows are unusually large appears to limit the extent of labor reallocation. Larger credit booms and capital inflows during the episodes we identify increase the probability of a sudden stop occurring during or immediately after the episode. In addition, the severity of the post-inflows recession is significantly related to the extent of labor reallocation during the boom, with a stronger shift of labor out of manufacturing during the inflows episode associated with a sharper contraction in the aftermath of the episode.
    Keywords: Capital Flows, Surges, Sectoral Allocation, Sudden Stops
    JEL: F31 F32 F41 O41
    Date: 2015–06
  3. By: Berk, Jonathan B. (Stanford University); van Binsbergen, Jules H. (University of PA)
    Abstract: We propose a new method of testing asset pricing models that relies on using quantities rather than simply prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the model that is closest to the model that investors use in making their capital allocation decisions. Using our method, we assess the performance of the most commonly used asset pricing models in the literature.
    Date: 2015–03
  4. By: Geert Bekaert; Kenton Hoyem; Wei-Yin Hu; Enrichetta Ravina
    Abstract: We examine the international equity allocations of 3.8 million individuals in 296 401(k) plans over the 2005-2011 period. We find enormous cross-individual variation, ranging from zero to over 75%, and strong cohort effects, with younger cohorts investing more internationally than older ones, and each cohort investing more internationally over time. Access to financial advice, lower fees and more international fund options are associated with higher international allocations, suggesting a role for plan design and policy. Education, financial literacy and the fraction of foreign-born population in the zip code also have positive effects on international diversification, consistent with familiarity and information stories.
    JEL: G11 G15
    Date: 2015–06
  5. By: He, Zhiguo (University of Chicago); Krishnamurthy, Arvind (Stanford University); Milbradt, Konstantin (Northwestern University)
    Abstract: A portion of the global wealth portfolio is directed towards a safe and liquid reserve asset, which recently has been the US Treasury bond. Our model links the determination of reserve asset status to relative fundamentals and relative debt sizes, by modeling two countries that issue sovereign bonds to satisfy investors' reserve asset demands. A sovereign's debt is more likely to be the reserve asset if its fundamentals are strong relative to other possible reserve assets, but not necessarily strong on an absolute basis. Debt size can enhance or detract from reserve asset status. If global demand for the reserve asset is high, a large-debt sovereign which offers a savings vehicle with better liquidity is more likely to be the reserve asset. If demand for the reserve asset is low, then large debt size is a negative as it carries more rollover risk, leading to a riskier vehicle for saving. When global demand is high, countries may make fiscal/debtstructuring decisions to enhance their reserve asset status. These actions have a tournament feature, and are self-defeating: countries may over-expand debt size to win the reserve asset tournament. Coordination can generate benefits. We use our model to study the benefits of "Eurobonds"--i.e. a coordinated common Europe-wide sovereign bond design. Eurobonds deliver welfare benefits only when they make up a sufficiently large fraction of countries' debts. Small steps towards Eurobonds may hurt countries and not deliver welfare benefits.
    Date: 2015–04

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