nep-ifn New Economics Papers
on International Finance
Issue of 2015‒10‒10
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International reserves and gross capital flow dynamics By Enrique Alberola-Ila; Aitor Erce; José María Serena
  2. Jagged cliffs and stumbling blocks: interest rate pass-through fragmentation during the Euro area crisis By Holton, Sarah; Rodriguez d'Acri, Costanza
  3. Beggar-thy-neighbor? The international effects of ECB unconventional monetary policy measures By Bluwstein, Kristina; Canova, Fabio
  4. The cyclicality of leverage By Adrian, Tobias; Boyarchenko, Nina; Shin, Hyun Song

  1. By: Enrique Alberola-Ila; Aitor Erce; José María Serena
    Abstract: This paper explores the role of international reserves as a stabiliser of international capital flows, in particular during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behaviour of gross capital flows. We analyse an extensive cross-country quarterly database, comprising 63 countries for the period 1991-2010, using standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves act as a buffer during financial stress. A robust result of the analysis is that international reserves facilitate financial disinvestment overseas by residents - a fall in capital outflows. This partially offsets the drop in foreign capital inflows observed in such periods. For the whole sample, we also find that larger stocks of international reserves are linked to higher gross inflows and lower gross outflows. These results, which challenge current approaches to measuring reserve adequacy, call for refining such tools to better account for the role of resident investors.
    Keywords: Gross capital flows, international reserves, systemic crises, capital retrenchment
    Date: 2015–10
  2. By: Holton, Sarah; Rodriguez d'Acri, Costanza
    Abstract: The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. Using micro-level bank data across a number of euro area countries, we identify individual bank balance sheet characteristics that contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks' funding constraints and balance sheet structures. Results show incomplete pass-through of changes in money market rates targeted by the central bank to firms' lending rates, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. Individual bank characteristics have an effect on pass-through during the crisis, even after controlling for changes in macroeconomic conditions. The effect is greatest when looking at characteristics that capture bank funding difficulties, suggesting that a recovery in banks' funding capacities is an important element in reducing fragmentation in the transmission of monetary policy. JEL Classification: E52, E58, G01, G20, E43
    Keywords: financial crises, Interest rate pass-through, monetary policy transmission
    Date: 2015–09
  3. By: Bluwstein, Kristina; Canova, Fabio
    Abstract: The effects that European Central Bank unconventional monetary policy measures have on nine European countries not adopting the Euro are examined with a novel Bayesian mixed frequency Structural Vector Autoregressive technique. The technique accounts for the fact that macro, monetary and financial data have different frequencies. Unconventional monetary policy disturbances generate important domestic fluctuations. The wealth, the risk, and the portfolio rebalancing channels matter for international propagation; the credit channel does not. International spillovers are larger in countries with more advanced financial systems and a larger share of domestic banks. A comparison with conventional monetary policy disturbances and with announcement surprises is provided.
    Keywords: Bayesian Mixed Frequency SVAR; Financial Spillovers; International Transmission; Unconventional Monetary Policy
    JEL: C11 C32 E52 F42 G15
    Date: 2015–10
  4. By: Adrian, Tobias (Federal Reserve Bank of New York); Boyarchenko, Nina (Federal Reserve Bank of New York); Shin, Hyun Song (Bank for International Settlements)
    Abstract: This paper studies the question of the economic scale of financial institutions. We show that banks actively smooth book equity by adjusting payouts to achieve a desired trajectory of book equity. The countercyclical nature of net payouts of financial institutions leads to procyclical book leverage, while market leverage is nearly entirely reflective of movements in book-to-market ratios. There is an apparent structural break after the 2008 crisis, indicated by the banking sector’s subdued growth rate relative to pre-crisis levels. Market volatility dampens the intermediary leverage cycle. We draw conclusions for theories of financial intermediation and for capital regulation.
    Keywords: financial intermediation; market volatility; macro-finance
    JEL: E02 E32 G00 G28
    Date: 2015–10–01

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