nep-ifn New Economics Papers
on International Finance
Issue of 2015‒11‒15
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The second wave of global liquidity: Why are firms acting like financial intermediaries? By Caballero, Julian; Panizza, Ugo; Powell, Andrew
  2. Currency Premia and Global Imbalances By Steven Riddiough; Lucio Sarno; Pasquale Della Corte
  3. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? By Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
  4. Multinational Banks By Stefania Garetto; Martin Goetz; Jose Fillat
  5. Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009 By Bacchetta, Philippe; Merrouche, Ouarda

  1. By: Caballero, Julian; Panizza, Ugo; Powell, Andrew
    Abstract: Recent work suggests that non-financial firms have acted like financial intermediaries particularly in emerging economies. We corroborate these findings but then ask why? Our results indicate evidence for carry-trade activities but focused in countries with higher levels of capital controls, particular controls on inflows. We find little evidence for such activities given other potential motives. We posit that this phenomenon is due more to the reaction to low global interest rates and strong capital inflows than to incomplete markets or the retreat of global banks due to impaired balance-sheets or tighter regulations.
    Keywords: bond issuance; capital controls; carry-trade; corporate finance; currency mismatches
    JEL: E51 F30 F33
    Date: 2015–11
  2. By: Steven Riddiough (University of Warwick); Lucio Sarno (City University London); Pasquale Della Corte (Imperial College London)
    Abstract: We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with recent exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in the cross sections of other major asset markets.
    Date: 2015
  3. By: Olivier Blanchard (Peterson Institute for International Economics); Gustavo Adler (International Monetary Fund); Irineu de Carvalho Filho (International Monetary Fund)
    Abstract: Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
    Keywords: foreign exchange intervention, exchange rate, capital flows, gross capital flows
    JEL: E42 E58 F31 F40
    Date: 2015–11
  4. By: Stefania Garetto (Boston University); Martin Goetz (Goethe University, Frankfurt am Main); Jose Fillat (Federal Reserve Bank of Boston)
    Abstract: This paper starts by establishing a set of stylized facts about global banks with operations in the United States. First, we show evidence of selection into foreign markets: the parent banks of global conglomerates tend to be larger than national banks. Second, selection by size is related to the mode of foreign operations: foreign subsidiaries of global banks are systematically larger than foreign branches, in terms of deposits, loans, and overall assets. Third, the mode of foreign operations affects the response of global banks to shocks and how those shocks are transmitted across countries. We develop a structural model of entry into global banking whose assumptions mimic the institutional details of the regulatory framework in the US. Heterogeneous, profit-maximizing banks decide whether and how to enter a foreign market. While shedding light on the relationship between market access, capital flows, regulation, and entry, the model rationalizes the observed stylized facts and can be used as a laboratory to perform counterfactual analysis.
    Date: 2015
  5. By: Bacchetta, Philippe; Merrouche, Ouarda
    Abstract: Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.
    Keywords: corporate debt; credit crunch; foreign banks; money market
    JEL: E44 G21 G30
    Date: 2015–11

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