nep-ifn New Economics Papers
on International Finance
Issue of 2016‒04‒16
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International Financial Flows in the New Normal: Key Patterns (and Why We Should Care) By Matthieu Bussière; Julia Schmidt; Natacha Valla
  2. Why bank capital matters for monetary policy By Leonardo Gambacorta; Hyun Song Shin
  3. A Market Based Solution for Fire Sales and Other Pecuniary Externalities By Weerachart T. Kilenthong; Robert M. Townsend

  1. By: Matthieu Bussière; Julia Schmidt; Natacha Valla
    Abstract: This policy brief documents recent trends in international financial flows, based on a newly assembled dataset covering 40 advanced and emerging countries. Specifically, we compare the period since 2012 with the pre-crisis period and highlight four key stylized facts. First, the “Great Retrenchment” that took place during the crisis has proved very persistent, and world financial flows are now down to half their pre-crisis levels. Second, this fall can predominantly be related to advanced economies, especially those in Western Europe, while emerging markets, except Eastern European countries, have been less severely affected until recently. Third, the global patterns of net flows have also recorded significant changes. Overall, net flows have fallen substantially relative to the years preceding the sudden stop, which is to some extent an expression of the changes registered in the current account. Fourth, not all types of flows have shown the same degree of resilience, resulting in a profound change in the composition of international financial flows: while banking flows, which used to account for the largest share of the total before 2008, have collapsed, FDI flows have been barely affected and now represent roughly 45% of global flows. Portfolio flows stand between these two extremes, and within them equity flows have proved more robust than debt flows, which should help to strengthen resilience and deliver genuine cross-border risk-sharing. Having highlighted these stylized facts, this policy brief turns to possible explanations for and likely implications of these changes, regarding international financial stability issues.
    Keywords: international financial flows;capital controls;macroprudential policy;financial stability;global imbalances
    JEL: F32 F36 F41
    Date: 2016–03
  2. By: Leonardo Gambacorta; Hyun Song Shin
    Abstract: One aim of post-crisis monetary policy has been to ease credit conditions for borrowers by unlocking bank lending. We find that bank equity is an important determinant of both the bank's funding cost and its lending growth. In a cross-country bank-level study, we find that a 1 percentage point increase in the equity-to-total assets ratio is associated with a 4 basis point reduction in debt financing and with a 0.6 percentage point increase in annual loan growth.
    Keywords: Bank capital, book equity, monetary transmission mechanisms, funding, bank lending
    Date: 2016–04
  3. By: Weerachart T. Kilenthong; Robert M. Townsend
    Abstract: We show how bundling, exclusivity and additional markets internalize fire sale and other pecuniary externalities. Ex ante competition can achieve a constrained efficient allocation. The solution can be put rather simply: create segregated market exchanges which specify prices in advance and price the right to trade in these markets so that participant types pay, or are compensated, consistent with the market exchange they choose and that type's excess demand contribution to the price in that exchange. We do not need to identify and quantify some policy intervention. With the appropriate ex ante design we can let markets solve the problem.
    JEL: D52 D53 D61 D62
    Date: 2016–03

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