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on International Finance |
| By: | Gustavo Adler; Rui Mano |
| Abstract: | The accumulation of large foreign asset positions by many central banks through sustained foreign exchange (FX) intervention has raised questions about its associated fiscal costs. This paper clarifies conceptual issues regarding how to measure these costs both from an ex-post and an ex-ante (relevant for decision making) perspective, and estimates both marginal and total costs for 73 countries over the period 2002-13. We find ex-ante marginal costs for the median emerging market economy (EME) in the inter-quartile range of 2-5.5 percent per year; while ex-ante total costs (of sustaining FX positions) in the range of 0.2-0.7 percent of GDP per year for light interveners and 0.3-1.2 percent of GDP per year for heavy interveners. These estimates indicate that fiscal costs of sustained FX intervention (via expanding central bank balance sheets) are not negligible. |
| Keywords: | Foreign exchange intervention;Risk premium;Fiscal analysis;Econometric models;central bank balance sheet, international reserves, foreign exchange intervention, currency risk premium |
| Date: | 2016–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/89&r=ifn |
| By: | Juan Carlos Cuestas (Economics and Research Department,Bank of Estonia); Ying Sophie Huang (College of Economics & Academy of Financial Research, Zhejiang University); Bo Tang (Department of Economics, University of Sheffield) |
| Abstract: | This study investigates both the symmetric and asymmetric exchange rate exposures of Chinese financial firms in the context of an accelerated pace of RMB internationalisation. We find that an increasing number of Chinese financial firms are exposed to negative symmetric effects from the change in the trade weighted effective exchange rate. The evidence concerning asymmetries shows that after 2009 negative exchange rate shocks have a stronger effect on exposures than positive shocks. Changes in the bilateral exchange rate also have a significant impact on firm returns, given the importance of the USD in the effective exchange rate. Further, the empirical analysis reveals that exchange rate exposures are associated with firm level characteristics including total assets, earnings per share, net cash flows, investment incomes, total liabilities and firm size. Finally, we suggest that domestic and foreign stakeholders need to pay close attention to the movement of the Yuan’s exchange rate before it becomes completely convertible. |
| Keywords: | exchange rate exposure; RMB internationalisation; Chinese financial firms |
| JEL: | C58 F3 G15 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2016006&r=ifn |
| By: | Forbes, Kristin (Monetary Policy Committee Unit, Bank of England); Reinhardt, Dennis (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | Have bank regulatory policies and unconventional monetary policies — and any possible interactions — been a factor behind the recent ‘deglobalisation’ in cross-border bank lending? To test this hypothesis, we use bank-level data from the United Kingdom — a country at the heart of the global financial system. Our results suggest that increases in microprudential capital requirements tend to reduce international bank lending and some forms of unconventional monetary policy can amplify this effect. Specifically, the United Kingdom’s Funding for Lending Scheme (FLS) significantly amplified the effects of increased capital requirements on external lending. Quantitative easing may also have had an amplification effect, but these estimates are usually insignificant and smaller in magnitude. We find that this interaction between microprudential regulations and the FLS can explain roughly 30% of the contraction in aggregate UK cross-border bank lending between mid-2012 and end-2013, corresponding to around 10% of the contraction globally. This suggests that unconventional monetary policy designed to support domestic lending can have the unintended consequence of reducing foreign lending. |
| Keywords: | Capital requirements; Funding for Lending Scheme; financial deglobalisation |
| JEL: | G21 G28 |
| Date: | 2016–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0044&r=ifn |
| By: | Galina Hale; Tümer Kapan; Camelia Minoiu |
| Abstract: | We study the transmission of financial sector shocks across borders through international bank connections. For this purpose, we use data on long-term interbank loans among more than 6,000 banks during 1997-2012 to construct a yearly global network of interbank exposures. We estimate the effect of direct (first-degree) and indirect (second-degree) exposures to countries experiencing systemic banking crises on bank profitability and loan supply. We find that direct exposures to crisis countries squeeze banks' profit margins, thereby reducing their returns. Indirect exposures to crisis countries enhance this effect, while indirect exposures to non-crisis countries mitigate it. Furthermore, crisis exposures have real effects in that they reduce banks' supply of domestic and cross-border loans. Our results, based on a large global sample, support the notion that interconnected financial systems facilitate shock transmission. |
| Keywords: | International banking;External shocks;Financial crises;Banks;Profits;Loans;Financial sector;shock transmission, long-term interbank exposures, systemic banking crises, financial networks, syndicated loans |
| Date: | 2016–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/91&r=ifn |
| By: | Aleksei Netšunajev; Lars Winkelmann; ; |
| Abstract: | To what extent are US and Euro Area (EA) inflation expectations determined by foreign shocks? How do transmissions change during the great recession and European sovereign debt crisis? We address these questions with a flexible structural VAR model of weekly financial markets’ inflation expectations and an index of commodity futures. For the identification of the model, we exploit the heteroscedasticity of the data. We propose instrument-type regressions to uncover the economic nature and origin of identified shocks. In line with the discussion about global inflation, we find that inflation expectations can be labeled global over short expectations horizons but local at long horizons. While large US macro shocks explain the strong drop in US and EA inflation expectations during the great recession, expectations shocks are the important driver from 2009 on. |
| Keywords: | Spillover, monetary policy, expectations shocks, financial crisis, identification through heteroskedasticity |
| JEL: | E31 F42 E52 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2016-019&r=ifn |