nep-ifn New Economics Papers
on International Finance
Issue of 2016‒10‒30
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International prudential policy spillovers: a global perspective By Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
  2. International Financial Adjustment in a Canonical Open Economy Growth Model By Richard H. Clarida; Ildikó Magyari
  3. Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates? By Adrien Verdelhan; Hanno Lustig
  4. QE: The Story so far. By Haldane, Andrew; Roberts-Sklar, Matt; Wieladek, Tomasz; Young, Chris
  5. Explaining the Failure of the Expectations Hypothesis with Short-Term Rates By Ranaldo, Angelo; Rupprecht, Matthias
  6. What Does Measured FDI Actually Measure? By Olivier Blanchard; Julien Acalin

  1. By: Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
    Abstract: We combine the BIS international banking statistics with the IBRN prudential instruments database in a global study analyzing the effect of prudential measures on international lending. Our bilateral setting, which features multiple home and destination countries, allows us to simultaneously estimate both the international transmission and the local effects of such measures. We find that changes in macroprudential policy via loan-to-value limits and local currency reserve requirements have a significant impact on international bank lending. Balance sheet characteristics play an important role in determining the strength of these effects, with better capitalized banking systems and those with more liquid assets and less core deposits reacting more. Overall, our results suggest that the tightening of these macroprudential measures can be associated with international spillovers.
    Keywords: International banking, macroprudential measures, spillovers
    Date: 2016–10
  2. By: Richard H. Clarida; Ildikó Magyari
    Abstract: Gourinchas and Rey (2007) have shown that international financial adjustment (IFA) in the path of expected future returns on a country’s international investment portfolio can complement or even substitute for the traditional adjustment channel via a narrowing of country’s current account imbalance. In their paper, GR derive this result using a log linearization of a net foreign asset accumulation identity without reference to any specific theoretical model of IFA in expected foreign asset returns or the real exchange rate. In this paper we calibrate the importance of IFA in a standard open economy growth model (Schmitt-Grohe and Uribe, 2003) with a well-defined steady level of foreign liabilities. In this model there is a country specific credit spread which varies as a function of the ratio of foreign liabilities to GDP. We find that allowing for an IFA channel results in a very rapid converge of the current account to its steady state (relative to the no IFA case) so that most of the time that the country is adjusting, all the adjustment is via the IFA channel of forecastable changes in the costs of servicing debt and in the appreciation real exchange rate. By contrast, in the no IFA case, current account adjustment by construction does all the work and current account adjustment is much slower.
    JEL: F3 F32 F41
    Date: 2016–10
  3. By: Adrien Verdelhan (MIT Sloan); Hanno Lustig (Stanford GSB)
    Abstract: Compared to the predictions of exchange rate models with complete spanning in financial markets, actual exchange rates are puzzlingly smooth and only weakly correlated with macro-economic fundamentals. This paper derives an upper bound on the effects of incomplete spanning in international financial markets. We introduce stochastic wedges between the exchange rate's rate of appreciation and the difference between the marginal utility growth rates of the countries' stand-in investors without violating the foreign investors' Euler equations for the domestic risk-free assets. The wedges always lower the volatility of no-arbitrage exchange rates and can help to match the volatility of exchange rates in the data, provided that the wedges are as volatile as the maximum Sharpe ratio, but the wedges cannot deliver exchange rates that are uncorrelated with macro-fundamentals without largely eliminating currency risk premia.
    Date: 2016
  4. By: Haldane, Andrew (Bank of England); Roberts-Sklar, Matt (Bank of England); Wieladek, Tomasz (Bank of England); Young, Chris (Bank of England)
    Abstract: In the past decade or so, a number of central banks have purchased assets financed by the creation of central bank reserves as a tool for loosening monetary policy – a policy often known as ‘quantitative easing’ or ‘QE’. The first half of the paper reviews the international evidence on the impact on financial markets and economic activity of this policy. It finds that these central bank balance sheet expansions had a discernible and significant impact on financial markets and the economy. The second half of the paper provides new empirical analysis on the macroeconomic impact of central bank balance sheet expansions, across time and countries. It finds three key results. First, it is only when central bank balance sheet expansions are used as a monetary policy tool that they have a significant macro-economic impact. Second, there is evidence for the US that the effectiveness of QE may vary over time, depending on the state of the economy and liquidity of the financial system. And third, QE can have strong spill-over effects cross-border, acting mainly via financial channels. For example, the impact of US QE on UK economic activity may be as large as the impact on US economic activity.
    Keywords: Quantitative Easing; QE; unconventional monetary policy; central bank balance sheet
    JEL: E43 E44 E52 E58 E60
    Date: 2016–10–24
  5. By: Ranaldo, Angelo; Rupprecht, Matthias
    Abstract: This paper provides the first systematic study of the temporal and cross-sectional variation in the risk premium of the expectations hypothesis. Using a unique and comprehensive data set of short-term European repo rates, we explain the sources and the time variation affecting the risk premium. Our results from unconditional and conditional analyses show that the expectations hypothesis cannot be rejected when repos constitute riskless loans. By contrast, the expectations hypothesis is violated when interest rates are affected by funding risk and collateral risk. Securing loans with safe collateral and unconventional monetary policy can substantially reduce risk premiums, thus supporting the validity of the expectations hypothesis.
    Keywords: Expectations hypothesis, interest rates, risk premium, monetary policy, repo
    JEL: D01 E43 E52 G10 G21
    Date: 2016–10
  6. By: Olivier Blanchard (Peterson Institute for International Economics); Julien Acalin (Peterson Institute for International Economics)
    Abstract: Foreign direct investment (FDI)—whether mergers and acquisitions or “greenfield” ventures built from the ground up—is generally thought of as reflecting decisions based on long-run factors. Conventional wisdom on capital flows holds that FDI inflows are “good flows,” while assessments of portfolio and other flows are more ambiguous. When considering restrictions on capital flows, the first reaction of researchers and policymakers is to want to exclude FDI inflows. Blanchard and Acelin find that FDI flows measured in the balance of payments are actually quite different from this depiction of FDI. Their analysis reveals that FDI inflows and outflows are highly correlated, even at high frequency and using different methodologies, and that FDI flows to emerging-market economies appear to respond to the US monetary policy rate, even at high frequency. Based on these findings they reach two conclusions. First, in many countries, a large proportion of measured FDI inflows are just flows going in and out of the country on their way to their final destination, with the stop due in part to favorable corporate tax conditions. Second, some of these measured FDI flows are much closer to portfolio debt flows, responding to short-run movements in US monetary policy conditions rather than to medium-run fundamentals of the country. Both these conclusions have implications for how researchers and policymakers should think about capital controls and the exclusion of measured FDI from such controls.
    Date: 2016–10

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