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on International Finance |
| By: | Avdjiev, Stefan (Bank for International Settlements); Gambacorta, Leonardo (Bank for International Settlements); Goldberg, Linda S. (Federal Reserve Bank of New York); Schiaffi, Stefano (Bocconi University) |
| Abstract: | The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flows to U.S. monetary policy rose substantially in the immediate aftermath of the global financial crisis, peaked around the time of the 2013 Federal Reserve “taper tantrum,” and then partially reverted toward pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably after the crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to U.S. monetary policy has been driven mainly by post-crisis changes in the behavior of national banking systems, especially those that ex ante had banks that were less well capitalized. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly owing to a compositional effect, driven by increases in the lending market shares of national banking systems that were better capitalized. The post-2013 reversal in the sensitivities to U.S. monetary policy partially reflects the expected divergence in the monetary policies of the United States and other advanced economies, highlighting the sensitivity of capital flows to the degree of commonality of cycles and the stance of policy. Moreover, global liquidity fluctuations have largely been driven by policy initiatives in creditor countries. Policies and prudential instruments that reinforced lending banks’ capitalization and stable funding levels reduced the volatility of international lending flows. |
| Keywords: | global liquidity; international bank lending; international bond flows; capital flows |
| JEL: | F34 G10 G21 |
| Date: | 2017–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:819&r=ifn |
| By: | Ahmed, Shaghil (Board of Governors of the Federal Reserve System); Coulibaly, Brahima (Board of Governors of the Federal Reserve System); Zlate, Andrei (Federal Reserve Bank of Boston) |
| Abstract: | We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs), covering the so-called taper-tantrum episode of 2013 and seven other episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in relatively early and persisted through this episode. (3) During the taper tantrum, while controlling for the EMEs' economic fundamentals, financial conditions also deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) During the EME crises of the 1990s and early 2000s, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities. (5) However, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode; it also occurred during the global financial crisis of 2008 and, subsequently, during financial stress episodes related to the European sovereign crisis in 2011 and China's financial market stresses in 2015. |
| Keywords: | Emerging market economies; financial spillovers; economic fundamentals; vulnerability index; depreciation pressure; taper tantrum; financial stress. |
| JEL: | E52 F31 F32 F65 |
| Date: | 2017–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:rpa17-2&r=ifn |