nep-ifn New Economics Papers
on International Finance
Issue of 2017‒08‒06
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Cross-border Flows and Monetary Policy By Teodora Paligorova; Horacio Sapriza; Andrei Zlate; Ricardo Correa
  2. Zeroing in: Asset Pricing at the Zero Lower Bound By Mohsan Bilal

  1. By: Teodora Paligorova (Bank of Canada); Horacio Sapriza (Federal Reserve Board); Andrei Zlate (Federal Reserve Bank of Boston); Ricardo Correa (Board of Governors of the Federal Reserve System)
    Abstract: We analyze the impact of monetary policy on cross-border bank flows using BIS Locational Banking Statistics data from 1995 to 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border portfolio reallocation channel that works in parallel with the traditional bank lending channel. As tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate credit away from relatively risky domestic borrowers toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with higher prevalence of household credit and weaker financial sectors. Also, the reallocation is directed especially toward foreign non-bank borrowers in advanced economies, or those in economies with investment grade sovereign rating. Thus, our study highlights the spillovers from domestic monetary policy on the dynamics of domestic and foreign credit, enhancing the understanding of the domestic and international monetary transmission mechanisms in the presence of global banks.
    Date: 2017
  2. By: Mohsan Bilal (New York University, Stern School)
    Abstract: This paper analyzes the effect of the Zero Lower Bound (ZLB) on asset prices, risk premia, and the co-movement of asset returns using a New Keynesian framework with nominal rigidities. I ï¬ nd that the presence of the ZLB generates a new source of macroeconomic risk: the risk that the ZLB will be binding in the future. When the monetary policy rate is high, stocks and bonds are both risky, and bond risk premia are high. In contrast, at the ZLB, stock market risk increases but bond risk decreases. When the probability of the ZLB binding in the near future increases, investors cut spending to increase savings. This lowers current and future output and dividends. Lower expected dividends and higher equity risk premia lower current stock prices. Simultaneously, investors expect future short rates and bond risk premia to drop which raise long-term bond prices. These opposite exposures to the same ZLB risk sharply lower the correlation between stock and bond returns. In fact, the stock-bond correlation turns negative. I develop and calibrate a model that endogenously generates these observed changes while respecting unconditional macroeconomic and asset pricing moments.
    Date: 2017

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