nep-ifn New Economics Papers
on International Finance
Issue of 2017‒08‒27
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Capital Controls and Foreign Currency Denomination By Guangling Liu; Fernando Garcia-Barragan
  2. What drives local lending by global banks? By Uluc Aysun; Stefan Avdjiev; Ralf Hepp
  3. Cross-Border Bank Flows and Monetary Policy: Implications for Canada By Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
  4. Dollar pricing redux By Camila Casas; Federico Díez; Gita Gopinath; Pierre-Olivier Gourinchas
  5. International financial integration, crises, and monetary policy: evidence from the euro area interbank crises By Abbassi, Puriya; Brauning, Falk; Fecht, Falko; Peydro, Jose Luis
  6. Import competition and household debt By Barrot, Jean-Noël; Loualiche, Erik; Plosser, Matthew; Sauvagnat, Julien

  1. By: Guangling Liu (University of Stellenbosch); Fernando Garcia-Barragan
    Abstract: This paper studies the effectiveness of capital controls with foreign currency denomination on business cycle fluctuations and the implications for welfare. To do this, we develop a general equilibrium model with financial frictions and banking, in which assets and liabilities are denominated in both domestic and foreign currencies. We propose a non-pecuniary, capital-control policy that limits the gap between foreign-currency denominated loans and deposits to the amount of foreign funds that bankers can borrow from the international credit market. We show that capital controls have a significant impact on the dynamics of assets and liabilities that are denominated in foreign currency. The non-pecuniary capital controls help to stabilize the financial sector, thereby reducing the negative spillovers to the real economy. A more restrictive capital-control policy significantly weakens the welfare effect of the foreign monetary policy and exchange rate shocks.
    Date: 2017
  2. By: Uluc Aysun (University of Central Florida, Orlando, FL); Stefan Avdjiev (Bank for International Settlements, Basel, Switzerland); Ralf Hepp (Fordham University, New York, NY)
    Abstract: We find that the lending behavior of large global banks’ subsidiaries throughout the world is more closely related to local macroeconomic conditions and their financial structure than to their owner-specific counterparts. This inference is drawn from a panel dataset populated with bank-level observations from the Bankscope database. Using this database, we identify ownership structures and incorporate them into a unique methodology that identifies and compares the owner and subsidiary-specific determinants of lending. A distinctive feature of our analysis is that we use multi- dimensional country-level data from the BIS international banking statistics to account for exchange rate fluctuations and cross-border lending
    Keywords: Bankscope; G-SIB; bank-level data; global banks; BIS international banking statistics
    JEL: E44 F32 G15 G21
    Date: 2017–08
  3. By: Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
    Abstract: Using the Bank for International Settlements (BIS) Locational Banking Statistics data on bilateral bank claims from 1995 to 2014, we analyze the impact of monetary policy on cross-border bank flows. We find that monetary policy in a source country is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border portfolio 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 source countries with weaker financial sectors that are likely more risk averse. Also, the reallocation is directed toward borrowers in advanced economies, or those in economies with investment-grade sovereign rating. In particular, source countries with tighter monetary policy increase cross-border credit to Canada. Our study highlights the spillovers of domestic monetary policy on foreign credit, which enhances the understanding of the international monetary transmission mechanism through global banks.
    Keywords: Financial Institutions, Monetary Policy
    JEL: F34 F36 G01
    Date: 2017
  4. By: Camila Casas; Federico Díez; Gita Gopinath; Pierre-Olivier Gourinchas
    Abstract: A country's exchange rate is at the center of economic and political debates on currency wars and trade competitiveness. The real consequences of exchange rate fluctuations depend critically on how firms set prices in international markets. Recent empirical evidence has challenged the dominant 'producer currency' pricing and 'local currency' pricing paradigms in the literature. In this paper we propose a new paradigm, consistent with the empirical evidence and characterized by three features: pricing in dollars, strategic complementarity in pricing and imported inputs in production. We call this the 'dollar pricing' paradigm and contrast its theoretical predictions with prior approaches in a general equilibrium New Keynesian model. We then employ novel data for Colombia to evaluate the implications of exchange rate fluctuations associated with commodity price shocks and show that the findings strongly support the dollar pricing paradigm.
    Keywords: dominant currency, terms of trade, pass-through, monetary policy
    JEL: F1 F2 F3 F4
    Date: 2017–08
  5. By: Abbassi, Puriya (Deutsche Bundesbank); Brauning, Falk (Federal Reserve Bank of Boston); Fecht, Falko (Frankfurt School of Finance & Management); Peydro, Jose Luis (Universitat Pompeu Fabra)
    Abstract: We analyze how financial crises affect international financial integration, exploiting euro area proprietary interbank data, crisis and monetary policy shocks, and variation in loan terms to the same borrower on the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of crossborder liquidity, with stronger volume effects than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home — but this is independent of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial reintegration.
    Keywords: financial integration; financial crises; cross-border lending; monetary policy; euro area sovereign crisis; liquidity
    JEL: E58 F30 G01 G21 G28
    Date: 2017–07–01
  6. By: Barrot, Jean-Noël (MIT Sloan School of Management); Loualiche, Erik (MIT Sloan School of Management); Plosser, Matthew (Federal Reserve Bank of New York); Sauvagnat, Julien (Bocconi University)
    Abstract: We analyze the effect of import competition on household balance sheets from 2000 to 2007 using individual data on consumer finances. We exploit variation in exposure to foreign competition using industry-level shipping costs and initial differences in regions’ industry specialization. We show that household debt increased significantly in regions where manufacturing industries are more exposed to import competition. A one standard deviation increase in exposure to import competition explains 30 percent of the cross-regional variation in household leverage growth, and is mostly driven by home equity extraction. Our results highlight the distributive effects of globalization and their consequences for household finances.
    Keywords: trade; household finance; mortgages
    JEL: D14 G21
    Date: 2017–08–15

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