nep-ifn New Economics Papers
on International Finance
Issue of 2017‒11‒12
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Unconventional Monetary Policy under Appreciation Pressure - The Role of Financial Frictions By Nicole Aregger; Jessica Leutert
  2. Policy Evaluation by the Synthetic Control Approach: The Case of the Swiss Franc By Nicole Aregger; Jessica Leutert
  3. U. S. monetary policy and emerging market credit cycles By Brauning, Falk; Ivashina, Victoria
  4. Design of Macro-prudential Stress Tests By Orlov, Dmitry; Zryumov, Pavel; Skrzypacz, Andrzej
  5. Capital Flows and Financial Stability in Emerging Economies By Christopher F. Baum; Madhavi Pundit; Arief Ramayandi

  1. By: Nicole Aregger; Jessica Leutert
    Abstract: We build a two-country model with imperfect financial intermediation. Banks face limits to arbitrage which lead to positive excess returns in the investment markets and a risk premium in the international credit market. Gross capital flows affect the exchange rate since banks are balance sheet constrained and can only absorb additional fl ows on the international credit market if the exchange rate adjusts. Similarly, unconventional monetary policies such as foreign exchange interventions and credit easing infl uence asset prices in financial markets where banks are credit constrained. Within this framework, we study three external sources of appreciation pressure: Financial frictions in the foreign investment market, financial frictions in the international credit market and capital infl ow shocks. In the two latter cases, foreign exchange interventions can reverse the resulting exchange rate movements and misallocations of capital. Furthermore, under certain conditions, foreign exchange interventions and credit easing are substitutes since asset purchases in one market reduce the excess returns in both.
    Date: 2017–11
  2. By: Nicole Aregger; Jessica Leutert
    Abstract: In this paper, we analyse the effect of unconventional monetary policies on the EUR/CHF exchange rate. We apply the synthetic control approach to four events defining a change in the Swiss National Bank's monetary policy during the 2009 to 2011 period before the introduction of the exchange rate floor. We provide evidence that in some periods the EUR/CHF exchange rate shares common factors not only with other exchange rates, but in particular with other safe assets. It is thus possible to construct a counterfactual exchange rate by assigning weights to other exchange rates or safe assets. The synthetic control approach finds major effects for the March 2009 and August 2011 announcements. The methodology seems less appropriate to evaluate the spring 2010 foreign exchange interventions.
    Date: 2017–11
  3. By: Brauning, Falk (Federal Reserve Bank of Boston); Ivashina, Victoria (Harvard Business School)
    Abstract: Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers face a 32-percentage-point greater increase in the volume of loans issued by foreign banks than borrowers from developed markets face, with a similarly large effect upon reversal of the U.S. monetary policy stance. This result is robust across different geographical regions and industries, and holds for non-U.S. lenders, including those with little direct exposure to the U.S. economy. Local EME lenders do not offset the foreign bank capital flows; thus, U.S. monetary policy affects credit conditions for EME firms. We show that the spillover is stronger in higher-yielding and more financially open markets, and for firms with a higher reliance on foreign bank credit.
    Keywords: global business cycle; monetary policy; emerging markets; reaching for yield
    JEL: E44 E52 F34 F44 G21
    Date: 2017–08–29
  4. By: Orlov, Dmitry (University of Rochester); Zryumov, Pavel (University of PA); Skrzypacz, Andrzej (Stanford University)
    Abstract: We study the design of macro-prudential stress tests and capital requirements. The tests provide information about correlation in banks portfolios. The regulator chooses contingent capital requirements that create a liquidity buffer in case of a fire sale. The optimal stress test discloses information partially: when systemic risk is low, capital requirements reflect full information. When systemic risk is high, the regulator pools information and requires all banks to hold precautionary liquidity. With heterogeneous banks, weak banks determine level of transparency and strong banks are often required to hold excess capital when systemic risk is high. Moreover, dynamic disclosure and capital adjustments can improve welfare.
    Date: 2017–05
  5. By: Christopher F. Baum (Boston College; DIW Berlin); Madhavi Pundit (Asian Development Bank); Arief Ramayandi (Asian Development Bank)
    Abstract: There is mixed evidence for the impact of international capital flows on financial sector's stability. This paper investigates the relationship between components of gross capital flows and various financial stability indicators for 16 emerging and newly industrialized economies. Departing from panel data methods, for each financial stability proxy, we employ systems of seemingly unrelated regression estimators to allow variation in the estimated relationship across countries, while permitting crossequation restrictions to be imposed within a country. The findings suggest that, after controlling for macroeconomic factors, there are significant effects of different gross capital flow measures on the financial stability proxies. However, the effects are not homogeneous across our sample economies and across flows. Country-specific financial and macroeconomic characteristics help to explain some of these differences.
    Keywords: emerging economies, financial stability, international capital flows
    JEL: E44 F41
    Date: 2017–10–30

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