nep-ifn New Economics Papers
on International Finance
Issue of 2017‒11‒26
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Exchange rates and monetary policy uncertainty By Mueller, Philippe; Tahbaz-Salehi, Alireza; Vedolin, Andrea
  2. International expansion and riskiness of Banks By Faia, Ester; Ottaviano, Gianmarco I. P.; Sanchez Arjona, Irene
  3. Monetary Policy Divergence, Net Capital Flows, and Exchange Rates: Accounting for Endogenous Policy Responses By Davis, Scott; Zlate, Andrei
  4. Global Trade and the Dollar By Mikkel Plagborg-Moller; Gita Gopinath; Emine Boz
  5. The international bank lending channel of unconventional monetary policy By Gräb, Johannes; Żochowski, Dawid
  6. TFP, News and "Sentiments:" The International Transmission of Business Cycles By Nitya Pandalai Nayar; Andrei Levchenko

  1. By: Mueller, Philippe; Tahbaz-Salehi, Alireza; Vedolin, Andrea
    Abstract: We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.
    JEL: F3 G3
    Date: 2017–06–01
  2. By: Faia, Ester; Ottaviano, Gianmarco I. P.; Sanchez Arjona, Irene
    Abstract: We exploit an original dataset on European G-SIBs to assess how expansion in foreign markets affects their riskiness. We find a robust negative correlation between foreign expansion and bank risk (proxied by various individual and systemic risk metrics). Given individual bank riskiness, banks’expansion reduces the average riskiness of the banks’ pool (between effect). Moreover, foreign expansion of any given bank reduces its own risk (within effect). Diversification, competition and regulation channels are all important. Expansion in destination countries with different business cycle co-movement, stricter regulations and higher competition than the origin country decreases a bank’s riskiness.
    Keywords: banks' risk; systemic risk; global expansion; competition; diversification; regulation
    JEL: G32 F3 G3
    Date: 2017–04
  3. By: Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: This paper measures the effect of monetary tightening in key advanced economies on net capital flows and exchange rates around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous responses of domestic monetary policy depends on each economy’s capital account openness and exchange rate regime. We develop a method to plot counter-factual impulse responses for net capital outflows under the assumption that domestic interest rates are held constant despite foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as ¼ for floaters and ½ for peggers with open capital accounts.
    JEL: E5 F3 F4
    Date: 2017–10–01
  4. By: Mikkel Plagborg-Moller (Harvard University); Gita Gopinath (Harvard); Emine Boz (International Monetary Fund)
    Abstract: We document the outsize role played by the U.S. dollar in driving international trade prices and flows. Our analysis is the first to examine the consequences of the dollar's prominence as an invoicing currency using a globally representative panel data set. We establish three facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. 2) The cross-sectional heterogeneity in pass-through/elasticity across country pairs is related to the share of imports invoiced in dollars. 3) Bilateral terms of trade are essentially uncorrelated with bilateral exchange rates. Our results derive from fixed effects panel regressions as well as a Bayesian semiparametric hierarchical panel data model. Unlike standard panel regressions, the Bayesian approach allows us to quantify the cross-sectional heterogeneity of exchange rate pass-through/elasticities and the relation of this heterogeneity to dollar invoicing. Our results imply that the majority of international trade is best characterized by a dominant currency paradigm, as opposed to the traditional producer or local currency pricing paradigms.
    Date: 2017
  5. By: Gräb, Johannes; Żochowski, Dawid
    Abstract: We use a confidential euro area bank-level data set of close to 250 banks to assess outward and inward spillovers of unconventional monetary policies on bank lending. We find that euro area banks increase lending to the rest of the world in response to non-standard ECB monetary policy accommodation. We also find strong evidence that euro area banks increase lending to the domestic non-financial private sector in response to accommodative unconventional monetary policy measures in the US. Inward and outward spillovers are substantially stronger for euro area banks which are liquidity constrained and which rely more on internal capital markets. This suggests that bank-specific supply effects, stemming from banks’ increased ability to lend following a central bank balance sheet expansion, are a major driver of monetary policy spillovers, providing strong support to the existence of an international bank lending channel that prevails at the effective lower bound. JEL Classification: E44, E52, G01
    Keywords: cross-border spillovers, international bank lending channel, monetary policy, quantitative easing
    Date: 2017–11
  6. By: Nitya Pandalai Nayar (Princeton University and UT Austin); Andrei Levchenko (University of Michigan)
    Abstract: We propose a novel identification scheme for a non-technology business cycle shock, that we label “sentiment.” This is a shock orthogonal to identified surprise and news TFP shocks that maximizes the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks – surprise TFP, news of future TFP, and “sentiment” – from the US to Canada. The US sentiment shock produces a business cycle in the US, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of US short-run business cycle fluctuations. The sentiment shock also has a significant impact on Canadian macro aggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the US and Canada, accounting for over 40% of the forecast error variance of Canadian GDP and over one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5-10 years, and surprise TFP innovations do not generate synchronization. We provide a simple theoretical framework to illustrate how US sentiment shocks can transmit to Canada.
    Date: 2017

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