nep-ifn New Economics Papers
on International Finance
Issue of 2018‒02‒19
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International capital flow pressures By Goldberg, Linda S.; Krogstrup, Signe
  2. Uncertainty and Cross-Border Banking Flows By Sangyup Choi; Davide Furceri
  3. Corporate Credit Risk Premia By Antje Berndt; Rohan Douglas; Darrell Duffie; Mark Ferguson
  4. Internationalisation of the Rupee. By Kumar, Shekhar Hari; Patnaik, Ila
  5. Financial shocks, credit spreads and the international credit channel By Cesa Bianchi, Ambrogio; Sokol, Andrej

  1. By: Goldberg, Linda S. (Federal Reserve Bank of New York); Krogstrup, Signe (International Monetary Fund)
    Abstract: This paper presents a new measure of capital flow pressures in the form of a recast exchange market pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes a global risk response index, which reflects the country-specific sensitivity of capital flow pressures to measures of global risk aversion. For a large sample of countries over time, we demonstrate time variation in the effects of global risk on exchange market pressures, the evolving importance of the global factor across types of countries, and the changing risk-on or risk-off status of currencies.
    Keywords: exchange market pressure; risk aversion; safe haven; capital flows; exchange rate; foreign exchange reserves
    JEL: F32 G11 G20
    Date: 2018–02–01
  2. By: Sangyup Choi; Davide Furceri
    Abstract: While global uncertainty—measured by the VIX—has proven to be a robust global “push” factor of international capital flows, there has been no systematic study assessing the role of country-specific uncertainty as a key (pull and push) factor of international capital flows. This paper tries to fill this gap in the literature by examining the effects of country-specific uncertainty shocks on cross-border banking flows using the confidential Bank for International Settlements Locational Banking Statistics data. The dyadic structure of this data allows to disentangle supply and demand factors and to better identify the effect of uncertainty shocks on cross-border banking flows. The results of this analysis suggest that: (i) uncertainty is both a push and pull factor that robustly predicts a decrease in both outflows (retrenchment) and inflows (stops); (ii) global banks rebalance their lending towards safer foreign borrowers from local borrowers when facing higher uncertainty; (iii) this rebalancing occurs only towards advanced economies (flight to quality), but not emerging market economies.
    Date: 2018–01–05
  3. By: Antje Berndt; Rohan Douglas; Darrell Duffie; Mark Ferguson
    Abstract: We measure credit risk premia - prices for bearing corporate default risk in excess of expected default losses - using Markit CDS and Moody’s Analytics EDF data. We find dramatic variation over time in credit risk premia, with peaks in 2002, during the global financial crisis of 2008-09, and in the second half of 2011. Even after normalizing these premia by expected default losses, median credit risk premia fluctuate over time by more than a factor of ten. Credit risk premia comove with macroeconomic indicators, even after controlling for variation in expected default losses, with higher premia per unit of expected loss during times of market-wide distress. Countercyclical variation of premia-to-expected-loss ratios is more pronounced for investment-grade issuers than for high-yield issuers.
    JEL: G12 G13 G22 G24
    Date: 2018–01
  4. By: Kumar, Shekhar Hari (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: The Indian Rupee currently accounts for approximately 1% of global foreign exchange turnover. It has a smaller market size across most trading instruments when compared to the top 8 emerging market currencies. In this paper, we evaluate the current status of the Indian Rupee as an international currency using the Chinn and Frankel (2008) framework, and explore the possibility of future Indian Rupee internationalisation. We find that the Indian Rupee has a negligible role as an official sector currency. It has some use as a reserve currency in its economic sphere of influence, but no role as an anchor or intervention currency. Private actor adoption of the Indian Rupee is much larger and more diverse than the official sector. However, this role is mostly restricted to financial flows and portfolio investment. In terms of trade invoicing and settlements in the private sector, the Indian Rupee plays a limited role due to concerns of convertibility and risk management. Given the current path of exchange control and capital account liberalisation, we anticipate gradual internationalisation of the Indian Rupee due to regional competition from the Renminbi.
    Date: 2018–02
  5. By: Cesa Bianchi, Ambrogio (Bank of England); Sokol, Andrej (Bank of England)
    Abstract: Recent empirical evidence on the cross-country synchronization of credit spreads in response to US monetary policy shocks has led to the notion of an ‘international credit channel’ of US monetary policy. This paper provides novel evidence on the existence of an international credit channel for the transmission of US financial shocks across borders, and compares their impact to US monetary policy shocks. We identify monetary policy and financial shocks by combining the external instruments approach with sign restrictions in a two-country SVAR for the United States and the United Kingdom. Adverse US financial shocks trigger a sharp and persistent contraction in the US economy, and an increase in US credit spreads. Crucially, this tightening in US credit conditions is quickly transmitted internationally, leading to an increase in credit spreads and a slowdown in economic activity in the United Kingdom. Unlike financial shocks, monetary policy shocks do not seem to induce as much international co-movement. Our results are in line with general equilibrium open economy models with credit market imperfections and a high degree of financial integration.
    Keywords: SVAR; credit channel; international transmission; external instruments; sign restrictions; financial shocks; monetary policy
    JEL: C32 E44 F44
    Date: 2017–11–15

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