nep-ifn New Economics Papers
on International Finance
Issue of 2018‒02‒26
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International Capital Flow Pressures By Linda S. Goldberg; Signe Krogstrup
  2. Secular drivers of the global real interest rate By Rachel, Lukasz; Smith, Thomas D
  3. The global financial cycle, bank capital flows and monetary policy. Evidence from Norway By Ragna Alstadheim; Christine Blandhol
  4. Risk-Taking Channel of Monetary Policy By Adrian, Tobias; Estrella, Arturo; Shin, Hyun Song

  1. By: Linda S. Goldberg; Signe Krogstrup
    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 the 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.
    JEL: F32 G11 G20
    Date: 2018–02
  2. By: Rachel, Lukasz; Smith, Thomas D
    Abstract: Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 basis points of the 450 basis points fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.
    Keywords: Equilibrium interest rate; long-term yields; global saving and investment; global trend growth.
    JEL: E10 E20 E40 E50 E60 F0 F41 F42 F47 J11 O30 O40
    Date: 2016–12
  3. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Christine Blandhol (University of Chicago and Statistics Norway)
    Abstract: We investigate the importance of a global financial cycle for gross capital inflows based on monthly balance sheet data for Norwegian banks. The VIX index has been interpreted as an “investor fear gauge” and associated with a global financial cycle. This index has also been found to impact real activity. We include both a global activity variable and the VIX index in our structural VAR model of capital inflows. We find that when global activity falls, banks’ foreign funding share falls. Our results suggest that global real activity rather than a global financial cycle is a main driver behind the volume of bank capital inflows. We also study domestic monetary policy and implications for capital flows. Domestic monetary policy helps absorb VIX shocks and there is no indication of procyclical (“carry trade”) effects on funding. Monetary policy affects activity and inflation in a standard fashion, and the exchange rate acts as a buffer when shocks hit the economy.
    Keywords: Bank Capital flows, Uncertainty-shocks, Structural VAR
    JEL: E32 E44 F32 G15
    Date: 2018–02–19
  4. By: Adrian, Tobias; Estrella, Arturo; Shin, Hyun Song
    Abstract: One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. We propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries and the risk-taking channel of monetary policy. Monetary tightening leads to the flattening of the term spread, reducing net interest margin and credit supply. We provide empirical support for the risk-taking channel.
    Keywords: risk taking channel of monetary policy
    Date: 2018–02

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