nep-ifn New Economics Papers
on International Finance
Issue of 2018‒04‒09
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Asset Bubbles and Global Imbalances By Ikeda, Daisuke; Phan, Toan
  2. Reach for Yield and Fickle Capital Flows By Ricardo J. Caballero; Alp Simsek
  3. Fearing the Fed: How Wall Street Reads Main Street By Tzuo Hann Law; Dongho Song; Amir Yaron

  1. By: Ikeda, Daisuke (Bank of England); Phan, Toan (Federal Reserve Bank of Richmond)
    Abstract: We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two large open economies. We establish a reinforcing relationship between global imbalances and bubbles. Capital flows from South to North facilitate the emergence and the size of bubbles in the North. Bubbles in the North in turn facilitate South-to-North capital flows. The model can simultaneously explain several stylized features of recent bubble episodes.
    Keywords: Rational bubbles; global imbalances; financial frictions; credit boom
    JEL: F32 F41 F44
    Date: 2018–03–23
  2. By: Ricardo J. Caballero; Alp Simsek
    Abstract: In Caballero and Simsek (2018), we develop a model of fickle capital flows and show that, when countries are similar, international flows create global liquidity and mitigate crises despite their fickleness. In this paper, we focus on the asymmetric situation of Emerging Markets (EM) exchanging flows with Developed Markets (DM) that feature lower returns but less frequent crises. Relatively high DM returns help to mitigate EM crises, by reducing fickle inflows, and by providing greater liquidity. The situation dramatically changes as the DM returns fall, as this increases the fickle inflows driven by reach for yield and exacerbates EM crises.
    JEL: F3 F34 F4 G15
    Date: 2018–03
  3. By: Tzuo Hann Law (Boston College); Dongho Song (Boston College); Amir Yaron (University of Pennsylvania)
    Abstract: Using intraday stock returns around macroeconomic news announcements (MNAs), we find strong evidence of persistent, cyclical variation in the stock market's response to MNA surprises. The response is particularly strong coming out of recessions and is gradually attenuated as the economy expands. We show that this cyclical pattern can be explained by a regime-switching model. In the model, we find that the direction and shape of the market's response reflect the evolution of beliefs about the state of the economy and monetary policy. The risk of an interest rate hike can entirely mitigate (and even reverse) the effect of positive MNA surprises on returns. This mechanism is consistent with the data -- positive MNA surprises coincide with negative stock market returns when there is substantial uncertainty over monetary policy.
    Date: 2017

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