nep-ifn New Economics Papers
on International Finance
Issue of 2018‒04‒30
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles By Barbone Gonzalez, Rodrigo; Khametshin, Dmitry; Peydró, José Luis; Polo, Andrea
  2. Short-Term Drivers of Sovereign CDS Spreads By Marcelo Yoshio Takami
  3. Sovereign Credit Risk and Exchange Rates: Evidence from CDS Quanto Spreads By Patrick Augustin; Mikhail Chernov; Dongho Song
  4. The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data By Davide Furceri; Prakash Loungani; Jonathan David Ostry
  5. Corporate Foreign Bond Issuance and Interfirm Loans in China By Yi Huang; Ugo Panizza; Richard Portes

  1. By: Barbone Gonzalez, Rodrigo; Khametshin, Dmitry; Peydró, José Luis; Polo, Andrea
    Abstract: We analyze whether the global financial cycle (GFC) affects local credit supply and the real effects, and whether local unconventional policies can attenuate such spillovers. For identification, we exploit GFC shocks, differential bank reliance on global funding, local central bank interventions in FX derivatives, and three matched administrative registers in Brazil: the register of foreign credit flows to domestic banks, the credit register, and the matched employer-employee register. We show that after the announcement of US Quantitative Easing tapering by Bernanke in May 2013, which is associated with massive FX depreciation and increased volatility, domestic banks with larger foreign liabilities reduce the supply of credit to firms, in turn reducing employment. However, these negative effects are attenuated after the Central Bank of Brazil announces a large intervention in the FX derivatives market, which consists in supplying insurance against FX risks - hedger of last resort. In addition to these two subsequent shocks, we also analyze a panel over 2008-2015. Banks with larger foreign liabilities cut credit supply after US Dollar appreciation or after an increase of FX volatility (even for US FX changes with EMs excluding Brazil). Moreover, the FX effects on credit supply and real effects are mitigated after the FX intervention of the central bank, thereby confirming that the policy of hedger of last resort has been effective in decreasing local economy spillovers to global financial conditions. Our results have important implications for international macro-finance models and policy.
    Keywords: Bank credit; central bank; foreign exchange; Hedging; monetary policy
    JEL: E5 F3 G01 G21 G28
    Date: 2018–03
  2. By: Marcelo Yoshio Takami
    Abstract: This paper presents large-scale estimated models, one for each country, representing factors driving changes in CDS (Credit Default Swap) spreads of 35 sovereigns. I estimate the models and test their robustness using data from July 2005 to July 2016. The set of eligible explanatory variables comprises indicators of the state of the global economy and of the domestic economic conditions, and proxies for risk premia. I find that not only the S&P 500 variable is pervasive across the countries, but also that the estimated S&P 500 coefficients are higher in magnitude for emerging markets than developed countries
    Date: 2018–04
  3. By: Patrick Augustin; Mikhail Chernov; Dongho Song
    Abstract: Sovereign CDS quanto spreads – the difference between CDS premiums denominated in U.S. dollars and a foreign currency – tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A no-arbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-week probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro devaluation in case of default exceeds the regular currency premium by up to 0.4% per week.
    JEL: C1 E43 E44 G12 G15
    Date: 2018–04
  4. By: Davide Furceri; Prakash Loungani; Jonathan David Ostry
    Abstract: We take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country- and industry-level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality—that is, they pose an equity–efficiency trade-off. Behind this average lies considerable heterogeneity in effects depending on country characteristics. Liberalization increases output in countries with high financial depth and those that avoid financial crises, while distributional effects are more pronounced in countries with low financial depth and inclusion and where liberalization is followed by a crisis. Difference-indifference estimates using sectoral data suggest that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, those with a higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and those with a higher elasticity of substitution between capital and labor. The sectoral results underpin a causal interpretation of the findings using macro data.
    Date: 2018–04–06
  5. By: Yi Huang; Ugo Panizza; Richard Portes
    Abstract: This paper uses firm-level data to document and analyze international bond issuance by Chinese non-financial corporations and the use of the proceeds of issuance. We find that dollar issuance is positively correlated with the differential between domestic and foreign interest rates. This interest rate differential increases the likelihood of dollar bond issuance by risky firms and decreases the likelihood of dollar bond issuance of exporters and profitable firms. Moreover, and most strikingly, we find that risky firms do more inter-firm lending than non-risky firms and that this lending rose significantly after the regulatory shock of 2008-09, when the authorities sought to restrict the financial activities of risky firms. Risky firms try to boost profitability by engaging in speculative activities that mimic the behavior of financial institutions while escaping prudential regulation that limits risk-taking by financial firms.
    JEL: F32 F34 G15 G30
    Date: 2018–04

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