|
on International Finance |
| By: | Elias Albagli; Luis Ceballos; Sebastián Claro; Damian Romero |
| Abstract: | We document significant US monetary policy (MP) spillovers to international bond markets. Our methodology identifies US MP shocks as the change in short-term treasury yields within a narrow window around FOMC meetings, and traces their effects on international bond yields using panel regressions. We emphasize three main results. First, US MP spillovers to long-term yields have increased substantially after the global financial crisis. Second, spillovers are large compared to the effects of other events, and at least as large as the effects of domestic MP after 2008. Third, spillovers work through different channels, concentrated in risk neutral rates (expectations of future MP rates) for developed countries, but predominantly on term premia in emerging markets. In interpreting these findings, we provide evidence consistent with an exchange rate channel, according to which foreign central banks face a tradeoff between narrowing MP rate differentials, or experiencing currency movements against the US dollar. Developed countries adjust in a manner consistent with freely floating regimes, responding partially with risk neutral rates, and partially through currency adjustments. Emerging countries display patterns consistent with FX interventions, which cushion the response of exchange rates but reinforce capital flows and their effects in bond yields through movements in term premia. Our results suggest that the endogenous effects of FXI on long-term yields should be added into the standard cost-benefit analysis of such policies. |
| Keywords: | monetary policy spillovers, risk neutral rates, term premia |
| JEL: | E43 G12 G15 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:719&r=ifn |
| By: | Signe Krogstrup (International Monetary Fund); Cédric Tille (The Graduate Institute of International and Development Studies); |
| Abstract: | The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. Analysis of data on European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area. |
| Keywords: | Currency mismatch, capital flows, push factors, spillovers, cross-border transmission of shocks, European bank balance sheets |
| JEL: | F32 F34 F36 |
| Date: | 2018–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp09-2018&r=ifn |
| By: | Patrick A. Pintus (CNRS-InSHS and Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Yi Wen (Federal Reserve Bank of St. Louis & Tsinghua University); Xiaochuan Xing (Department of Economics, Yale University) |
| Abstract: | This paper stresses a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom in both home and foreign economies. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business-cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor’s intimate link to global financial markets. |
| Keywords: | world interest rate, international co-movement, self-fulfilling equilibria |
| JEL: | E21 E22 E32 E44 E63 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1814&r=ifn |