nep-ifn New Economics Papers
on International Finance
Issue of 2018‒08‒20
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Currency Wars? Unconventional Monetary Policy Does Not Stimulate Exports By Andrew K. Rose
  2. Cross-border spillovers of monetary policy: what changes during a financial crisis? By Mary Everett; Diana Bonfim; Luciana Barbosa; Sónia Costa
  3. Gauging procyclicality and financial vulnerability in Asia through the BIS banking and financial statistics By Stefan Avdjiev; Bat-el Berger; Hyun Song Shin
  4. Following the Money: Evidence for the Portfolio Balance Channel of Quantitative Easing By Itay Goldstein; Jonathan Witmer; Jing Yang
  5. Model-Free International Stochastic Discount Factors By Mirela Sandulescu; Fabio Trojani; Andrea Vedolin

  1. By: Andrew K. Rose
    Abstract: I investigate whether countries that use unconventional monetary policy (UMP) experience export booms. I use a popular gravity model of trade which requires neither the exogeneity of UMP, nor instrumental variables for UMP. In practice, countries that engage in UMP experience a drop in exports vis-á-vis countries that are not engaged in such policies, holding other things constant. Quantitative easing is associated with exports that are about 10% lower to countries not engaged in UMP; this amount is significantly different from zero and similar to the effect of negative nominal interest rates. Thus, there is no evidence that countries have gained export markets through unconventional monetary policy; currency wars that have been launched have also been lost. UMP is also associated with a comparable drop in imports and exchange rates, suggesting that countries engage in UMP when they are experiencing adverse macroeconomic shocks concurrent with those that eviscerate international trade.
    JEL: E58 F14
    Date: 2018–07
  2. By: Mary Everett; Diana Bonfim; Luciana Barbosa; Sónia Costa
    Abstract: This paper analyses cross-border spillovers of monetary policy by examining two countries that were in the eye of the storm during the euro area sovereign debt crisis, namely Ireland and Portugal. The research provides insight as to how banking and sovereign stress aect the inward transmission of foreign monetary policy to two economies that share many characteristics, but that also have many distinct features. In particular, our research addresses the question of whether a banking system in distress reacts more or less to monetary policy changes in other major economies. The empirical analysis indicates that international spillovers are present for US and UK monetary policy for both Ireland and Portugal, but there is heterogeneity in the transmission mechanisms by which they affect credit growth in the two economies.
    JEL: G15 G21
    Date: 2018
  3. By: Stefan Avdjiev; Bat-el Berger; Hyun Song Shin
    Abstract: We look back at past episodes of financial stress in Asia with a forward-looking perspective. We put ourselves in the shoes of a contemporary observer with the data at hand and ask what evidence was available on the systematic build-up of vulnerabilities. We reconstruct a graphical narrative of banking and financial developments at the time. Our exercise showcases the usefulness of the BIS international banking and financial statistics as a window on the financial system's procyclicality. We conclude with a real-time forward-looking survey of current financial vulnerabilities, focusing on the implications of the shift in the pattern of credit intermediation from banks to bond markets.
    Keywords: Asian Financial Crisis, international bank lending, procyclicality, financial stability
    JEL: F32 F34 G01
    Date: 2018–07
  4. By: Itay Goldstein; Jonathan Witmer; Jing Yang
    Abstract: Recent research suggests that quantitative easing (QE) may affect a broad range of asset prices through a portfolio balance channel. Using novel security-level holding data of individual US mutual funds, we establish evidence that portfolio rebalancing occurred both within and across funds. Contrary to conventional wisdom, portfolio rebalancing by fund managers into riskier assets is much smaller in magnitude than into other government bonds. We find that mutual funds replaced QE securities with other government bonds that have similar characteristics. Intriguingly, this shift occurred mainly into newly issued government bonds. Such within-fund portfolio rebalancing is material. For every $100 in QE bonds sold, mutual funds replenished their portfolios with about $50 to $60 of newly issued government bonds. Thus, QE played an important role in funding treasury debt issuance during this period. Meanwhile, the rebalancing into riskier assets, such as corporate bonds, did occur, but was mainly carried out by the end investors of the funds instead of the fund managers themselves.
    Keywords: Monetary Policy, Monetary policy implementation, Transmission of monetary policy
    JEL: E5 E58 G23
    Date: 2018
  5. By: Mirela Sandulescu (University of Lugano and Swiss Finance Institute); Fabio Trojani (University of Geneva and Swiss Finance Institute); Andrea Vedolin (Boston University)
    Abstract: We provide a theoretical characterization of international stochastic discount factors (SDFs) in incomplete markets under different degrees of market segmentation. Using 40 years of data on a cross-section of countries, we estimate model-free SDFs and factorize them into permanent and transitory components. We find that large permanent SDF components help to reconcile the low exchange rate volatility, the exchange rate cyclicality, and the forward premium anomaly. However, integrated markets entail highly volatile and almost perfectly comoving international SDFs. In contrast, segmented markets can generate less volatile and more dissimilar SDFs. In quest of relating the SDFs to economic fundamentals, we document strong links between proxies of financial intermediaries' risk-bearing capacity and model-free international SDFs. We interpret this evidence through the lens of an economy with two building blocks: limited participation by households and financiers who face an intermediation friction.
    Keywords: Stochastic Discount Factor, Exchange Rates, Market Segmentation, Market Incompleteness, Financial Intermediaries
    JEL: F31 G12
    Date: 2017–11

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