nep-ifn New Economics Papers
on International Finance
Issue of 2018‒09‒17
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Exchange Rate Exposure and Firm Dynamics By Juliana Salomao; Liliana Varela
  2. Measuring the Effects of US Unconventional Monetary Policy on International Financial Markets By Francisco Ilabaca
  3. Currency Unions, Trade, and Heterogeneity By Natalie Chen; Dennis Novy

  1. By: Juliana Salomao (University of Minnesota); Liliana Varela (University of Warwick)
    Abstract: This paper develops a firm-dynamics model with endogenous currency debt composition to study financing and investment decisions in developing economies. In our model, foreign currency borrowing arises from a trade-off between exposure to currency risk and growth. There is cross-sectional heterogeneity in these decisions in two dimensions. First, there is selection into foreign currency borrowing, as only productive firms employ it. Second, there is heterogeneity in firms’ share of foreign currency loans, driven by their potential growth. We assess econometrically the pattern of foreign currency borrowing using firm-level census data on Hungary, calibrate the model and quantify its aggregate impact.
    Date: 2018
  2. By: Francisco Ilabaca (University of California, Irvine)
    Abstract: I replicate the analysis of Swanson 2017 to separately identify the effects of U.S. forward guidance and large-scale asset purchases during the US zero lower bound period. I then estimate the effects of these two unconventional monetary policy tools on bond yields, stock indices, and exchange rates for the UK, Canada, Australia, Japan, and Germany. I find that these two factors have substantial effects on international bond yields, but these effects vary across countries and across maturities. I find small effects on exchange rates, and no effect on stock indices. I compute a spillover rate for each factor to facilitate cross country analysis. I extend this analysis to a larger panel of countries, and find similar results. I conclude that there are significant spillover effects on international bond yields from US monetary policy across countries and maturities.
    Date: 2018
  3. By: Natalie Chen (Warwick University); Dennis Novy (University of Warwick)
    Abstract: What is the effect of currency unions on international trade? This paper offers a new approach. We rely on a translog gravity equation that predicts variable trade cost elasticities, both across and within country pairs. While we estimate that currency unions are associated with a trade increase of around 38 percent on average, we find substantial underlying heterogeneity. Consistent with the predictions of our model, we find effects around three times as strong for country pairs associated with small import shares, and a zero effect for large import shares. Our results imply that conventional homogeneous currency union estimates do not provide helpful guidance for countries considering to join a currency union such as the euro.
    Date: 2018

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