nep-ifn 2018-11-26 papers

on International Finance

Issue of 2018‒11‒26
two papers chosen by
Vimal Balasubramaniam
University of Oxford

Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? By Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt
International Yield Curves and Currency Puzzles By Mikhail Chernov; Drew D. Creal

Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability?

By:	Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt
Abstract:	Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich data set of macroprudential FX regulations. These empirical tests show that FX regulations (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements; but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
Keywords:	Financial system regulation and policies, Exchange rates, Financial institutions, International financial markets
JEL:	F32 F34 G15 G21 G28
Date:	2018
URL:	http://d.repec.org/n?u=RePEc:bca:bocawp:18-55&r=ifn

International Yield Curves and Currency Puzzles

By:	Mikhail Chernov; Drew D. Creal
Abstract:	The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices alone to estimate these kernels leads to currency puzzles: the inability of models to match violations of uncovered interest parity and the volatility of exchange rates. One cannot use information in bonds alone because exchange rates are not spanned by bonds. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. It also allows us to connect the differences between international yield curves to characteristics of exchange rates.
JEL:	F31 G12 G15
Date:	2018–11
URL:	http://d.repec.org/n?u=RePEc:nbr:nberwo:25206&r=ifn

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