nep-ifn 2018-12-17 papers

on International Finance

Issue of 2018‒12‒17
two papers chosen by
Vimal Balasubramaniam
University of Oxford

Gross capital flows by banks, corporates and sovereigns By Stefan Avdjiev; Sebnem Kalemli-Ozcan; Luis Servén
Foreign currency borrowing, balance sheet shocks and real outcomes By Bryan Hardy

Gross capital flows by banks, corporates and sovereigns

By:	Stefan Avdjiev; Sebnem Kalemli-Ozcan; Luis Servén
Abstract:	We construct a new data set of quarterly international capital flows by sector, with an emphasis on debt flows. Using our new data set, we establish four facts. First, the co-movement of capital inflows and outflows is driven by inflows and outflows vis-à-vis the domestic banking sector. Second, the procyclicality of capital inflows is driven by banks and corporates, whereas sovereigns' external liabilities move acyclically in advanced and countercyclically in emerging countries. Third, the procyclicality of capital outflows is driven by advanced countries' banks and emerging countries' sovereigns (reserves). Fourth, capital inflows and outflows decline for banks and corporates when global risk aversion (VIX) increases, whereas sovereign flows show no response. These facts are inconsistent with a large class of theoretical models.
Keywords:	quarterly capital flows, business cycles, external corporate and bank debt, sovereign debt, VIX, systemic risk, emerging markets
JEL:	F21 F41 O1
Date:	2018–11
URL:	http://d.repec.org/n?u=RePEc:bis:biswps:760&r=ifn

Foreign currency borrowing, balance sheet shocks and real outcomes

By:	Bryan Hardy
Abstract:	Emerging market firms frequently borrow in foreign currency (FX), but their assets are often denominated in domestic currency. This behavior leads to an FX mismatch on firms balance sheets, which can harm their net worth in the event of a depreciation. I use a large, unanticipated, and exogenous depreciation episode and a unique dataset to identify the real and financial effects of firm balance sheet shocks. I construct a new dataset of all listed non-financial firms, matched to their banks, in Mexico over 2008q1-2015q2. This dataset combines firm-level balance sheets and real outcomes, currency composition of both assets and liabilities, and firms' loan-level borrowing from banks in peso and FX. This data allows me to control for shocks to firms' credit supply to identify the balance sheet shock and examine its real consequences. I find that non-exporting firms that have a larger FX mismatch experience greater negative balance sheet effects following the depreciation. Among these, smaller firms see a decrease in loan growth, resulting in stagnant employment growth and decreased growth in physical capital relative to firms with smaller FX mismatch. Larger firms with a large FX mismatch also have lower growth in FX loans following the shock, but are able to increase borrowing in peso loans, resulting in relatively higher growth in employment and physical capital. My results imply that firms are subject to net worth based borrowing constraints, and that these constraints are more binding on smaller firms and for loans in FX.
Keywords:	balance sheet shocks, credit rationing, currency risk, foreign currency, corporate finance, bank lending, investment
JEL:	E44 F31 F41 F44 G31 G32
Date:	2018–11
URL:	http://d.repec.org/n?u=RePEc:bis:biswps:758&r=ifn

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