nep-ifn New Economics Papers
on International Finance
Issue of 2019‒01‒07
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. A Global Safe Asset for and from Emerging Market Economies By Brunnermeier, Markus K; Huang, Lunyang
  2. The Rise of the Dollar and Fall of the Euro as International Currencies By Matteo Maggiori; Brent Neiman; Jesse Schreger

  1. By: Brunnermeier, Markus K; Huang, Lunyang
    Abstract: This paper examines international capital flows induced by flight-to-safety and proposes a new global safe asset. In the model domestic investors have to co-invest in a safe asset along with their physical capital. At times of crisis, investors replace the initially safe domestic government bonds with safe US Treasuries and fire-sell part of their capital. The reduction in physical capital lowers GDP and tax revenue, leading to increased default risk justifying the loss of the government bond's safe-asset status. We compare two ways to mitigate this self-fulfilling scenario. In the "buffer approach" international reserve holding reduces the severity of a crisis. In the "rechannelling approach'' flight-to-safety capital flows are rechannelled from international cross-border flows to flows across two EME asset classes. The two asset classes are the senior and junior bond of tranched portfolio of EME sovereign bonds.
    Keywords: Capital Flows; Flight to safety; SBBS; sovereign bond backed securities; sudden stop
    JEL: F32 G23
    Date: 2018–12
  2. By: Matteo Maggiori; Brent Neiman; Jesse Schreger
    Abstract: The modern notion of an international currency involves use in areas of international finance and trade that extend well beyond central banks' coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes. In this short article, we provide evidence suggesting a recent rise in the use of the dollar, and fall of the use in the euro, with similar patterns manifesting across all these aspects of international currency use.
    JEL: E4 E5 F3 G15 G23
    Date: 2018–12

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