nep-ifn New Economics Papers
on International Finance
Issue of 2019‒09‒02
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. A Model of Fickle Capital Flows and Retrenchment By Caballero, Ricardo; Simsek, Alp
  2. The Effect of Unconventional Monetary Policy on Cross‐Border Bank Loans: Evidence from an Emerging Market By Koray Alper; Fatih Altunok; Tanju Çapacıoğlu; Steven Ongena
  3. The Natural Level of Capital Flows By John D. Burger; Francis E. Warnock; Veronica Cacdac Warnock
  4. Safe U.S. Assets and U.S. Capital Flows By Charles Engel

  1. By: Caballero, Ricardo; Simsek, Alp
    Abstract: We develop a model of gross capital flows and analyze their role in global financial stability. In our model, consistent with the data, when a country experiences asset fire sales, foreign investments exit (fickleness) while domestic investments abroad return home (retrenchment). When countries have symmetric expected returns and financial development, the benefits of retrenchment dominate the costs of fickleness and gross flows increase fire-sale prices. Fickleness, however, creates a coordination problem since it encourages local policymakers to restrict capital inflows. When countries are asymmetric, capital flows are driven by additional mechanisms, reach-for-safety and reach-for-yield, that can destabilize the receiving country.
    Keywords: asset fire sales; capital controls; fickleness; Global liquidity; Gross capital flows; Policy Coordination; reach-for-safety; reach-for-yield; retrenchment; scarcity of safe assets
    JEL: E3 E4 F3 F4 G1
    Date: 2019–06
  2. By: Koray Alper (Government of the Republic of Turkey - Central Bank of the Republic of Turkey); Fatih Altunok (Central Bank of the Republic of Turkey); Tanju Çapacıoğlu (Central Bank of Turkey); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We analyze the impact of quantitative easing by the Federal Reserve, European Central Bank and Bank of England on cross‐border credit flows. Relying on comprehensive loan‐level data, we find that Fed QE strongly boosts cross‐border credit granted to Turkish banks by banks located in the US, Euro Area and UK, while ECB and BoE QEs work only moderately through banks in the EA and UK, respectively. In general QE works at short maturities across bank locations and loan currencies, more strongly for weaker lenders and borrowers, and may have resulted in maturity mismatches in Turkish banks searching for yield.
    Keywords: bank lending channel; bank borrowing channel; monetary transmission; quantitative easing (QE); cross‐border bank loans, micro‐level data, capital requirements, financial de‐globalization
    JEL: E44 E52 F42 G15 G21
    Date: 2019–07
  3. By: John D. Burger; Francis E. Warnock; Veronica Cacdac Warnock
    Abstract: We put forward the notion that capital flows—specifically, gross portfolio flows—fluctuate around some natural level. Our particular measure of the natural level of capital flows, denoted by KF*, is a theory-based time-varying supply-side factor, much like potential GDP is a theory based time varying supply side measure of economic activity. We construct KF* for 184 countries and, for the subset of countries that have quarterly time series data of capital flows, we show that KF* is a level to which flows converge in the medium term. That is, KF* appears to help identify the underlying persistent component in gross portfolio inflows by differentiating between longer-term structural flows and short-term cyclical noise. Overall, we conclude that there is a natural level of capital flows that is well approximated by our measure of KF*.
    JEL: F3 F4
    Date: 2019–08
  4. By: Charles Engel (University of Wisconsin – Madison)
    Abstract: The “exorbitant privilege” of the U.S. – the ability of the U.S. to earn positive net income on its international portfolio even though it is a net debtor – may be linked to the “convenience yield” on U.S. government bonds. The convenience yield refers to the low pecuniary return on U.S. Treasuries associated with the non-pecuniary yield on those assets arising from their liquidity and safety. A simple model shows how the convenience yield can lead to current account deficits, an appreciated currency in real terms, and positive net factor income. Empirically, we find evidence associating the convenience yield with a strong dollar in real terms, and, in turn, evidence linking the real exchange rate to the U.S. current account. We calculate that this channel may account for approximately 40% of the U.S. current account deficit. We then discuss factors that might influence the convenience yield, and discuss possible drawbacks to the exorbitant privilege.
    Date: 2019–08–18

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