nep-ifn New Economics Papers
on International Finance
Issue of 2019‒11‒18
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. In the face of spillovers: prudential policies in emerging economies By Coman, Andra; Lloyd, Simon
  2. Attention to the tail(s): global financial conditions and exchange rate risks By Eguren-Martin, Fernando; Sokol, Andrej
  3. The Impact of Pensions and Insurance on Global Yield Curves By Robin M. Greenwood; Annette Vissing-Jorgensen

  1. By: Coman, Andra (European Central Bank); Lloyd, Simon (Bank of England)
    Abstract: We examine whether emerging market prudential policies offset the macro-financial spillover effects of US monetary policy. We find that emerging markets with tighter overall prudential policy face significantly smaller, and less negative, spillovers to total credit from US monetary policy tightening shocks. Loan-to-value ratio limits and reserve requirements appear to be particularly effective prudential tools at mitigating the spillover effects of US monetary policy. Our findings indicate that prudential policies can dampen emerging markets’ exposure to US monetary policy and the associated global financial cycle, suggesting they may be a useful tool in the face of international macroeconomic policy trade-offs.
    Keywords: International spillovers; local projections; policy interactions; monetary policy; prudential policy
    JEL: E52 E58 E61 F44
    Date: 2019–09–27
  2. By: Eguren-Martin, Fernando (Bank of England); Sokol, Andrej (European Central Bank, Bank of England and CfM)
    Abstract: We document how the entire distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Based on quantile regression results, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating some of the prevailing narratives about safe haven and risky currencies. We then carry out a portfolio sorting exercise to identify the macroeconomic fundamentals associated with such different tail behaviour, and find that currency portfolios sorted on the basis of relative interest rates, current account balances and levels of international reserves display a higher likelihood of large losses in response to a tightening of global financial conditions.
    Keywords: Exchange rates; tail risks; financial conditions indices; global financial cycle; quantile regression
    JEL: F31 G15
    Date: 2019–09–16
  3. By: Robin M. Greenwood (Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)); Annette Vissing-Jorgensen (National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business)
    Abstract: We document a strong effect of pension and insurance company (P&I) assets on the long end of the yield curve. Using data from 26 countries, the yield spread between 30-year and 10-year government bond yields is negatively related to the ratio of pension assets (in funded and private pension and life insurance arrangements) to GDP, suggesting that preferred-habitat demand by the P&I sector for long-dated assets drives the long end of the yield curve. We draw on changes in regulations in several European countries between 2008 and 2013 to provide well-identified evidence on the effect of the P&I sector on yields and to show that P&I demand is in part driven by hedging linked to the regulatory discount curve. When regulators reduce the dependence of the regulatory discount curve on a particular security, P&I demand for the security falls and its yield increases. These effects extend beyond long government bonds. Our results suggest that pension discount rules can have a destabilizing impact on bond markets that reverses once rules are changed.
    Date: 2019–12

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