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on International Finance |
| By: | Patrick Pintus (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Yi Wen (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Xiaochuan Xing (Yale University [New Haven]) |
| Abstract: | This paper stresses a new channel through which global financial linkages contribute to the co‐movement in economic activity across countries. We show in a two‐country setting with borrowing constraints that international credit markets are subject to self‐fulfilling variations in the world real interest rate. Those expectation‐driven changes in the borrowing cost in turn act as global shocks that induce strong cross‐country co‐movements in both financial and real variables (such as asset prices, gross domestic product, consumption, investment, and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom both at home and abroad. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business‐cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor's intimate link to global financial markets. |
| Keywords: | world interest rate,international co-movement,self-fulfilling equilibria |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02075885&r=all |
| By: | Antonio Coppola; Matteo Maggiori; Brent Neiman; Jesse Schreger |
| Abstract: | Global firms finance themselves through foreign subsidiaries, often shell companies in tax havens, which obscures their nationality in aggregate statistics. We associate the universe of traded securities with their issuer's ultimate parent and restate bilateral investment positions to better reflect the true financial linkages connecting countries around the world. We find that portfolio investment from developed countries to firms in large emerging markets is dramatically larger than previously thought. The national accounts of the United States, for example, understate the U.S. position in Chinese firms by nearly $600 billion, while China's official net creditor position to the rest of the world is overstated by about 50 percent. We additionally show how taking account of offshore issuance is important for our understanding of the currency composition of external liabilities, the nature of foreign direct investment, and the growth of financial globalization. |
| JEL: | E0 F0 G0 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26855&r=all |
| By: | Michał Brzoza-Brzezina; Jacek Kotłowski; Grzegorz Wesołowski |
| Abstract: | Business cycles are strongly correlated between countries. One possible explanation (beyond traditional economic linkages like trade or finance) is that consumer or business sentiments spread over boarders and a ect cyclical uctuations in various countries. We first lend empirical support to this concept by showing that sentiments travel between countries at a speed much higher than can be explained by traditional linkages. Then we construct a two-economy new Keynesian model where noisy international information can generate cyclical fluctuations (comovement of GDP, consumption, investment and in ation) in both countries. Estimation with US and Canadian data reveals a significant role of international noise shocks in generating common fluctuations - they explain between 15-30% of consumption variance in the US and Canada and raise the correlation between these variables by up to unity in periods of sentiment breakdowns. We also show that our estimated noise shock has a clear interpretation as a sentiment shock. |
| Keywords: | International spillovers, animal spirits, sentiments, business cycle |
| JEL: | C32 E32 F44 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2020047&r=all |
| By: | Stéphane Dées; Alessandro Galesi |
| Abstract: | We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macrofinancial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. |
| Keywords: | : Trilemma, Global Financial Cycle, Monetary Policy Spillovers, Network Effects. |
| JEL: | C32 E52 F40 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:744&r=all |
| By: | Ulrike Malmendier; Demien Pouzo; Victoria Vanasco |
| Abstract: | We propose a novel explanation for classic international macro puzzles regarding capital flows and portfolio investment, which builds on modern macro-finance models ofexperience-based belief formation. Individual experiences of past macroeconomic out-comes have been shown to exert a long-lasting influence on beliefs about future realizations, and to explain domestic stock-market investment. We argue that experience effects can explain the tendency of investors to hold an over proportional fraction of their equity wealth in domestic stocks (home bias), to invest in domestic equity markets in periods of domestic crises (retrenchment), and to withdraw capital from foreign equity markets in periods of foreign crises (fickleness). Experience-based learning generates additional implications regarding the strength of these puzzles in times of higher or lower economic activity and depending on the demographic composition of market participants. We test and confirm these predictions in the data. |
| Keywords: | experience effects, learning, asset prices, portfolio choice, Demographics |
| JEL: | G11 G12 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1163&r=all |
| By: | Margherita Bottero (Bank of Italy); Enrico Sette (Bank of Italy) |
| Abstract: | We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply— and the real economy —through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero lower bound. For identification, we exploit ECB’s NIRP and matched administrative datasets— including the credit register— from Italy, severely hit by the Eurozone crisis. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to lending, especially to ex-ante riskier and smaller firms—without higher ex-post delinquencies—and cut loan rates (even to the same firm), inducing sizable firm-level real effects. By contrast, there is no evidence of a retail deposits channel associated with NIRP. |
| Keywords: | negative interest rates, portfolio rebalancing, bank lending channel of monetary policy, liquidity management, Eurozone crisis |
| JEL: | E52 E58 G01 G21 G28 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1269_20&r=all |
| By: | Rafael Cezar; Timothée Gigout; Fabien Tripier |
| Abstract: | This paper studies the impact of uncertainty on cross-border investments. We build a data-set of firm-level outward Foreign Direct Investments between 2000 and 2015. We create a time and country varying measure of uncertainty based on the dispersion of idiosyncratic investment returns. An increase in uncertainty delays cross-border flows to the affected country. Yet, this average effect hides strong heterogeneity. Firms with low ex-ante performance durably reduce their foreign investments. Meanwhile high-performing firms increase their investments after the initial shock. We interpret these results as the evidence of a cleansing effect of uncertainty shocks among multinational firms in the presence of financial frictions. |
| Keywords: | Uncertainty;Asymmetric Uncertainty;FDI flows;FDI Returns;Volatility;Multinational Firms |
| JEL: | D81 F23 G10 G15 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2020-03&r=all |
| By: | Franz, Thorsten |
| Abstract: | The dynamic effects of ECB announcements, disentangled into pure monetary policy and central bank information shocks, on the euro (EUR) exchange rate are examined using a Bayesian Proxy Vector Autoregressive (VAR) model fed with high-frequency data. Contractionary monetary policy shocks result in a sizable appreciation of the nominal effective and bilateral EUR exchange rates, peaking on impact. By contrast, despite similar effects on interest rate differentials, responses to central bank information shocks exhibit strong heterogeneities across currency pairs. This disparity can be rationalized by an increase in investors' risk appetite, as measured by the VIX, triggering capital flows into speculative currencies when the ECB reveals a surprisingly sanguine economic outlook. In line with this, the EUR depreciates against a high-yielding carry trade investment portfolio, while it appreciates against a low-yielding carry trade funding portfolio. |
| Keywords: | central bank information,monetary policy,exchange rate,Proxy VAR,high-frequency data,carry trades |
| JEL: | E52 E58 F31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:132020&r=all |
| By: | Michael Melvin; Wenqiang Pan; Petra Wikstrom |
| Abstract: | The literature on currency investing that incorporates transaction costs uses costs relevant for small trade sizes. Using the entire order book of the major electronic brokerages for FX, we compute sweep-to-fill costs for trades of different sizes and illustrate the reduction in post-cost returns as trade size increases. Researchers should consider trade size and frequency to create realistic forecasts of post-tcost returns to gauge the capacity of a strategy. We show how incorporating tcosts in the construction of a portfolio improves performance for both high and low frequency strategies and retains a larger portion of the alpha. |
| Keywords: | transaction costs, FX microstructure, exchange rates, portfolio construction |
| JEL: | G15 F31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8143&r=all |
| By: | Aldatmaz,Serdar; Brown,Greg W.; Demirguc-Kunt,Asli |
| Abstract: | Using a comprehensive and proprietary data set on international private equity activity, this paper studies the determinants of buyout investments across 61 countries and 19 industries over 1990-2017. The study finds evidence that macroeconomic conditions, development of stock and credit markets, and the regulatory environment in a country are important drivers of international buyout capital flows. The paper shows that countries with low unemployment, more active stock and credit markets, and better rule of law receive more buyout capital. A difference-in-differences approach is used to explore the regulatory reforms some countries have adopted over the sample period. The findings are that countries receive significantly more buyout capital following investor protection and contract enforcement reforms. The impact of regulatory reform is more pronounced in countries with better corporate governance standards and education. Buyout investment responds to these factors more so than foreign direct investment and gross domestic fixed investment. |
| Date: | 2020–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:9191&r=all |