nep-ifn New Economics Papers
on International Finance
Issue of 2020‒05‒25
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global and domestic financial cycles: variations on a theme By Iñaki Aldasoro; Stefan Avdjiev; Claudio Borio; Piti Disyatat
  2. Does monetary policy impact international market co-movements? By Caporin, Massimiliano; Pelizzon, Loriana; Plazzi, Alberto
  3. Elusive Safety: The New Geography of Capital Flows and Risk By Laura Alfaro; Ester Faia; Ruth Judson; Tim Schmidt-Eisenlohr

  1. By: Iñaki Aldasoro; Stefan Avdjiev; Claudio Borio; Piti Disyatat
    Abstract: We compare and contrast two prominent notions of financial cycles: a domestic variant, which focuses on how financial conditions within individual economies lead to boom-bust cycles there; and a global variant, which highlights how global financial conditions affect individual economies. The two notions share a common analytical basis - the "procyclicality" of the financial system. Yet a number of distinguishing features stand out. These include differences in: (i) the underlying components - financial asset prices and capital flows for the global financial cycle (GFCy) versus credit and property prices for the domestic financial cycle (DFC); (ii) their empirical properties - the GFCy has a shorter duration and is primarily linked with traditional business cycles, while the DFC has a longer duration and is predominantly linked with medium-term business cycles; and (iii) the policy focus - "dilemma versus trilemma" for the GFCy, "lean versus clean" for the DFC. Despite these differences, the two cycles tend to come together around crises. Finally, we show that traditional GFCy measures mainly reflect developments in advanced economies and that a simple alternative measure is much more relevant for emerging market economies.
    Keywords: global financial cycle, financial cycle, business cycle, capital flows
    JEL: F30 F40 E32 E50
    Date: 2020–05
  2. By: Caporin, Massimiliano; Pelizzon, Loriana; Plazzi, Alberto
    Abstract: We show that FED policy announcements lead to a significant increase in international comovements in the cross-section of equity and in particular sovereign CDS markets. The relaxation of unconventionary monetary policies is felt strongly by emerging markets, and by countries that are open to the trading of goods and flows, even in the presence of floating exchange rates. It also impacts closed economies whose currencies are pegged to the dollar. This evidence is consistent with recent theories of a global financial cycle and the pricing of a FED's put. In contrast, ECB announcements hardly affect comovements, even in the Eurozone.
    Keywords: Unconventional Monetary policy,Quantitative easing,Mundellian trilemma,Comovements,Sovereign credit risk
    JEL: E58 G12 G15
    Date: 2020
  3. By: Laura Alfaro; Ester Faia; Ruth Judson; Tim Schmidt-Eisenlohr
    Abstract: Using a unique confidential data set with industry disaggregation of official U.S. claims and liabilities, we find that dollar-denominated securities are increasingly inter-mediated by tax havens financial centers (THFC) and by less regulated funds. These securities are risky and respond to tax rates and prudential regulations, suggesting tax avoidance and regulatory arbitrage. Issuers are mostly intangible-intensive multinationals, that can more easily move across borders. Investors require a high Sharpe ratio, suggesting search for yield. In contrast, safe treasuries are mainly held by the foreign official sector and increased with quantitative easing policies. Facts on the privately held securities are rationalized through a model where multinationals with heterogeneous default probabilities endogenously choose to shift profits to a THFC against a cost and are funded by global intermediaries with endogenous monitoring intensity. A fall in debt costs, due to an increase in global savings channeled by low regulated intermediaries, raises firms’ profits. More firms can afford to enter the THFC and, as they appear elusively safer, intermediaries reduce monitoring intensity, increasing ex post risk.
    Keywords: tax havens, geography of flows, profit shifting, tax avoidance, risk, safe assets, endogenous entry
    JEL: F10 F20
    Date: 2020

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