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on International Finance |
| By: | Christian Friedrich; Pierre Guérin; Danilo Leiva-Leon |
| Abstract: | We propose a new strength measure of the global financial cycle by estimating a regime-switching factor model on cross-border equity flows for 61 countries. We then assess how the strength of the global financial cycle affects monetary policy independence, which is defined as the response of central banks' policy interest rates to exogenous changes in inflation. We show that central banks tighten their policy rates in response to an unanticipated increase in the inflation gap during times when global financial cycle strength is low. During times of high financial cycle strength, however, the responses of the same central banks to the same unanticipated changes in the inflation gap appear muted. Finally, by assessing the impact of different policy tools on countries' sensitivities to the global financial cycle, we show that using capital controls, macroprudential policies, and the presence of a flexible exchange rate regime can increase monetary policy independence. |
| Keywords: | Business fluctuations and cycles; Exchange rate regimes; Financial system regulation and policies; International financial markets; Monetary policy |
| JEL: | E4 E5 F3 F32 F4 F42 G1 G15 G18 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:20-25&r=all |
| By: | Jon Frost; Hiro Ito; René van Stralen |
| Abstract: | This paper compares the effectiveness of macroprudential policies (MaPs) and capital controls (CCs) in influencing the volume and composition of capital inflows, and the probability of banking and currency crises. We distinguish between foreign exchange (FX)-based MaPs, which may be similar to some types of CCs, and non-FX-based MaPs. Using a panel of 83 countries over the period 2000-17, and a propensity score matching model to control for selection bias, we find that capital inflow volumes are lower where FX-based MaPs have been activated. The imposition of CCs does not have a significant effect on the volume or composition of capital inflows. Further, we find that the activation of MaPs is associated with a lower probability of banking crises and surges in capital inflows in the following three years. |
| Keywords: | capital account openness; capital flows; capital controls; macroprudential policy; banking crises; currency crises |
| JEL: | F38 G01 G28 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:686&r=all |
| By: | Delatte, Anne-Laure; Guillin, Amélie; Vicard, Vincent |
| Abstract: | Tax avoidance schemes generate artificially complex cross-border financial structures inflating measured international investment stocks in tax havens. Using a standard gravity framework, we estimate that about 40\% of global assets (FDI, portfolio equity and debt) are 'abnormal' - unexplained - stocks. Abnormal stocks are increasing over time and concentrated in a limited number of jurisdictions. Six jurisdictions including three European countries are the largest contributors: Cayman, Bermuda, Luxembourg, Hong Kong, Ireland and the Netherlands. Interestingly, the Luxleaks in 2014 do not appear to have diverted cross-border investments away. |
| Keywords: | Capital openness; Cross-border investments; Gravity Equation; tax havens |
| JEL: | F23 G21 H22 H32 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14756&r=all |
| By: | Markus K. Brunnermeier; Michael Sockin; Wei Xiong |
| Abstract: | China's economic model involves active government intervention in financial markets. We develop a theoretical framework in which interventions prevent a market breakdown and a volatility explosion caused by the reluctance of short-term investors to trade against noise traders. In the presence of information frictions, the government can alter market dynamics since the noise in its intervention program becomes an additional factor driving asset prices. More importantly, this may divert investor attention away from fundamentals and totally toward government interventions (as a result of complementarity in investors' information acquisition). A trade-off arises: government's objective to reduce asset price volatility may worsen, rather than improve, information efficiency of asset prices. |
| JEL: | G01 G14 G28 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27171&r=all |
| By: | Rafael Cezar; Timothée Gigout; Fabien Tripier |
| Abstract: | This paper studies the impact of uncertainty on cross-border investments. We build a dataset 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 e_ect 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: | E02 E31 E58 E63 P16 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:766&r=all |
| By: | Bailey, Michael; Gupta, Abhinav; Hillenbrand, Sebastian; Kuchler, Theresa; Richmond, Robert; Ströbel, Johannes |
| Abstract: | We use anonymized data from Facebook to construct a new measure of the pairwise social connectedness between 180 countries and 332 European regions. We find that two countries trade more with each other when they are more socially connected and when they share social connections with a similar set of other countries. The social connections that determine trade in each product are those between the regions where the product is produced in the exporting country and those where it is used in the importing country. Once we control for social connectedness, the estimated effect of geographic distance on trade declines substantially, and the effect of country borders disappears. Our findings suggest that social connectedness increases trade by reducing information asymmetries and by providing a substitute for both trust and formal mechanisms of contract enforcement. We also present evidence against omitted variables and reverse causality as alternative explanations for the observed relationships between social connectedness and trade flows. |
| Keywords: | Contract enforcement; Information Frictions; international trade; Social Connectedness |
| JEL: | F1 F5 F6 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14624&r=all |