nep-ifn New Economics Papers
on International Finance
Issue of 2020‒06‒29
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Elusive Safety: The New Geography of Capital Flows and Risk By Alfaro, Laura; Faia, Ester; Judson, Ruth; Schmidt-Eisenlohr, Tim
  2. Interest Rate Uncertainty as a Policy Tool By Ghironi, Fabio; Ozhan, Galip Kemal
  3. When the Markets Get COVID: COntagion, Viruses, and Information Diffusion. By Croce, Mariano Massimiliano; Farroni, Paolo; Wolfskeil, Isabella
  4. Trade credit, trade finance, and the Covid-19 Crisis By Frederic Boissay; Nikhil Patel; Hyun Song Shin
  5. Coping with Disasters: Two Centuries of International Official Lending By Sebastian Horn; Carmen M. Reinhart; Christoph Trebesch

  1. By: Alfaro, Laura; Faia, Ester; Judson, Ruth; Schmidt-Eisenlohr, Tim
    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 multination- als with heterogeneous default probabilities endogenously choose to shift profits to a THFC against a cost and are funded by global intermediaries with endogenous monit- oring 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: Endogenous entry; Geography of flows; Profit shifting; risk; safe assets; Tax avoidance; tax havens
    JEL: F1 F2
    Date: 2020–04
  2. By: Ghironi, Fabio; Ozhan, Galip Kemal
    Abstract: We study a novel policy tool-interest rate uncertainty-that can be used to discourage inefficient capital inflows and to adjust the composition of external accounts between short-term securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between external balance and price stability. The interest rate uncertainty policy discourages short-term inflows mainly through portfolio risk and precautionary saving channels. A markup channel generates net FDI inflows under imperfect exchange rate pass-through. We further investigate new channels under different assumptions about the irreversibility of FDI, the currency of export invoicing, risk aversion of outside agents, and effective lower bound in the rest of the world. Under every scenario, uncertainty policy is inflationary.
    Keywords: international financial policy; Short-Term and Long-Term Capital Movements; stochastic volatility; Unconventional Monetary Policy
    JEL: E32 F21 F32 F38 G15
    Date: 2020–04
  3. By: Croce, Mariano Massimiliano; Farroni, Paolo; Wolfskeil, Isabella
    Abstract: We quantify the exposure of major financial markets to news shocks about global contagion risk accounting for local epidemic conditions. For a wide cross section of countries, we construct a novel data set comprising (i) announcements related to COVID19, and (ii) high-frequency data on epidemic news diffused through Twitter. Across several classes of financial assets, we provide novel empirical evidence about {financial dynamics (i) around epidemic announcements, (ii) at a daily frequency, and (iii) at an intra-daily frequency.} Formal estimations based on both contagion data and social media activity about COVID19 confirm that the market price of contagion risk is very significant. We conclude that prudential policies aimed at mitigating either global contagion or local diffusion may be extremely valuable.
    Keywords: asset prices; contagion; Epidemic
    JEL: G01 G1 I1
    Date: 2020–04
  4. By: Frederic Boissay; Nikhil Patel; Hyun Song Shin
    Abstract: As the Covid-19 pandemic hits economic activity, the vulnerabilities of longer and more geographically extended trade credit chains are coming to the fore, especially those related to international trade. While risk mitigation is available from financial intermediaries, the bulk of the exposures associated with supply chains is borne by the participating firms themselves, through inter-firm credit. Given the prevalence of the US dollar in trade financing, measures such as central bank swap lines that ease global dollar credit conditions may cushion the impact of the pandemic on global value chains.
    Date: 2020–06–19
  5. By: Sebastian Horn; Carmen M. Reinhart; Christoph Trebesch
    Abstract: Official (government-to-government) lending is much larger than commonly known, often surpassing total private cross-border capital flows, especially during disasters such as wars, financial crises and natural catastrophes. We assemble the first comprehensive long-run dataset of official international lending, covering 230,000 loans, grants and guarantees extended by governments, central banks, and multilateral institutions in the period 1790-2015. Historically, wars have been the main catalyst of government-to-government transfers. The scale of official credits granted in and around WW1 and WW2 was particularly large, easily surpassing the scale of total international bailout lending after the 2008 crash. During peacetime, development finance and financial crises are the main drivers of official cross-border finance, with official flows often stepping in when private flows retrench. In line with the predictions of recent theoretical contributions, we find that official lending increases with the degree of economic integration. In crises and disasters, governments help those countries to which they have greater trade and banking exposure, hoping to reduce the collateral damage to their own economies. Since the 2000s, official finance has made a sharp comeback, largely due to the rise of China as an international creditor and the return of central bank cross-border lending in times of stress, this time in the form of swap lines.
    JEL: E42 E5 F02 F3 F35 G01 G15 N1 N20
    Date: 2020–06

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