nep-ifn New Economics Papers
on International Finance
Issue of 2020‒07‒20
nine papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global Imbalances and Policy Wars at the Zero Lower Bound By Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
  2. Dollar borrowing, firm-characteristics, and FX-hedged funding opportunities By Gambacorta, Leonardo; Mayordomo, Sergio; Serena Garralda, Jose-Maria
  3. Cross-border lending and the international transmission of banking crises By Dieckelmann, Daniel
  4. Measuring Global Macroeconomic Uncertainty By Graziano Moramarco
  5. Patterns of Foreign Exchange Intervention under Inflation Targeting By Gustavo Adler; Kyun Suk Chang; Zijiao Wang
  6. Different no more: Country spreads in advanced and emerging economies By Born, Benjamin; Müller, Gernot; Pfeifer, Johannes; Wellmann, Susanne
  7. Uncertainty and Downside Risk in International Stock Returns By Aslanidis, Nektarios; Christiansen, Charlotte; Kouretas, George
  8. Global Macro-Financial Cycles and Spillovers By Ha, Jongrim; Kose, Ayhan; Otrok, Christopher; Prasad, Eswar
  9. Global Capital and Local Assets: House Prices, Quantities, and Elasticities By Caitlin S. Gorback; Benjamin J. Keys

  1. By: Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
    Abstract: This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. We establish four main results: (i) Liquidity traps spread to the rest of the world through the current account, which we illustrate with a new Metzler diagram in quantities; (ii) Beggar-thy-neighbor currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (iii) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; (iv) At the ZLB, net issuers of safe assets experience a disproportionate share of the global stagnation.
    JEL: E0 F3 F4 G1
    Date: 2020–02
  2. By: Gambacorta, Leonardo; Mayordomo, Sergio; Serena Garralda, Jose-Maria
    Abstract: We explore the link between firms' dollar bond borrowing and their FX-hedged funding opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). Consistent with previous research, we first document that firms substitute domestic for dollar borrowing when they have higher dollar revenues or long-term assets and when the corporate basis widens. Importantly, our novel firm-level dataset enables to show that when these funding opportunities appear, the currency substitution is stronger for high-grade firms, as they can offer to investors close substitutes for safe dollar assets. However, firms with higher dollar revenues or long-term assets do not react to changes in the corporate basis. Altogether, the composition of dollar borrowers shifts when the basis widens, as high-grade firms gain importance, relative to firms with operational needs.
    Keywords: Covered interest rate parity; credit spread; debt issuance; dollar convenience yield; foreign exchange rate hedge; Limits of arbitrage
    JEL: E44 F3 F55 G12 G15 G23 G28 G32
    Date: 2020–02
  3. By: Dieckelmann, Daniel
    Abstract: This paper introduces a new transmission channel of banking crises where sizable cross-border bank claims on foreign countries with high domestic crisis risk enable contagion to the home economy. This asset-side channel opposes traditional views that see banking crises originating from either domestic credit booms or from cross-border borrowing. I propose a combined model that predicts banking crises using both domestic and foreign factors. For developed economies, the channel is predictive of crises irrespective of other types of capital ows, while it is entirely inactive for emerging economies. I show that policy makers can significantly enhance current early warning models by incorporating exposure-based risk from cross-border lending.
    Keywords: cross-border bank lending,banking crises,systemic risk,financial linkages
    JEL: C53 E44 F34 G01 G21
    Date: 2020
  4. By: Graziano Moramarco
    Abstract: This paper provides new indices of global macroeconomic uncertainty and investigates the cross-country transmission of uncertainty using a global vector autoregressive (GVAR) model. The indices measure the dispersion of forecasts that results from parameter uncertainty in the GVAR. Relying on the error correction representation of the model, we distinguish between measures of short-run and long-run uncertainty. Over the period 2000Q1-2016Q4, global short-run macroeconomic uncertainty strongly co-moves with financial market volatility, while long-run uncertainty is more highly correlated with economic policy uncertainty. We quantify global spillover effects by decomposing uncertainty into the contributions from individual countries. On average, over 40% of country-specific uncertainty is of foreign origin.
    JEL: C15 C32 E17 D80 F44 G15
    Date: 2020–06
  5. By: Gustavo Adler; Kyun Suk Chang; Zijiao Wang
    Abstract: The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.
    Date: 2020–05–29
  6. By: Born, Benjamin; Müller, Gernot; Pfeifer, Johannes; Wellmann, Susanne
    Abstract: Interest-rate spreads fluctuate widely across time and countries. We characterize their behavior using some 3,200 quarterly observations for 21 advanced and 17 emerging economies since the early 1990s. Before the financial crisis, spreads are 10 times more volatile in emerging economies than in advanced economies. Since 2008, the behavior of spreads has converged across country groups, largely because it has adjusted in advanced economies. We also provide evidence on the transmission of spread shocks and find it similar across sample periods and country groups. Spread shocks have become a more important source of output fluctuations in advanced economies after 2008.
    Keywords: Average treatment effect; Business cycle; Country risk; Country spreads; financial crisis; Interest-rate shocks; Spread shocks
    JEL: E32 F41 G15
    Date: 2020–02
  7. By: Aslanidis, Nektarios; Christiansen, Charlotte; Kouretas, George
    Abstract: We conduct an international analysis of the cross-sectional risk premiums of uncertainty risk factors in addition to traditional risk factors. We consider the stock markets in five regions separately. Internationally, uncertainty has negative risk premiums which is similar to previous findings for the US. This implies that investors get lower returns for assets with high uncertainty betas. We further contribute with an analysis of downside un- certainty risk. Here, the downside uncertainty risk factor is high uncertainty which has additional risk premiums. We measure uncertainty by the logs of the local and US economic policy uncertainty indices. Keywords: International stock returns; economic policy uncertainty; Fama- French factor models; downside risk. JEL Classifications: G12; G15
    Keywords: Mercats financers, 33 - Economia,
    Date: 2020
  8. By: Ha, Jongrim; Kose, Ayhan; Otrok, Christopher; Prasad, Eswar
    Abstract: We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles.
    Keywords: Common Shocks; Dynamic factor models; Global business cycles; global financial cycles; International spillovers
    JEL: C1 C32 E32 F4
    Date: 2020–02
  9. By: Caitlin S. Gorback; Benjamin J. Keys
    Abstract: Interconnected capital markets allow mobile global capital to flow into immobile local assets. This paper examines how foreign demand affects U.S. housing markets, and uses this demand shock to estimate local price elasticities of supply. Other countries introduced foreign-buyer taxes meant to deter Chinese housing investment beginning in 2011. We first show house prices grew 8 percentage points more in U.S. zipcodes with high foreign-born Chinese populations after 2011, subsequently reversing with the onset of the U.S.–China trade war. Second, we use international tax policy changes as a U.S. housing demand shock and estimate local house price and quantity elasticities with respect to international capital. We find that a 1% increase in instrumented foreign capital raises house prices at the zip code level by 0.27%, and housing supply by 0.004%. Finally, we use the two elasticities to construct new local house price elasticities of supply for the largest 100 CBSAs. These supply elasticities average 0.1 and vary between 0.02 and 0.7, suggesting that local housing markets are inelastic in the short run and exhibit substantial spatial heterogeneity.
    JEL: R21 R31
    Date: 2020–06

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