nep-ifn New Economics Papers
on International Finance
Issue of 2020‒11‒09
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. How Shocks Affect International Reserves? A Quasi-Experiment of Earthquakes By Yothin Jinjarak; Ilan Noy; Quy Ta
  2. The Diplomacy Discount in Global Syndicated Loans By Ambrocio, Gene; Gu, Xian; Hasan, Iftekhar; Politsidis, Panagiotis
  3. Bank Liquidity Provision across the Firm Size Distribution By Gabriel Chodorow-Reich; Olivier M. Darmouni; Stephan Luck; Matthew Plosser
  4. "Global effects of US uncertainty: real and financial shocks on real and financial markets" By Jose E. Gomez-Gonzalez; Jorge Hirs-Garzon; Jorge M. Uribe

  1. By: Yothin Jinjarak; Ilan Noy; Quy Ta
    Abstract: We evaluate the change in international reserves in the aftermath of significant external shocks. We examine the response of international reserves to shocks by using a quasi-experimental setup and focusing on earthquakes. The estimation is done on a panel of 103 countries over the period 1979–2016. We find that in the five years following a large earthquake (i) countries exposed accumulate reserves, for precautionary reasons, (ii) trade openness is positively associated with the post-earthquake reserves accumulation, (iii) episodes of reserves depletion are observed in countries under the fixed exchange rate and/or inflation targeting regimes, and (iv) the patterns of reserves holding post-earthquake vary with a country’s income level.
    Keywords: disasters, earthquakes, international reserves, foreign exchange holding
    JEL: F31 F41 Q54
    Date: 2020
  2. By: Ambrocio, Gene; Gu, Xian; Hasan, Iftekhar; Politsidis, Panagiotis
    Abstract: We investigate whether state-to-state political ties with a global superpower affects the pricing of international syndicated bank loans. We find statistically and economically significant effects of stronger state political ties with the United States, arguably the most dominant global superpower of our times, on the pricing of global syndicated loans. A one standard deviation improvement in state political ties between the U.S. and the government of a borrower's home country is associated with 14 basis points lower loan spread. This is equivalent to a cumulative savings in loan interest payments of about 10 million USD for the average loan in our sample. The effect of political ties on loan pricing is also stronger when lead arrangers are U.S. banks, during periods in which the U.S. is engaged in armed conflicts such as in the Afghan, Iraq and Syrian wars, when the U.S. president belongs to the Republican Party, and for borrowers with better balance sheets and prior lending relationships. Notably, we find that not all firms exploit this mechanism, as cross-listed firms and firms in countries with strong institutional quality and ability to attract institutional investors are much less reliant on political ties for lowering their borrowing costs.
    Keywords: Global syndicated loans; Political ties; Loan pricing
    JEL: F50 G15 G21 G30
    Date: 2020–09–08
  3. By: Gabriel Chodorow-Reich; Olivier M. Darmouni; Stephan Luck; Matthew Plosser
    Abstract: Using loan-level data covering two-thirds of all corporate loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizes these facts as the equilibrium outcome of a trade-off between commitment and discretion. We test the model’s prediction that small firms may be unable to access liquidity when large shocks arrive using data on drawdowns in the COVID recession. Consistent with the theory, the increase in bank credit in 2020:Q1 and 2020:Q2 came almost entirely from drawdowns by large firms on pre-committed lines of credit. Differences in demand for liquidity cannot fully explain the differences in drawdown rates by firm size, as we show that large firms also exhibited much higher sensitivity of drawdowns to industry-level measures of exposure to the COVID recession. Finally, we match the bank data to a list of participants in the Paycheck Protection Program (PPP) and show that SME recipients of PPP loans reduced their non-PPP bank borrowing in 2020:Q2 by between 53 and 125 percent of the amount of their PPP funds, suggesting that government-sponsored liquidity can overcome private credit constraints.
    Keywords: liquidity provision; macro-finance; credit; financial constraints; loan terms; banking; credit lines; COVID-19
    JEL: G00 G20 G30
    Date: 2020–10–01
  4. By: Jose E. Gomez-Gonzalez (Escuela Internacional de Ciencias Económicas y Administrativas, Universidad de La Sabana, Chia. Colombia.); Jorge Hirs-Garzon (Inter-American Development Bank, Washington, D.C., USA.); Jorge M. Uribe (Faculty of Economics and Business, Open University of Catalonia, Riskcenter, Universitat de Barcelona, Spain.)
    Abstract: We estimate the effects of financial, macroeconomic and policy uncertainty from the United States on the dynamics of credit growth, stock prices, economic activity, bond yields and inflation in five of the main receptors of US foreign direct investment from 1950 to 2019: The United Kingdom, The Netherlands, Ireland, Canada and Switzerland. Our multicounty approach allows us to clearly identify the effects of the different sources of uncertainty by imposing natural contemporaneous exogenity restrictions which cannot be used in a single-country perspective, frequently undertaken by the literature. It also considers international common cycle factors that have been previously identified and which are key to adequately measure the dynamics of the effects of uncertainty shocks on financial and real markets, on a global basis. We use an international FAVAR model to carry out our estimations. This approach permits handling a large data set consisting of variables for more than 45 countries at once. Our results point out to financial uncertainty as the main driver (even more than real uncertainty or the US interest rate) of global economic cycles. We show that increases of US financial uncertainty deteriorate economic activity on a global scale, especially by reducing credit and stock prices, and therefore funding opportunities for firms and households (heterogeneously on a country level basis). Our results emphasize the importance of financial markets, and especially financial uncertainty in the United States, as the main origin of global economic fluctuations, which can be said to describe the recent history of the global economy. They also cast doubts on the ability of uncertainty indicators based on the counting of key words in the media as a barometer of traditional economic uncertainty, known to be theoretically associated to negative outcomes in terms of activity and prices. In this sense, uncertainty indicators based on the estimation and aggregation of forecast errors seem more appropriate, hence producing results in line with the understanding of uncertainty as a negative phenomenon on a macro level, especially for investment prospects.
    Keywords: Macroeconomic uncertainty, Financial uncertainty, Credit markets, Funding, Global business cycles. JEL classification: D80, E44, F21, F44, G15.
    Date: 2020–10

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