nep-ifn New Economics Papers
on International Finance
Issue of 2020‒11‒23
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  2. Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s By Elliott, David; Meisenzahl, Ralf; Peydro, Jose-Luis; Turner, Bryce
  3. Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk By Lutz, Flora; Zessner-Spitzenberg, Leopold

  1. By: Kaufmann, Christoph
    Abstract: This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital ows receded significantly in the aftermath of the global financial crisis, portfolio ows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis "second phase of global liquidity" (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher global investment fund in ows to euro area equities and debt. These in ows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance in the euro area. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability.
    Keywords: Monetary policy,international spillovers,capital ows,investment funds
    JEL: F32 F42 G11 G15
    Date: 2020
  2. By: Elliott, David; Meisenzahl, Ralf; Peydro, Jose-Luis; Turner, Bryce
    Abstract: We show that nonbanks (funds, shadow banks, fintech) reduce the effectiveness of tighter monetary policy on credit supply and the resulting real effects, and increase risk-taking. For identification, we exploit exhaustive US loan-level data since 1990s and Gertler-Karadi monetary policy shocks. Higher policy rates shift credit supply from banks to less-regulated, more fragile nonbanks. The bank-to-nonbank shift largely neutralizes total credit and associated consumption effects for consumer loans and attenuates the response of total corporate credit (firm investment) and mortgages (house price spillovers). Moreover, different from the so-called risktaking channel, higher policy rates imply more risk-taking by nonbanks.
    Keywords: Nonbank Lending,Monetary Policy Transmission,Risk-Taking Channel
    JEL: E51 E52 G21 G23 G28
    Date: 2020
  3. By: Lutz, Flora; Zessner-Spitzenberg, Leopold
    Abstract: We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to the presence of a pecuniary externality individual agents borrow too much and hold too little liquid assets relative to a social planner. This inefficiency rationalizes macroprudential policy interventions in the form of reserve accumulation at the central bank coupled with a tax on foreign borrowing. Unless combined with other measures, a tax on foreign borrowing is detrimental to welfare; it reduces agents' incentives to invest in liquid assets and thereby increases financial instability. Our model can quantitatively match the simultaneous depreciation of the exchange rate and contractions in output, gross trade ows, foreign liabilities and foreign reserves during sudden stop episodes.
    Keywords: international reserves,sudden stops,liquidity,macroprudential policy,pecuniary externalities
    JEL: D62 E44 F32 F34 F41
    Date: 2020

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