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on International Finance |
| 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 flows receded significantly in the aftermath of the global financial crisis, portfolio flows 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 investment fund inflows to equities and debt globally. Focussing on the euro area, these inflows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance. 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. JEL Classification: F32, F42, G15, G23 |
| Keywords: | capital flows, international spillovers, monetary policy, non-bank financial intermediation |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202489&r=all |
| By: | J. Scott Davis; Michael B. Devereux; Changhua Yu |
| Abstract: | This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through foreign exchange intervention. Intervention is effective due to frictions in private international financial intermediation. Reserve accumulation has ex ante benefits by reducing the risk of a sudden stop, while intervention has ex-post benefits by limiting inefficient deleveraging. But intervention itself faces constraints. When the central bank's stock of reserves is low, even foreign exchange intervention cannot prevent a sudden stop. |
| Keywords: | Central bank; sudden stops; foreign exchange reserves; capital controls |
| JEL: | E50 E30 F40 |
| Date: | 2020–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:89034&r=all |