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on International Finance |
| By: | J. Scott Davis; Eric van Wincoop |
| Abstract: | We develop a theory to account for changes in prices of risky and safe assets and gross and net capital flows over the global financial cycle (GFC). The multi-country model features global risk-aversion shocks and heterogeneity of investors both within and across countries. Within-country heterogeneity is needed to account for the drop in gross capital flows during a negative GFC shock (higher global risk-aversion). Cross-country heterogeneity is needed to account for the differential vulnerability of countries to a negative GFC shock. The key vulnerability is associated with leverage. In both the data and the theory, leveraged countries (net borrowers of safe assets) deleverage through negative net outflows of risky assets and positive net outflows of safe assets, experience a rise in the current account and a greater than average drop in risky asset prices. The opposite is the case for non-leveraged countries (net lenders of safe assets). |
| JEL: | F30 F40 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29217&r= |
| By: | Kevin Lai (Federal Reserve Bank of New York); Tao Wang (Swarthmore College); David Xu (Peterson Institute for International Economics) |
| Abstract: | Capital control policies have consequences for economic growth and international trade. Using data on 99 countries from 1995 to 2014, we find evidence that the effect of capital controls on trade vary across industries that have differing levels of external financing and asset tangibility. For exporting countries that tighten capital controls, industries that rely more heavily on external financing experience a larger decline in exports, while industries that possess more tangible assets experience a smaller decline in exports. For importing countries, tighter capital controls imply a decrease in trade, and this effect is uniform across all industries. The pattern with respect to external financing persists after accounting for availability of domestic credit and differences in industry shares and is predominantly found in countries with low levels of financial development. On the other hand, the varying effect related to asset tangibility is mostly absorbed by the domestic credit market. |
| Keywords: | Capital controls, Financial vulnerability, International trade |
| JEL: | F14 F38 F68 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp19-20&r= |
| By: | Beckmann, Joscha; Comunale, Mariarosaria |
| Abstract: | This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyze whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks’ transmission covering 11 emerging market countries for the period 2000Q1–2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand regarding foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to apeiation) decreases GDP. The financial channel works mostly in the short run except for Brazil, Malaysia, and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rate. |
| JEL: | F31 F41 F43 G15 |
| Date: | 2021–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2021_011&r= |