nep-ifn 2021-09-20 papers

on International Finance

Issue of 2021‒09‒20
two papers chosen by
Vimal Balasubramaniam
University of Oxford

A Theory of the Global Financial Cycle By J. Scott Davis; Eric Van Wincoop
ECB euro liquidity lines By Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer

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).
Keywords:	Global Financial Cycle; Capital Flows; Current Account
JEL:	F30 F40
Date:	2021–09–09
URL:	http://d.repec.org/n?u=RePEc:fip:feddgw:93046&r=

ECB euro liquidity lines

By:	Silvia Albrizio (Banco de España); Iván Kataryniuk (Banco de España); Luis Molina (Banco de España); Jan Schäfer (CEMFI)
Abstract:	The use of central bank liquidity lines has gained momentum since the global financial crisis in order to provide liquidity in foreign exchange markets, while at the same time preventing threats to financial stability and negative spillbacks. US dollar swap lines are well studied, but much less is known about the effects of liquidity lines in euros. We use a difference-in-differences strategy to show that the announcement of ECB euro liquidity lines has a direct positive signalling effect since the premium paid by foreign agents to borrow euros in FX markets decreases up to 76 basis points relative to currencies not covered by these facilities. Additionally, the paper provides suggestive evidence that these facilities generate positive spillbacks to the euro area since domestic bank equity prices increase by 6.7% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
Keywords:	liquidity facilities, central banks swap and repo lines, spillbacks
JEL:	E44 E58 F33 G15
Date:	2021–08
URL:	http://d.repec.org/n?u=RePEc:bde:wpaper:2125&r=

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