nep-ifn New Economics Papers
on International Finance
Issue of 2021‒11‒29
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Rise of Regional Financial Cycle and Domestic Credit Markets in Asia By Banti, Chiara; Bose, Udichibarna
  2. Financial condition indices for emerging market economies: can Google help? By Fabrizio Ferriani; Andrea Gazzani
  3. The shock absorbing role of cross-border investments: net positions versus currency composition By Agustin S. Benetrix; Beren Demirolmez; Martin Schmitz
  4. Macroprudential Policies and The Covid-19 Pandemic: Risks and Challenges For Emerging Markets By Sebastian Edwards

  1. By: Banti, Chiara; Bose, Udichibarna
    Abstract: This paper documents the emergence of a regional financial cycle in Asia, evidenced by commonality in regional bank flows, and its impact on domestic credit. Using a dataset of 24,169 non-financial Indian firms for the period 2001-2019, we establish that the regional financial cycle has a positive and significant impact on domestic corporate debt, as opposed to an insignificant effect on foreign currency corporate debt, after controlling for the global financial cycle. We find that both interbank markets and monetary policy conditions in the region act as transmission channels for this effect. We show that transparent firms which have lower monitoring costs are relatively more exposed to the regional financial cycle, suggesting that affiliates of foreign banks play an important role. However, the exposure of domestic credit markets reduces once regulators institute more stringent policy actions such as macroprudential policies, selective capital controls and floating currency regimes.
    Keywords: Regional financial cycle; domestic credit markets; macroprudential policies; capital controls; emerging markets
    Date: 2021–11–19
  2. By: Fabrizio Ferriani (Bank of Italy); Andrea Gazzani (Bank of Italy)
    Abstract: We compare different approaches to constructing financial condition indices (FCIs) for major emerging market economies (EMEs). We further test whether measures of web-search intensity for keywords related to financial tensions can complement the information content of traditional financial variables. We find that an index constructed as a simple average of key financial variables augmented with data from Google searches outperforms several alternative definitions of FCIs in explaining business cycle fluctuations and capital flows episodes. These results hold true when controlling for proxies of the global financial cycle, highlighting that local financial market conditions are important for the macroeconomic performance of EMEs
    Keywords: financial condition index, emerging markets, Google search, principal component analysis, VAR, quantile regressions
    JEL: C51 E44 F30 G01 G15
    Date: 2021–11
  3. By: Agustin S. Benetrix (Department of Economics, Trinity College Dublin); Beren Demirolmez (Department of Economics, Trinity College Dublin); Martin Schmitz (European Central Bank)
    Abstract: We present a comprehensive analysis of the shock absorption role of external positions using the currency exposures dataset by Bénétrix, Gautam, Juvenal, and Schmitz (2020). While the literature has frequently studied how the net international investment position and its currency composition determine the direction and scale of valuation effects, we focus on their amplitude. This is of central importance for global financial stability given the large and increasing scale of external balance sheets. To that end, we propose an indicator showing the extent to which external positions absorb or amplify exchange rate shocks. Analysing a set of 50 countries over the period 1990-2017, we find the external shock absorption role to be present for advanced economies, while this was initially not the case for emerging markets economies (EMEs). In recent years, however, EMEs' external positions increasingly showed a shock absorption capacity. Our regression-based analysis reveals that the level of economic and financial development is associated with a greater capacity to absorb exchange rate shocks.
    Keywords: Currency composition, international investment position, foreign currency exposures, valuation effects, global imbalances
    JEL: F21 F31 F32 F41
    Date: 2021–06
  4. By: Sebastian Edwards
    Abstract: This paper deals with COVID and macroprudential regulations in emerging markets. I document the build-up of a sturdy macroprudential structure during 2009-2019, and the relaxation of regulations in 2020-2021, as part of the effort to deal with the sanitary emergency. I show that in every country, regulatory forbearance played a key role in the response to COVID. I discuss capital controls as macroprudential instruments. I argue that rebuilding the macroprudential fabric is important to reduce the costs of future systemic shocks. I maintain that post-COVID regulations should incorporate the risks associated with digital currencies.
    JEL: E31 E52 E58 F3 F41
    Date: 2021–10

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