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on International Finance |
| By: | Marina Lovchikova; Johannes Matschke |
| Abstract: | Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that tighten during economic booms to mitigate future sudden-stop dynamics, but it has been challenging to document such patterns in the data. Instead, we show that emerging markets tighten their capital controls in response to volatility in international financial markets and elevated risk aversion. We develop a model in which this behavior arises from a desire to manipulate the risk premium. When investors are more risk-averse or markets are volatile, investors require a high marginal compensation to hold risky emerging market debt. Regulators are able to exploit this tight link and raise capital inflow controls, thereby lowering the risk premium and reducing the overall cost of debt. We emphasize that risk premium manipulations via capital controls are only optimal from the perspective of the individual emerging market, but not from a global perspective. This suggests that the use of capital controls may impose costs in an international context. |
| Keywords: | Capital Controls; Risk Aversion; Risk Premium; Volatility |
| JEL: | F36 F38 F41 |
| Date: | 2021–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93103&r= |
| By: | Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek |
| Abstract: | In this paper, we study the interplay between sovereign risk and global financial risk. We show that a substantial portion of the comovement among sovereign spreads is accounted for by changes in global financial risk. We construct bond-level sovereign spreads for dollar-denominated bonds issued by more than 50 countries from 1995 to 2020 and use various indicators to measure global financial risk. Through panel regressions and local projection analysis, we find that an increase in global financial risk causes a large and persistent widening of sovereign bond spreads. These effects are strongest when measuring global risk using the excess bond premium, which is a measure of the risk-bearing capacity of US financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds. |
| Keywords: | sovereign bonds; CDS; global financial risk; excess bond premium; global financial cycle |
| JEL: | E43 E44 F33 G12 |
| Date: | 2021–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:93483&r= |
| By: | Li, Xiang |
| Abstract: | By focusing on the episodes of substantial capital account liberalisation and adopting a new methodology, this paper provides new evidence on the dilemma and global financial cycle theory. I first identify the capital account liberalisation episodes for 95 countries from 1970 to 2016, and then employ an augmented inverse propensity score weighted (AIPW) estimator to calculate the average treatment effect (ATE) of opening capital account on the interest rate comovements with the core country. Results show that opening capital account causes a country to lose its monetary policy independence, and a floating exchange rate regime cannot shield this effect. Moreover, the impact is stronger when liberalising outward and banking flows. |
| Keywords: | average treatment effect,capital control,global financial cycle,monetary policy autonomy,propensity score matching,trilemma |
| JEL: | E52 F32 F33 F42 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:132021&r= |