nep-ifn New Economics Papers
on International Finance
Issue of 2022‒02‒07
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Currency Carry Trade by Trucks: The Curious Case of China's Massive Imports from Itself By Xuepeng Liu; Heiwai Tang; Zhi Wang; Shang-Jin Wei
  2. On the International Spillover Effects of Country-Specific Financial Sector Bailouts and Sovereign Risk Shocks By Matthew Greenwood-Nimmo; Viet Hoang Nguyen; Eliza Wu
  3. Preemptive Policies and Risk-Off Shocks in Emerging Markets By Ms. Mitali Das; Ms. Gita Gopinath; Şebnem Kalemli-Özcan
  4. Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification By Pablo Ottonello; Wenting Song
  5. Foreign institutional investors and the great productivity slowdown By Schain, Jan Philip
  6. Exchange rate depreciations and local business cycles: The role of bank loan supply By Beck, Thorsten; Bednarek, Peter; te Kaat, Daniel Marcel; von Westernhagen, Natalja

  1. By: Xuepeng Liu; Heiwai Tang; Zhi Wang; Shang-Jin Wei
    Abstract: With capital controls, the standard financial market transactions needed for currency carry trade are hard to implement. Using detailed trade data reported by both the mainland Chinese and Hong Kong’s governments, we present evidence that indirect currency carry trade likely takes place via round-trip reimports. We also show that greater state control in terms of more state-owned firms does not reduce such “carry trade by trucks.”
    JEL: F14 F3 G15
    Date: 2022–01
  2. By: Matthew Greenwood-Nimmo (Department of Economics, The University of Melbourne; Centre for Applied Macroeconomic Analysis, Australian National University); Viet Hoang Nguyen (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne); Eliza Wu (University of Sydney Business School; Centre for Applied Macroeconomic Analysis, Australian National University)
    Abstract: We use sign-identified macroeconomic models to study the interaction of financial sector and sovereign credit risks in Europe. We find that country-specific financial sector bailout shocks do not generate strong international spillovers, because they primarily transfer private sector risk onto the local sovereign. By contrast, sovereign risk shocks generate substantial spillovers onto the global financial sector and for international sovereign debt markets. We conclude that any financial sector bailout policy that undermines the creditworthiness of the affected sovereign is likely to exacerbate global credit risk. Our findings highlight the unintended global consequences of country-specific financial sector bailout programmes.
    Keywords: Financial sector bailouts; sovereign risk shocks; international spillovers; structural shocks; sign restrictions
    JEL: C58 E61 F42
    Date: 2020–11
  3. By: Ms. Mitali Das; Ms. Gita Gopinath; Şebnem Kalemli-Özcan
    Abstract: We show that “preemptive” capital flow management measures (CFM) can reduce emerging markets and developing countries’ (EMDE) external finance premia during risk-off shocks, especially for vulnerable countries. Using a panel dataset of 56 EMDEs during 1996–2020 at monthly frequency, we document that countries with preemptive policies in place during the five year window before risk-off shocks experienced relatively lower external finance premia and exchange rate volatility during the shock compared to countries which did not have such preemptive policies in place. We use the episodes of Taper Tantrum and COVID-19 as risk-off shocks. Our identification relies on a difference-in-differences methodology with country fixed effects where preemptive policies are ex-ante by construction and cannot be put in place as a response to the shock ex-post. We control the effects of other policies, such as monetary policy, foreign exchange interventions (FXI), easing of inflow CFMs and tightening of outflow CFMs that are used in response to the risk-off shocks. By reducing the impact of risk-off shocks on countries’ funding costs and exchange rate volatility, preemptive policies enable countries’ continued access to international capital markets during troubled times.
    Keywords: Preemptive policies, UIP, external finance premia, risk-off shocks, FX debt
    Date: 2022–01–07
  4. By: Pablo Ottonello; Wenting Song
    Abstract: We provide empirical evidence of the causal effects of changes in financial intermediaries' net worth in the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries' net worth in a narrow window around their earnings announcements, based on U.S. tick-by-tick data. Using these shocks, we estimate that news of a 1-percent decline in intermediaries' net worth leads to a 0.2-0.4 percent decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low.
    JEL: E30 E5 G01 G2
    Date: 2022–01
  5. By: Schain, Jan Philip
    Abstract: This article analyzes the impact of institutional investors on firm productivity duringthe financial crisis 2008/09 across European manufacturing industries. Using propen-sity score matching combined with a difference in differences estimator I find a positivesignificant effect of 2% of foreign institutional ownership. Employing a variety of prox-ies for financial constraints, the article shows that the effect is driven by industries,countries, and firms that are more financially constrained indicating that foreign insti-tutional ownership prevents the known productivity slowdown during the financial crisisby alleviating financial constraints.
    Keywords: Institutional Investors,Financial Crisis,Productivity,Financial Constraints
    JEL: F61 G23 G32 G01 L25 D22 D24
    Date: 2022
  6. By: Beck, Thorsten; Bednarek, Peter; te Kaat, Daniel Marcel; von Westernhagen, Natalja
    Abstract: This paper uses matched bank-firm-level data and the 2014 depreciation of the euro to show that exchange rate depreciations lead to increased bank loan supply of large banks with significant net foreign asset exposure. This increase in lending can be explained by a shift in credit towards both export-intensive firms and small banks without foreign asset exposure that have a higher share of exporting firms in their credit portfolio. We also find that German regions where these reallocation effects are stronger experience higher output growth. In economic terms, we show that such regions grow by 1.2 percentage points more than less exposed regions, cumulatively, in the two years after the depreciation relative to the two pre-depreciation years.
    Keywords: Exchange Rates,Bank Lending,Interbank Markets,Real Effects,Regional Business Cycles,Germany
    JEL: E44 E52 G21 O40
    Date: 2021

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