nep-ifn New Economics Papers
on International Finance
Issue of 2022‒02‒14
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Flexible exchange rates in emerging markets: shock absorbers or drivers of endogenous cycles? By Karsten Kohler; Engelbert Stockhammer
  2. An unintended consequence of holding dollar assets By Czech, Robert; Huang, Shiyang; Lou, Dong; Wang, Tianyu
  3. Foreign Demand for U.S. Treasury Securities during the Pandemic By Colin Weiss
  4. Hide-seek-hide? The effects of financial secrecy on cross-border financial assets By Petr Janský; Tereza Palanská; Miroslav Palanský
  5. Monetary policy, Twitter and financial markets: evidence from social media traffic By Donato Masciandaro; Davide Romelli; Gaia Rubera

  1. By: Karsten Kohler; Engelbert Stockhammer
    Abstract: While flexible exchange rates are commonly regarded as shock absorbers, heterodox views suggest that they can play a pro-cyclical role in emerging markets. This article provides theoretical and empirical support for this view. Drawing on post-Keynesian and structuralist theory, we propose a simple model in which flexible exchange rates in conjunction with external shocks become endogenous drivers of boom-bust cycles, once financial effects from foreign-currency debt are accounted for. We present empirical evidence for regular cycles in nominal US-dollar exchange rates in several emerging markets that are closely aligned with cycles in economic activity. An econometric analysis suggests the presence of a cyclical interaction mechanism between exchange rates and output, in line with the theoretical model, in Chile, South Africa, and partly the Philippines. Further evidence indicates that such exchange rate cycles cannot exclusively be attributed to external factors, such as commodity prices, US monetary policy or the global financial cycle. We therefore argue that exchange rate cycles in emerging markets are driven by the interplay of external shocks and endogenous cycle mechanisms. Our argument implies that exchange rate management may be beneficial for macroeconomic stability.
    Keywords: Exchange rates, emerging markets, boom-bust cycles, structuralism, global financial cycle, commodity prices
    JEL: C32 E12 E32 F31
    Date: 2022–02
  2. By: Czech, Robert (Bank of England); Huang, Shiyang (University of Hong Kong); Lou, Dong (London School of Economics); Wang, Tianyu (Tsinghua University)
    Abstract: We study investor trading behaviour and yield patterns in the UK government bond market during the recent Covid crisis. We show that the yield spike in mid-March 2020 was accompanied by heavy selling of gilts by UK-based insurance companies and pension funds (ICPFs), which we argue was an indirect result of the US dollar’s global prominence. Non-US institutions invest a large portion of their capital in dollar assets and hedge their dollar exposures by selling dollars forward through FX derivatives. In crisis periods, dollars appreciate against other currencies. To meet margin calls on these short-dollar FX positions, non-US institutions sell their domestic safe assets, thereby contributing to the yield spikes in domestic markets.
    Keywords: Covid crisis; gilt yields; variation margin; FX derivatives; global reserve currency; currency hedging
    JEL: F31 G11 G12 G15 G22 G23
    Date: 2021–12–10
  3. By: Colin Weiss
    Abstract: Foreign investors hold a sizable amount of U.S. Treasury securities—$7.5 trillion or about 35 percent of the total outstanding—so net purchases by foreign investors receive significant attention from a variety of sources, including academic researchers, finance professionals, and journalists. During the pandemic, foreign demand for U.S. Treasury securities has received scrutiny for a variety of reasons, including the contribution of foreign investors to the massive selloff in March 2020 (Duffie, 2020; Vissing-Jorgensen, forthcoming) and the ability of foreign investors to absorb additional Treasury securities as the Federal Reserve prepares to taper its asset purchases (Duguid and Rennison, 2021).
    Date: 2022–01–28
  4. By: Petr Janský; Tereza Palanská; Miroslav Palanský
    Abstract: Excessive financial secrecy facilitates illicit financial flows, which constitute a major developmental challenge for low-income economies and cause significant tax revenue losses for governments around the world. In this paper we estimate the semi-elasticity of cross-border financial assets to changes in financial secrecy and how it differs for countries at various income levels. We develop a new financial secrecy dataset for the 2011-20 period, which covers many specific policies in addition to the previously studied automatic information exchange.
    Keywords: Financial secrecy, Transparency, Secrecy jurisdictions, Tax havens, Offshore financial centres
    Date: 2022
  5. By: Donato Masciandaro; Davide Romelli; Gaia Rubera
    Abstract: How does central bank communication affect financial markets? This paper shows that the monetary policy announcements of three major central banks, i.e. the European Central Bank, the Federal Reserve and the Bank of England, trigger significant discussions on monetary policy on Twitter. Using machine learning techniques we identify Twitter messages related to monetary policy around the release of monetary policy decisions and we build a metric of the similarity between the policy announcement and Twitter traffic before and after the announcement. We interpret large changes in the similarity of tweets and announcements as a proxy for monetary policy surprise and show that market volatility spikes after the announcement whenever changes in similarity are high. These findings suggest that social media discussions on central bank communication are aligned with bond and stock market reactions.
    Keywords: monetary policy, central bank communication, financial markets, social media, Twitter, Federal Reserve, European Central Bank, Bank of England
    JEL: E44 E52 E58 G14 G15 G41
    Date: 2021

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