nep-ifn New Economics Papers
on International Finance
Issue of 2022‒02‒28
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycle By Anusha Chari; Karlye Dilts Stedman; Kristin Forbes
  2. International Pecking Order By Egemen Eren; Semyon Malamud; Haonan Zhou
  3. Foreign Direct Investment under Uncertainty: Evidence from a Large Panel of Countries By Caroline Jardet; Cristina Jude; Menzie D. Chinn

  1. By: Anusha Chari; Karlye Dilts Stedman; Kristin Forbes
    Abstract: The effects of macroprudential policy on portfolio flows vary considerably across the global financial cycle. A tighter ex-ante macroprudential stance amplifies the impact of global risk shocks on bond and equity flows, increasing outflows significantly more during risk-off episodes and increasing inflows significantly more during risk-on episodes. These amplification effects are more prominent at the “extremes,” especially for extreme risk-off periods and for regulations that target specific risks instead of generalized cyclical buffers. This paper estimates these relationships using a policy-shocks approach that corrects for reverse causality by combining high-frequency risk measures with weekly data on portfolio investment and a new measure of macroprudential regulations that captures the intensity of policy stances. Overall, the results support a growing body of evidence that macroprudential regulation can reduce the volume and volatility of bank flows but shift risks in ways that aggravate vulnerabilities in other parts of the financial system.
    JEL: E58 F3 G15 G28
    Date: 2022–01
  2. By: Egemen Eren (Bank for International Settlements (BIS) - Monetary and Economic Department); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Haonan Zhou (Princeton University - Department of Economics)
    Abstract: We document that corporates in emerging markets borrow more in foreign currency when the local currency provides a better hedge in downturns. We develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. The nature of this equilibrium crucially depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence for this signalling channel using micro data for firms in multiple emerging markets and event studies of local currency depreciation episodes.
    Keywords: Foreign currency debt, corporate debt, signalling, exchange rates, pecking order
    JEL: D82 F34 G01 G15 G32
    Date: 2022–02
  3. By: Caroline Jardet; Cristina Jude; Menzie D. Chinn
    Abstract: We examine the effect of uncertainty on foreign direct investment inflows for a heterogeneous sample of advanced, emerging market and developing countries over a 25 year long (pre-Covid) sample. Using a push-pull framework, and controlling for both global and local factors, we find policy uncertainty has discernable and significant effects on inflows, but those effects vary in strength and direction between different groups of countries. Moreover, it is not host country uncertainty that seems to matter the most, but rather global uncertainty. Additionally, we find that high levels of uncertainty matter disproportionately. Finally, financial openness accentuates the impact of uncertainty for emerging market and developing countries.
    JEL: F21 F4
    Date: 2022–01

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