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on International Finance |
| By: | Boris Hofmann; Nikhil Patel; Steve Pak Yeung Wu |
| Abstract: | Many emerging markets (EMs) have graduated from "original sin" and are able to borrow from abroad in their local currency. Using a two-country model, this paper shows that the shift from foreign currency to local currency external borrowing does not eliminate the vulnerability of EMs to foreign financial shocks but instead results in "original sin redux" (Carstens and Shin (2019)). Even under local currency borrowing from foreign lenders, a monetary tightening abroad is propagated to EM financial conditions through a tightening of foreign lenders' financial constraints. Moreover, local currency borrowing does not eliminate currency mismatches, but shifts them from the balance sheets of EM borrowers to the balance sheets of financially constrained global lenders, so that amplifying financial effects of exchange rate fluctuations remain. We provide empirical evidence in line with this prediction of the model using data on currency composition of external debt of emerging and advanced economies. Our model-based analysis further suggests that foreign exchange intervention and capital flow management measures can mitigate the adverse effects of capital flow swings in the short run and that a larger domestic investor base can reduce the vulnerability to such swings in the longer run. |
| Keywords: | emerging market, capital flows, exchange rate, currency mismatch. |
| JEL: | E3 E5 F3 F4 F6 G1 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1004&r= |
| By: | Eric Jondeau; Benoit Mojon; Luiz Awazu Pereira da Silva |
| Abstract: | In this paper, we build portfolios with a progressively falling carbon footprint, which passive investors could use as a new Paris-consistent (PC) benchmark while keeping their risk-adjusted returns at the same level as those of business-as-usual (BAU) benchmarks. We identify the worst polluters globally, exclude them from the portfolio, and re allocate the proceeds so as to keep sectoral and regional exposures similar to those of the business as usual (BAU) benchmark. This approach limits the divestment from corporates in emerging market economies that would result from implementing exclusions and reinvestment without the objective of preserving regional exposures. We show that reducing the carbon footprint of the portfolio by 64% in 10 years could be achieved by sequentially excluding up to 11% of the corporates, which together amount to less than 6% of the global market portfolio. While this reallocation keeps regional and sectoral exposures at a similar level to those of the BAU benchmark, it does not change the portfolio's risk-adjusted return. We define PC benchmark portfolios at the global level as well as for Emerging Countries, Europe, North America, and the Pacific. |
| Keywords: | Portfolio carbon footprint, Green and brown assets, Alignment with Paris Net Zero Emissions Agreement |
| JEL: | G11 G24 Q56 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:985&r= |