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on International Finance |
| By: | Ralph S. J. Koijen (University of Chicago); Motohiro Yogo (Princeton University) |
| Abstract: | Using international holdings data, we estimate a demand system for financial assets across 36 countries. The demand system provides a unified framework for decomposing variation in exchange rates, long-term yields, and stock prices, interpreting major economic events such as the European sovereign debt crisis, and estimating the convenience yield on US assets. Macro variables and policy variables (i.e., short-term rates, debt quantities, and foreign exchange reserves) account for 55 percent of the variation in exchange rates, 57 percent of long-term yields, and 69 percent of stock prices. The average convenience yield is 2.15 percent on US long-term debt and 1.70 percent on US equity. |
| Keywords: | demand system, international |
| JEL: | E52 F31 G12 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2020-33&r= |
| By: | Stéphane Auray (CREST-Ensai and Université du Littoral Côte d’Opale, France); Michael B. Devereux (Vancouver School of Economics, University of British Columbia, Canada); Aurélien Eyquem (Université Lumière Lyon2, France) |
| Abstract: | Countries distort trade patterns (‘trade wars’) to gain strategic advantage relative to one another. At the same time, monetary policies are set independently and have spillover effects on partner countries (‘currency wars’). We combine these two scenarios, and show that they interact in deep and interesting ways. The stance of monetary policy has substantial effects on the equilibrium degree of protection in a Nash equilibrium of the monetary and trade policy game. Trade wars lead to higher equilibrium inflation rates. Cooperation in monetary policy leads to both higher inflation and greater degree of trade protection. By contrast, when monetary policy is constrained by pegged exchange rates or the zero lower bound on interest rates, equilibrium tariffs are lower. Finally, when one country has the dominant currency in trade, it gains a large advantage in a trade war. |
| Keywords: | Protectionism, Currency Wars, Trade Wars |
| JEL: | F30 F40 F41 |
| Date: | 2021–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2021-15&r= |
| By: | Maurice Obstfeld (Peterson Institute for International Economics) |
| Abstract: | In March 2020, international markets seized up with a violence unequaled since the global financial crisis nearly a dozen years before. As economies around the world locked down in the face of the potentially deadly but completely novel SARS-CoV-2 virus, stock markets fell, firms and governments scrambled for cash, liquidity strains emerged even in the market for US Treasurys, and capital flows to emerging-market and developing economies (EMDEs) reversed violently. This paper reviews the evolution of global financial markets since the global financial crisis, changes in academic thinking about these markets' domestic impacts, the strains seen during the COVID-19 crisis, and perils that may lie ahead. A key theme is that stability will be enhanced if the global community embraces reforms that elevate market resilience, rather than depending on skillful policymakers wielding aggressive but ad hoc policy interventions to ride to the rescue again. |
| Keywords: | COVID-19 crisis, emerging markets, capital flows, international finance, global financial cycle, US dollar, Korean economy |
| JEL: | E58 F32 F33 F36 F42 F44 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp22-2&r= |
| By: | Markus K. Brunnermeier (Princeton University); Michael Sockin (University of Texas at Austin); Wei Xiong (Princeton University) |
| Abstract: | China's economic model involves active government intervention in financial markets. We develop a theoretical framework in which interventions prevent a market breakdown and a volatility explosion caused by the reluctance of short-term investors to trade against noise traders. In the presence of information frictions, the government can alter market dynamics since the noise in its intervention program becomes an additional factor driving asset prices. More importantly, this may divert investor attention away from fundamentals and totally toward government interventions (as a result of complementarity in investors' information acquisition). A trade-off arises: government's objective to reduce asset price volatility may worsen, rather than improve, information efficiency of asset prices. |
| Keywords: | China, financial markets |
| JEL: | G01 G14 G28 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2020-45&r= |