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on International Finance |
| By: | Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva |
| Abstract: | A core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the magnitude of regulatory spillovers and the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks in both regions are subject to risk-sensitive capital regulation. Following an expansionary monetary policy in the core, a countercyclical response in capital requirements induces the global bank to engage in regulatory arbitrage. The magnitude of the resulting cross-border capital flows depends on the degree of economies of scope in lending. Welfare gains associated with countercyclical capital buffers are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity---a regime in which capital ratios set in the core are imposed on branches operating in the periphery. If regulators set policies on the basis of a narrow financial stability mandate, and these policies are evaluated in terms of household welfare, reciprocity may perform better than Nash, and as well as coordination for all parties, when regulatory leakages are strong. |
| Keywords: | global banking, financial spillovers, regulatory leakages, macroprudential policy coordination. |
| JEL: | E58 F42 F62 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1007&r= |
| By: | Bruno Feunou; Jean-Sébastien Fontaine; Ingomar Krohn |
| Abstract: | We provide a novel daily decomposition of the real exchange rate that exploits a direct link between bond and foreign exchange (FX) markets. Real exchange rate dynamics can be attributed to changes in the expected future level of the exchange rate; cross-country differentials of expected inflation, yields and bond term premia; and an FX risk premium. Through a variance decomposition exercise, we fi nd that the FX risk premium is the dominant component. Monetary policies and macroeconomic news announcements largely move the real exchange through changes in the FX risk premium. |
| Keywords: | Asset pricing; Exchange rates; International financial markets; Monetary policy transmission |
| JEL: | E43 F31 G12 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:22-6&r= |
| By: | Giraldo, I.; Turner P |
| Abstract: | A decade of low interest rates in the major currencies and failings in the regulatory oversight of international bond markets have led investors to take more and more risk in their search for higher yields. Non-financial corporations (NFC's) in Latin America have taken full advantage, and their dollar indebtedness is now heavier than for corporations in most other emerging market regions. This paper documents the many warning signs of macroeconomic and financial instability in the region from such indebtedness. Macroeconomic data show that the NFC sector has become much more leveraged and faces increased currency mismatches. Microeconomic data drawn from a sample of more than 160 companies confirm that several balance sheet indicators have deteriorated for firms in both the tradable and the non-tradable sectors. As dollar debts were rising, profits were declining, capital expenditures falling and solvency risk rising. This situation warrants careful and continuous monitoring by the authorities in the region. Macroprudential policies in Latin America need to address with urgency the vulnerabilities created by international market-based finance and ensure that local banks remain resilient to external financial shocks. Interest rates will rise and, given the recent warnings of the Bank for International Settlements (BIS) and the Financial Stability Board (FSB), some regulatory tightening affecting bond markets is likely. |
| Keywords: | Non-financial corporate debt, Latin America, currency mismatches, global liquidity, corporate balance sheets, FSB, IMF, BIS |
| JEL: | D25 E44 F30 F34 F65 G15 G18 G28 |
| Date: | 2022–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000566:020025&r= |
| By: | Antoine Bouveret; Antoine Martin; Patrick E. McCabe |
| Abstract: | Money market funds (MMFs) are popular around the world, with over $9 trillion in assets under management globally. From their origins in the 1970s, MMFs have operated in a niche between the capital markets and the banking system, as investment funds that offer private money-like assets with features similar to those of bank deposits. Hence, they are vulnerable to runs that arise from liquidity transformation and from sudden changes in investor perceptions of the funds’ ability to serve as money-like assets. Since 2000, MMF runs have occurred in many countries and under many regulatory regimes. The global pattern of runs and crises shows that MMF vulnerabilities are not unique to a particular set of governing arrangements, and that mitigating these vulnerabilities requires fundamental reforms that either place MMFs more clearly within the investment-fund sector or establish protections for MMFs similar to those for deposits. |
| Keywords: | money market funds; liquidity transformation; runs; nonbank financial institutions; short-term funding markets; information-insensitive assets; financial stability |
| JEL: | G20 G23 G28 |
| Date: | 2022–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:93851&r= |
| By: | Cong, Lin William; Mayer, Simon |
| Abstract: | We model the dynamic global competition among national fat currencies, cryptocurrencies, and Central Bank Digital Currencies (CBDCs) in which the strength of a country and of its currency are mutually reinforcing. The rise of cryptocurrencies hurts stronger fat currencies, but can beneft weaker fat currencies by reducing competition from stronger ones. Countries strategically implement CBDCs in response to competition from emerging cryptocurrencies and other currencies. Our model suggests the following pecking order: Countries with strong but non-dominant currencies (e.g., China) are most incentivized to launch CBDC due to both technological frst-mover advantage and potential reduction in dollarization; the strongest currencies (e.g., USD) beneft from developing CBDC early on to nip cryptocurrency growth in the bud and to counteract competitors’ CBDCs; nations with the weakest currencies forgo implementing CBDCs and adopt cryptocurrencies instead. Strong fat competition and the emergence of cryptocurrencies spur fnancial innovation and digital currency development. Our fndings help rationalize recent developments in currency and payment digitization, while providing insights into the global battle of currencies and the future of money. |
| Keywords: | Financial Economics |
| Date: | 2022–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:ags:cuaepw:320020&r= |