nep-ifn New Economics Papers
on International Finance
Issue of 2022‒05‒16
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. A Preferred-Habitat Model of Term Premia, Exchange Rates, and Monetary Policy Spillovers By Pierre-Olivier Gourinchas; Walker D. Ray; Dimitri Vayanos
  2. The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies By Mr. Serkan Arslanalp; Chima Simpson-Bell; Mr. Barry J. Eichengreen
  3. Valuing Financial Data By Maryam Farboodi; Dhruv Singal; Laura Veldkamp; Venky Venkateswaran
  4. A Stock Return Decomposition Using Observables By Benjamin Knox; Annette Vissing-Jorgensen
  5. New Financial Technologies, Sustainable Development, and the International Monetary System By Prasad, Eswar

  1. By: Pierre-Olivier Gourinchas; Walker D. Ray; Dimitri Vayanos
    Abstract: We develop a two-country model in which currency and bond markets are populated by different investor clienteles, and segmentation is partly overcome by global arbitrageurs with limited capital. Our model accounts for the empirically documented violations of Uncovered Interest Parity (UIP) and the Expectations Hypothesis, and for how UIP violations depend on bond maturity, investment horizon, and yield curve slope differentials. Large-scale purchases of long-maturity bonds lower domestic and foreign bond yields, and depreciate the currency. Conventional monetary policy is transmitted to domestic and international bond yields as well, but its international transmission is weaker than for unconventional policy.
    JEL: F31 F41 F42 G11 G12
    Date: 2022–03
  2. By: Mr. Serkan Arslanalp; Chima Simpson-Bell; Mr. Barry J. Eichengreen
    Abstract: We document a decline in the dollar share of international reserves since the turn of the century. This decline reflects active portfolio diversification by central bank reserve managers; it is not a byproduct of changes in exchange rates and interest rates, of reserve accumulation by a small handful of central banks with large and distinctive balance sheets, or of changes in coverage of surveys of reserve composition. Strikingly, the decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen and euro, other long-standing reserve currencies and units that, along with the dollar, have historically comprised the IMF’s Special Drawing Rights. Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies. A characterization of the evolution of the international reserve system in the last 20 years is thus as ongoing movement away from the dollar, a recent if still modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies. These observations provide hints of how the international system may evolve going forward.
    Keywords: International reserves, currency composition, dollar; USD share; dollar dominance; currency share; dollar share; share of foreign exchange; Reserve currencies; Currencies; International reserves; Reserves management; Asset valuation; Global; Africa
    Date: 2022–03–24
  3. By: Maryam Farboodi; Dhruv Singal; Laura Veldkamp; Venky Venkateswaran
    Abstract: How should an investor value financial data? The answer is complicated because it depends on the characteristics of all investors. We develop a sufficient statistics approach that uses equilibrium asset return moments to summarize all relevant information about others' characteristics. It can value data that is public or private, about one or many assets, relevant for dividends or for sentiment. While different data types have different valuations, heterogeneous investors value the same data very differently, which suggests a low price elasticity for data demand. Heterogeneous investors' data valuations are also affected very differentially by market illiquidity.
    JEL: G0 G11 G12 G14
    Date: 2022–03
  4. By: Benjamin Knox; Annette Vissing-Jorgensen
    Abstract: We propose a method to decompose stock returns period by period. First, we argue that one can directly estimate expected stock returns from securities available in modern financial markets (using the real yield curve and the Martin (2017) equity risk premium). Second, we derive a return decomposition which is based on stock price elasticities with respect to expected returns and expected dividends. We calculate elasticities from dividend futures. Our decomposition is an alternative to the Campbell-Shiller log-linearization which relies on an assumption about the log-linearization constant. An application to the COVID crisis in 2020 reveals that risk premium changes drove much of the crash and rebound in the SP500 while a fall in long-term real yields drove a strong positive return for 2020 as a whole.
    Keywords: Asset pricing; Duration; Return decomposition; Stock Market
    JEL: G10 G12 G14
    Date: 2022–03–23
  5. By: Prasad, Eswar (Asian Development Bank Institute)
    Abstract: New financial technologies—including those underpinning cryptocurrencies—herald broader access to the financial system, quicker and more easily verifiable settlement of transactions and payments, and lower transaction costs. Domestic and cross-border payment systems are on the threshold of transformation, with significant gains in speed and lowering of transaction costs on the horizon. For emerging market and developing economies, the digitization of finance carries a number of potential benefits, including broadening of financial inclusion, quicker and cheaper cross-border remittances, and increased convenience of domestic payments. But some of these developments could also increase these countries’ exposure to volatile capital flows. Governments, central banks, and regulatory agencies will face difficult challenges in striking the right balance between fostering innovations and mitigating risks arising from them.
    Keywords: fintech; payment systems; international payments; financial inclusion; capital flows; financial regulation
    JEL: E50 G00
    Date: 2021–07

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