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on International Finance |
| By: | J. Scott Davis; Andrei Zlate |
| Abstract: | We estimate the heterogeneous effect of the global financial cycle on exchange rates and cross-border capital flows during the COVID-19 pandemic, using weekly exchange rate and portfolio flow data for a panel of 48 advanced and emerging market economies. We begin by estimating the global financial cycle at a weekly frequency with data through 2021 and observe the two standard deviation fall in our global financial cycle index over a period of four weeks in March 2020. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the global financial cycle. We show how during the pandemic crisis, high-frequency COVID-19 fundamentals like infection and vaccination rates—which differed in timing and intensity across our sample countries—were just as important as traditional, slow-moving macroeconomic fundamentals, such as the net external asset position and the current account balance, in explaining the cross-country heterogeneity in exchange rates and capital flows. |
| Keywords: | COVID-19; global financial cycle; capital flows; exchange rates |
| JEL: | F3 F4 |
| Date: | 2022–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:94227&r= |
| By: | Xin Tian; Jan Jacobs; Jakob de Haan |
| Abstract: | We construct several measures for the global financial cycle using dynamic factor models and data for 25 advanced and emerging countries over 1980-2019. Our results suggest that global cycles in asset prices and capital flows are highly similar and synchronized, especially during crisis episodes. Our measures for asset-specific global cycles suggest that cycles in credit and house prices are less volatile and have a longer duration than cycles in equity and bond prices. Finally, we find significant co-movement of our global financial cycle measures and two measures as suggested in the literature that are based on top-down and bottom-up approaches. |
| Keywords: | global financial cycle, national financial cycle, dynamic factor analysis, capital flows, asset prices |
| JEL: | E44 F32 F36 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9730&r= |
| By: | Ozge Akinci; Sebnem Kalemli-Ozcan; Albert Queraltó |
| Abstract: | Foreign investors’ changing appetite for risk-taking has been shown to be a key determinant of the global financial cycle. Such fluctuations in risk sentiment also correlate with the dynamics of uncovered interest parity (UIP) premia, capital flows, and exchange rates. To understand how these risk sentiment changes transmit across borders, we propose a two-country macroeconomic framework. Our model features cross-border holdings of risky assets by U.S. financial intermediaries that operate under financial frictions and act as global intermediaries in that they take on foreign asset risk. In this setup, an exogenous increase in U.S.-specific uncertainty, modeled as higher volatility in U.S. assets, leads to higher risk premia in both countries. This occurs because higher uncertainty leads to deleveraging pressure on U.S. intermediaries, triggering higher global risk premia and lower global asset values. Moreover, when U.S. uncertainty rises, the exchange rate in the foreign country vis-a-vis the dollar depreciates, capital flows out of the foreign country, and the UIP premium increases in the foreign country and decreases in the U.S., as in the data. |
| Keywords: | financial frictions; risk premia; time-varying uncertainty; intermediary asset pricing; financial spillovers; global financial cycle |
| JEL: | E32 E44 F41 |
| Date: | 2022–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:94242&r= |
| By: | Linda S. Goldberg; Fabiola Ravazzolo |
| Abstract: | In March 2020, the Federal Reserve eased the terms on its standing swap lines in collaboration with other central banks, reactivated temporary swap agreements, and then introduced the new Foreign and International Monetary Authorities (FIMA) repo facility. We provide new evidence on how the central bank swap lines and FIMA repo facility reduce strains in global dollar funding markets and US Treasury markets during extreme stress events. These facilities are found to contribute to the narrowing of foreign exchange swap basis spreads and to reduce the sensitivity of global funding strain metrics to risk sentiment deterioration. Cross border flows through banks for excess liquidity support purposes are reduced in the near term, and the risk sensitivity of equity and bond fund flows declines. However, access to these facilities leave longer-term patterns of liquidity and capital flows across borders broadly unchanged. While official sector liquidity hoarding and “dash for cash” type of activity is expected to be lower with access to these facilities, initial evidence does not show general differential changes in foreign exchange reserve holdings by foreign central banks in line with the type of liquidity access. |
| JEL: | F31 F33 F42 G01 G15 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29982&r= |
| By: | Borsuk, Marcin; Kowalewski, Oskar; Pisany, Pawel |
| Abstract: | In this study, we reassess the links between commercial bank ownership and lending growth during the 1996–2019 period. We find evidence that the lending activities of foreign state-controlled and foreign privately owned banks differ, particularly during different crisis type periods and origins. Foreign state-controlled banks’ loan growth rates are higher than those of foreign private-owned banks during host banking crises. By contrast, foreign state-controlled banks reduce their credit growth during a home banking crisis, while foreign private-owned banks increase lending in the host countries. Moreover, we find evidence that bank-specific characteristics were more important determinants of credit growth than ownership structure during the global financial crisis of 2008 and gain in importance in the post-crisis period. JEL Classification: G01, G21, G28 |
| Keywords: | credit growth, crisis, foreign banks, internal capital market, state-controlled banks |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222661&r= |
| By: | Oleg Itskhoki; Dmitry Mukhin |
| Abstract: | We show that the exchange rate may appreciate or depreciate depending on the specific mix of sanctions imposed, even if the underlying equilibrium allocation is the same. Sanctions that limit a country's imports tend to appreciate the country’s exchange rate, while sanctions that limit exports and/or freeze net foreign assets tend to depreciate it. Increased precautionary household demand for foreign currency is another force that depreciates the exchange rate, and it can be offset with domestic financial repression of foreign currency savings. The overall effect depends on the balance of currency demand and currency supply forces, where exports and official reserves contribute to currency supply and imports and foreign currency precautionary savings contribute to currency demand. Domestic economic downturn and government fiscal deficits are additional forces that affect the equilibrium exchange rate. The dynamic behavior of the ruble exchange rate following Russia's military invasion of Ukraine in February 2022 and the resulting sanctions is entirely consistent with the combined effects of these mechanisms. |
| JEL: | E50 F31 F32 F41 F51 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30009&r= |