nep-ifn New Economics Papers
on International Finance
Issue of 2022‒06‒20
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Uncertainty Shocks, Capital Flows, and International Risk Spillovers By Ozge Akinci; Ṣebnem Kalemli-Özcan; Albert Queralto
  2. A tale of two global monetary policies By Agrippino, Silvia Miranda; Nenova, Tsvetelina
  3. Central bank swap lines: micro-level evidence By Ferrara, Gerardo; Mueller, Philippe; Viswanath-Natraj, Ganesh; Wang, Junxuan
  4. The Rest of the World's Dollar-Weighted Return on U.S. Treasurys By Jiang, Zhengyang; Krishnamurthy, Arvind; Lustig, Hanno

  1. By: Ozge Akinci; Ṣebnem Kalemli-Özcan; Albert Queralto
    Abstract: Foreign investors’ changing appetite for risk-taking have been shown to be a key determinant of the global financial cycle. Such fluctuations in risk sentiment also correlate with the dynamics of 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 who operate under financial frictions, and who 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-à-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.
    JEL: F3 F31 F32 F4 F41 F44
    Date: 2022–05
  2. By: Agrippino, Silvia Miranda (Bank of England); Nenova, Tsvetelina (London Business School)
    Abstract: We compare the macroeconomic and financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in the two areas are followed by a contraction in global activity and trade, a retrenchment in global capital flows, a fall in global stock markets, and a rise in risk aversion. Bilateral spillovers are also powerful. Fed and ECB monetary policies propagate internationally through the same channels – trade and risk-taking – but the magnitude of ECB spillovers is smaller. We postulate that the relative importance of the euro and the US dollar in the international financial system can help to explain such asymmetries, and produce tentative evidence that links the strength of the ECB spillovers to € exposure in trade invoicing and the pricing of financial transactions.
    Keywords: Unconventional monetary policy; high-frequency identification; international spillovers; Fed; ECB
    JEL: E52 F42 G15
    Date: 2022–04–14
  3. By: Ferrara, Gerardo (Bank of England); Mueller, Philippe (Warwick Business School); Viswanath-Natraj, Ganesh (Warwick Business School); Wang, Junxuan (Warwick Business School)
    Abstract: In this paper we investigate the price, volatility and micro-level effects of central bank swap lines during the 2020 pandemic. These policies lowered the ceiling on covered interest rate parity violations and reduced volatility following settlement of swap line auctions. We then combine dealer-level dollar repo auctions by the Bank of England with a trade repository that includes the universe of FX forward and swap contracts traded in the UK. We find evidence of a substitution channel: dealers that draw on swap lines reduce their demand for dollars at the forward leg in the FX market. We also find evidence that dealers that draw on swap lines increased their net supply of dollars to non-financial institutions, supporting the rationale for swap lines in providing cross-border liquidity to the real economy.
    Keywords: Swap lines; monetary policy; foreign exchange swaps; covered interest rate parity; central banking
    JEL: E44 F30 F31 F32 F41 G11 G12 G15 G18 G20
    Date: 2022–05–06
  4. By: Jiang, Zhengyang (Kellogg School of Management, Northwestern University); Krishnamurthy, Arvind (Stanford University, Graduate School of Business, and NBER); Lustig, Hanno (Stanford University, Graduate School of Business, and NBER)
    Abstract: Since 1980, foreign investors have timed their purchases and sales of U.S. Treasurys to yield particularly low returns. Their annual dollar-weighted returns, measured by IRRs, are around 3% lower than a buy-and-hold strategy over the same horizon. In comparison, the IRRs achieved by domestic investors are at least 1% higher, while the IRRs achieved by the Federal Reserve are similarly low. Our results are consistent with theories where foreign investors are price inelastic buyers of safe dollar assets, which provide them with convenience services.
    Date: 2022–04

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