nep-ifn New Economics Papers
on International Finance
Issue of 2022‒06‒27
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Foreign Exchange Interventions: The Long and the Short of It By Patrick Alexander; Sami Alpanda; Serdar Kabaca
  2. The Term Structure of the Excess Bond Premium: Measures and Implications By Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek
  3. Liquidity Traps, Prudential Policies, and International Spillovers By Javier Bianchi; Louphou Coulibaly
  4. Global Stagflation By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge

  1. By: Patrick Alexander; Sami Alpanda; Serdar Kabaca
    Abstract: We provide empirical evidence of the causal effects of changes in financial intermediaries’ net worth on the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries’ net worth in a narrow window around their earnings announcements, based on US tick-by-tick data. Using these shocks, we estimate that news of a 1% decline in intermediaries’ net worth leads to a 0.2% to 0.4% decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low.
    Keywords: Business fluctuations and cycles; Exchange rate regimes; Exchange rates; Foreign reserves management; International financial markets; International topics
    Date: 2022–06
  2. By: Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek
    Abstract: In this article, we construct daily aggregate as well as short-, medium-, and long-term "excess bond premium" (EBP) measures using a widely available corporate bond database (known as "TRACE"). The novel EBP measures we construct provide an important gauge of strains in the financial sector at different horizons. We find that the short-term EBP measure increased more dramatically at the peaks of the COVID-19 pandemic and the 2007–09 global financial crisis, but the pattern was reversed around the interest rate liftoff at the end of 2015.
    Keywords: excess bond premium; term structure; TRACE; COVID-19
    JEL: E44 E58 G12
    Date: 2021–09–24
  3. By: Javier Bianchi; Louphou Coulibaly
    Abstract: This paper studies the transmission channels of monetary and macroprudential policies in an open economy framework and evaluates the normative implications for international spillovers and global welfare. An analytical decomposition uncovers the prominent role of expenditure switching for monetary policy, while macroprudential policy operates primarily through intertemporal substitution. We show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing current output and containing capital inflows to lower the likelihood of a future recession, but leaning against the wind is not necessarily optimal. Finally, contrary to emerging policy concerns, capital controls can enhance global stability.
    JEL: E21 E23 E43 E44 E52 E62 F32
    Date: 2022–05
  4. By: Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
    Abstract: Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
    JEL: E31 E32 E52 Q43
    Date: 2022–06

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