nep-ifn New Economics Papers
on International Finance
Issue of 2022‒08‒08
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Scrambling for Dollars: International Liquidity, Banks and Exchange Rates By Javier Bianchi; Saki Bigio; Charles Engel
  2. Estimating the Currency Composition of Foreign Exchange Reserves By Matthew Ferranti
  3. Intermediary Balance Sheets and the Treasury Yield Curve By Wenxin Du; Benjamin Hébert; Wenhao Li
  4. Monetary policy press releases: an international comparison By Mario Gonzalez and Raul Cruz Tadle; Raul Cruz Tadle
  5. Urban Autonomy: Is China’s Belt and Road Initiative a Zero-Sum Game? By Veljko Fotak; William Megginson; Yi-Da Tsai

  1. By: Javier Bianchi (Federal Reserve Bank of Minneapolis); Saki Bigio (Department of Economics, University of California, Los Angeles and NBER); Charles Engel (Department of Economics, University of Wisconsin, Madison, NBER and CEPR)
    Abstract: We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory.
    Keywords: Exchange rates, liquidity premia, monetary policy
    Date: 2022–07
  2. By: Matthew Ferranti
    Abstract: Central banks manage over \$12 trillion in foreign exchange reserves, influencing global exchange rates and asset prices. However, some of the largest holders of reserves report minimal information about their currency composition, hindering empirical analysis. I develop a Hidden Markov Model to estimate the composition of a central bank's reserves by relating the fluctuation in the portfolio's valuation to the exchange rates of major reserve currencies. I apply the model to China and Singapore, two countries that collectively hold over \$3.5 trillion in reserves and conceal their composition. The results underscore the U.S. dollar's predominance in foreign exchange reserves.
    Date: 2022–06
  3. By: Wenxin Du; Benjamin Hébert; Wenhao Li
    Abstract: We have documented a regime change in the U.S. Treasury market post-Global Financial Crisis (GFC). We first derived bounds on Treasury yields that account for dealer balance sheet costs, which we call the net short and net long curves. We show that actual Treasury yields moved from the net short curve pre- GFC to the net long curve post-GFC, consistent with the shift in the dealers’ net position. We then use a stylized model to demonstrate that increased bond supply and tightening leverage constraints can explain this change in regime. This change, in turn, helps explain negative swap spreads and the co-movement between swap spreads, dealer positions, yield curve slope, and covered-interest-parity violations, and implies changing effects for a wide range of monetary and regulatory policy interventions.
    Keywords: yield curve; balance sheet constraints; CIP deviations
    JEL: G12 E52 F3
    Date: 2022–07–01
  4. By: Mario Gonzalez and Raul Cruz Tadle; Raul Cruz Tadle
    Abstract: Around the world, several countries have adopted inflation targeting as their monetary policy framework. These institutions set their target interest rates in monetary policy meetings. These decisions are then circulated through press releases that explain the policy rationale. The information contained in the press releases includes current policies, economic outlook, and signals about likely future policies. In this paper, using linguistic methods, such as Latent Dirichlet Allocation (LDA) and semi-automated content analysis, we examine the information contained in the monetary press releases of inflation targeting countries. In addition, we build a custom dictionary for analyzing monetary policy press releases. Using Semi-automated Content Analysis, we then develop a measure, which we refer to as the Sentiment Score index, that quantifies the policy tilt implied in the information provided in the press releases. We find that for a significant majority of the in flation targeting countries, the index provides additional information that helps predict monetary policy rate movements.
    Keywords: central bank, financial market, monetary policy, communication
    JEL: E44 E52 E58
    Date: 2022–06
  5. By: Veljko Fotak; William Megginson; Yi-Da Tsai
    Abstract: UForeign infrastructure investments tend to increase cross-border economic activity between investor and recipient countries. We question whether such an increase comes at the expense of trade with third-party countries (a “zero-sum hypothesis”), or whether the infrastructure investment leads to an increase in overall trade (a “lifting all boats hypothesis”). Our investigation is within the context of the Chinese Belt and Road Initiative (BRI). In a sample spanning 2013 to 2018 and covering 1,135 BRI projects in 110 countries, we find strong evidence in support of the zero-sum hypothesis. The increase in cross-border economic activity (imports, exports, and M&A flows) with China is accompanied by a decrease in activity with third party countries. Further, we show that, following BRI investments, BRI countries trade more with other countries that are politically aligned with China, but less with countries that have recently been visited by the Dalai Lama. Overall, our evidence points to both a “zero-sum” nature of the impact of infrastructure on cross-border trade, and to the existence of a BRI “network” that favors countries that are politically aligned with China.
    Keywords: Trade, cross-border M&As, infrastructure, Belt and Road
    JEL: F14 F36
    Date: 2022

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