nep-ifn New Economics Papers
on International Finance
Issue of 2022‒08‒22
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. A global monetary policy factor in sovereign bond yields By Dimitris Malliaropulos; Petros Migiakis
  2. E pluribus plures: shock dependency of the USD pass-through to real and financial variables By Minesso, Massimo Ferrari; Gräb, Johannes
  3. The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications By Weber, Michael; D’Acunto, Francesco; Gorodnichenko, Yuriy; Coibion, Olivier
  4. Sovereign Credit Spreads, Banking Fragility, and Global Factors By Anusha Chari; Felipe Garcés; Juan Francisco Martínez; Patricio Valenzuela
  5. The effects of Monetary Policy on Capital Flows A Meta-Analysis By Mauricio Villamizar-Villegas; Lucía Arango-Lozano; Geraldine Castelblanco; Nicolás Fajardo-Baquero; Maria A. Ruiz-Sanchez

  1. By: Dimitris Malliaropulos (Bank of Greece); Petros Migiakis
    Abstract: We document the existence of a global monetary policy factor in sovereign bond yields, related to the size of the aggregate balance sheet of nine major central banks of developed economies that have implemented programs of large-scale asset purchases. Balance sheet policies of these central banks reduced the net supply of safe assets in the global economy, triggering a decline in global yields as investors rebalanced their portfolios towards more risky assets. We find that central banks’ large-scale asset purchases have contributed to significant and permanent declines in long-term yields globally, ranging from around 330 bps for AAA-rated sovereigns to 800 bps for non-investment grade sovereigns. The stronger decline in yields of high-risk sovereigns can be partly attributed to the decline in the foreign exchange risk premium as their currencies appreciated. Global central bank asset purchases during the Covid-19 crisis have more than counterbalanced the effects of expanding fiscal deficits on global bond yields, driving them to even lower levels. Our findings have important policy implications: normalizing monetary policy by scaling down central bank balance sheets to pre-crisis levels may lead to sharp increases in sovereign bond yields globally, widening spreads and currency depreciations of vulnerable sovereigns with severe consequences for financial stability and the global economy.
    Keywords: quantitative easing; central bank balance sheet policies; sovereign risk; interest rates; panel cointegration.
    JEL: E42 E43 G12 G15
    Date: 2022–07
  2. By: Minesso, Massimo Ferrari; Gräb, Johannes
    Abstract: This paper quantifies the pass-through of a US dollar appreciation on trade variables and domestic financial conditions in a panel of 34 countries. Pass-through coefficients are highly shock-dependent: if the appreciation is driven by a US expansionary shock, the positive effects of stronger global demand - the “real” channel dominate the negative effects of a stronger dollar - the “exchange rate” channel. As a result, a positive US demand (supply)-drive appreciation expands global trade and stock valuations up to 2.2 (2.5) and 8% (15%) respectively, while if the appreciation is driven by a monetary policy shock the sign is opposite, leading to a contraction in the order of 2.5% (3%) depending on the country. The coefficients also exhibit a large degree of cross-country heterogeneity, we find that financial and trade exposure to the US, trade openness and USD invoicing shares explain up to 60% of the USD pass-through after demand and supply shocks. Cross-country differences, instead, are not explained by dollar invoicing if monetary policy or risk shocks determine USD movements. We explain this finding with the endogenous policy reaction of monetary authorities in emerging markets that stabilizes the exchange rate against the dollar and weakens the invoicing channel of dollar shocks. JEL Classification: F31, F41, F44, E44, E32
    Keywords: Exchange rate, pass-through, USD, VAR
    Date: 2022–07
  3. By: Weber, Michael (University of Chicago); D’Acunto, Francesco (Georgetown University); Gorodnichenko, Yuriy (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin)
    Abstract: Households' and firms' subjective inflation expectations play a central role in macroeconomic and intertemporal microeconomic models. We discuss how subjective inflation expectations are measured, the patterns they display, their determinants, and how they shape households' and firms' economic choices in the data and help us make sense of the observed heterogeneous reactions to business-cycle shocks and policy interventions. We conclude by highlighting the relevant open questions and why tackling them is important for academic research and policy making.
    Keywords: macroeconomics, intertemporal choice, consumption, savings, surveys, monetary policy, fiscal policy, experiments, financial decision-making, cognition, communication
    JEL: D1 D2 D8 D9 E2 E3 E4 E5 E7 J1
    Date: 2022–06
  4. By: Anusha Chari; Felipe Garcés; Juan Francisco Martínez; Patricio Valenzuela
    Abstract: This study explores the relationship between sovereign credit risk, banking fragility, and global financial factors in a large panel database of emerging market economies. To measure banking fragility, we construct a novel model-based semi-parametric metric (JLoss) that computes the expected joint loss of the banking sector conditional on a systemic event. Our metric of banking fragility is positively associated with sovereign credit spreads, after controlling for the standard determinants of sovereign credit risk, a comprehensive set of measures of systemic risk, and country and time fixed effects. The results additionally indicate that countries with more fragile banking sectors are more exposed to global (exogenous) financial factors than those with more resilient banking sectors. These findings underscore that regulators must ensure the stability of the banking sector to improve governments’ borrowing costs in international debt markets.
    Date: 2022–05
  5. By: Mauricio Villamizar-Villegas; Lucía Arango-Lozano; Geraldine Castelblanco; Nicolás Fajardo-Baquero; Maria A. Ruiz-Sanchez
    Abstract: We investigate whether central banks are able to attract or redirect capital flows, by bringing together the entire empirical literature into the first quantitative meta-analysis on the subject. We dissect policy effects by the type of flow and by the origin of the monetary shock. Further, we assess whether policy effects depend on factors that drive investors to either search for yields or fly to safety. Our findings indicate a mean effect size of inflows in the amount of 0.09% of quarterly GDP in response to either a 100 basis point (bp) increase in the domestic policy rate or a 100bp reduction in the external rate. However, the effect size under a random effect specification is much lower (0.01%). Factors that significantly attract inflows include foreign exchange reserves, output growth, and financial openness, while factors that deter flows include foreign debt, capital controls, and departures from the uncovered interest rate parity. Also, both local and global risks matter (global risks exerting a larger pressure). Finally, we shed light on differences across the different types of flows: banking flows being the most responsive to monetary policy, while foreign direct investment being the least responsive. **** RESUMEN: Este trabajo representa el primer metanálisis cuantitativo sobre si los bancos centrales son capaces de atraer o redirigir los flujos de capital. Se analizan los efectos por tipo de flujo y por el origen del choque monetario. Además, se evalúa si los efectos de las políticas dependen de factores que impulsan a que inversionistas extranjeros busquen rendimientos o, por el contrario, busquen refugio. Nuestros hallazgos indican que, en promedio, el tamaño de las entradas de capital es de 0,09% del PIB trimestral en respuesta a un choque de 100 puntos básicos, ya sea en aumentos de la tasa de política doméstica o en reducciones de la tasa de política externa. Sin embargo, bajo una especificación de efectos aleatorios el tamaño del efecto es mucho menor (0,01%). Los factores que atraen significativamente flujos de capital incluyen el nivel de reservas internacionales, el crecimiento de la producción y el grado de apertura financiera, mientras que los factores que disuaden los flujos incluyen la deuda fiscal, controles de capital y desviaciones de la paridad descubierta de la tasa de interés. También, tanto los riesgos locales como los globales importan (aunque los riesgos globales ejercen una mayor presión). Finalmente, brindamos luces sobre las diferencias entre los tipos de flujos: los flujos bancarios siendo los más reactivos a la política monetaria, y los de inversión extranjera directa los menos reactivos.
    Keywords: Meta-Analysis, Capital Flows, Monetary Policy, Meta-Análisis, Flujos de Capital, Política Monetaria
    JEL: C83 E58 F21 F31 F32
    Date: 2022–08

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