nep-ifn New Economics Papers
on International Finance
Issue of 2022‒08‒29
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Cross-border flights to safe assets in bond markets: evidence from emerging market economies By Janus, Jakub
  2. On Foreign Drivers of EMEs Fluctuations By Gent Bajraj; Jorge Lorca; Juan M. Wlasiuk
  3. The Global Distributive Impact of the US Inflation Shock By Gautam Nair; Federico Sturzenegger
  4. Leaning-against-the-wind Intervention and the “Carry-Trade” View of the Cost of Reserves By Eduardo Levy Yeyati; Juna Francisco Gómez
  5. Heterogeneous global booms and busts By Farboodi, Maryam; Kondor, Peter

  1. By: Janus, Jakub
    Abstract: This paper investigates cross-border flights to safety (FTS) in sovereign bond markets from the perspective of emerging market economies (EMEs). Accurate identification of such events provides a detailed picture of sharp changes in prices of international assets and potential sources of EMEs' financial fragility. We construct new measures of the FTS occurrence and magnitude by focusing on extreme movements in long-term bond markets vis-à-vis the US for a diverse group of 21 EMEs. An adaptable time-series anomaly detection algorithm is used to recognize patterns in daily data on bond returns from 2002 to 2021. The paper shows that the FTS episodes in the entire sample of EMEs turn out to be short-lived and map well into periods of international financial and economic downturns. We demonstrate the importance of global uncertainty shocks and the US dollar exchange rate fluctuations in driving FTS, with the relative importance of the latter factor increasing after the Global Financial Crisis. The results from panel data models indicate that a range of country-specific economic, financial, and political factors matter visibly more for the FTS magnitude than their mere occurrence. This supports the notion that flights from bond markets are triggered mainly by shocks originating outside of EMEs, but the magnitude of these events may materially depend on their domestic conditions, including macroeconomic stability and policy factors. However, the role of economic fundamentals in driving FTS seems to subside post-2010 at the expense of financial factors. As a by-product, we present a database on FTS episodes in bond markets.
    Keywords: emerging market economies; flight to safety; safe assets; bond markets; foreign-exchange markets; global risk
    JEL: E42 F32 F41 G15
    Date: 2022–07–25
  2. By: Gent Bajraj; Jorge Lorca; Juan M. Wlasiuk
    Abstract: Global macroeconomic forces such as liquidity fluctuations in the US and commodity price cycles among others have been extensively documented as relevant drivers of economic activity for emerging market economies (EMEs). The dynamics of the interactions between those external forces and their ensuing effect on EMEs business cycles, however, are still relatively less explored. We embed a series of different contemporary interactions between a set of common, external drivers shaping EMEs cycles in order to assess their relative empirical importance through the lens of a dynamic factor model. Our results point toward quantitatively relevant effects induced by shocks to the global factors that we identify. Indeed, while shocks to our financial and commodity factors explain independently about 7 and 21% of GDP fluctuations, respectively, they unload rather differently on long term yields and exchange rates: the financial factor explains about half of exchange rate dynamics and more than a fifth of long rates, where our commodity factor ends up playing a much lesser role.
    Date: 2022–04
  3. By: Gautam Nair (John F. Kennedy School of Government, Harvard University); Federico Sturzenegger (Harvard University/Universidad de San Andrés)
    Abstract: We study the global distributive consequences of the “Great Reflation.” The conventional wisdom holds that the increases in interest rates resulting from high inflation in the United States will have a negative impact on the rest of the world (and developing countries in particular) due to the reversal of capital flows and higher financing costs. We show that the standard view fails to take into account an important countervailing force: the effect of higher US inflation on the changing real value of nominal US dollar assets and liabilities across countries. Decades of low inflation led to widespread use of dollar-denominated financial instruments with fixed interest rates and long maturities. Unanticipated inflation in the US diminishes the real value of dollar-denominatedsovereign debt, both in the US and abroad. For sovereigns other than the US, the gains are equivalent to a debt relief that exceeds $100 billion. On the other hand, the US government benefited from the dilution of non-residents’ holdings of US treasuries and dollar cash by an amount close to $600 billion. These gains come at the expense of private creditors and other sovereigns.
    Date: 2022–07
  4. By: Eduardo Levy Yeyati (Universidad Torcuato Di Tella); Juna Francisco Gómez (Universidad de Buenos Aires)
    Abstract: We estimate, for a sample of emerging economies, the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor), but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread).
    Keywords: Exchange rates, foreign exchange intervention, international reserves, selfinsurance
    Date: 2022–07
  5. By: Farboodi, Maryam; Kondor, Peter
    Abstract: We investigate the heterogeneous boom and bust patterns across countries that emerge as a result of global shocks. Our analysis sheds light on the emergence of core and periphery countries, and the joint determination of the depth of recessions and tightness of credit across countries. The model implies that interest rates are similar across core and periphery countries in booms, with larger credit and output growth in periphery countries. However, a common global shock that leads to a credit crunch across the globe gives rise to a sharper spike in interest rates and a deeper recession in periphery countries, while a credit flight to the core alleviates the adverse consequences in these countries.
    Keywords: international credit markets; global cycles; information frictions; (Starting Grant #336585
    JEL: E44 E43 E21 G15 E32
    Date: 2022–07–01

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