nep-ifn New Economics Papers
on International Finance
Issue of 2022‒09‒12
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Origins of International Factor Structures By Zhengyang Jiang; Robert J. Richmond
  2. A Portfolio Approach to Global Imbalances By Zhengyang Jiang; Robert J. Richmond; Tony Zhang
  3. Taming the "Capital Flows-Credit Nexus": A Sectoral Approach By Daniel Carvalho; Etienne Lepers; Rogelio V. Mercado, Jr.
  4. Monetary Policy and Risk-Taking: Evidence from Thai Corporate Bond Markets By Warinthip Worasak; Nuwat Nookhwun; Pongpitch Amatyakul
  5. Changing anchor of the renminbi: A Bayesian learning approach to the decade-long transition By Chen Zhang; Ying Fang; Linlin Niu

  1. By: Zhengyang Jiang; Robert J. Richmond
    Abstract: We show that exchange rate correlations tend to be explained by the global trade network while consumption correlations tend to be explained by productivity correlations. Sharing common trade linkages with other countries increases exchange rate correlations beyond bilateral linkages. We explain these findings using a model of the global trade network with market segmentation. Interdependent global production generates international comovements, while market segmentation disconnects the drivers of exchange rate correlations from the drivers of consumption correlations. Moreover, we show that the trade network generates common factors found in exchange rates. Our findings offer a trade-based account of the origins of international comovements and shed light on important frictions in international markets.
    JEL: F31 G15
    Date: 2022–08
  2. By: Zhengyang Jiang; Robert J. Richmond; Tony Zhang
    Abstract: We use a portfolio-based framework to understand what drives the decline of the U.S. net foreign asset (NFA) position and the reversal in returns earned on the US NFA (exorbitant privilege). We show that global savings gluts and monetary policies widened the U.S. NFA position, while investor demand shifts partially offset this widening. Moreover, U.S. privilege declined after 2010, in accordance with increasing foreign demand for U.S. equity. We also highlight a quantity dimension of the U.S. privilege: the U.S. can issue substantially more debt than other countries for a given yield increase.
    JEL: E44 F32 G15
    Date: 2022–07
  3. By: Daniel Carvalho (Banco de Portugal); Etienne Lepers (OECD); Rogelio V. Mercado, Jr. (South East Asian Central Banks (SEACEN) Research and Training Centre)
    Abstract: Capital flows may lead to financial vulnerabilities by fueling domestic credit booms, the so-called “capital flows-credit growth nexus, of particular concern to emerging markets. This paper makes two important contributions to the understanding of this nexus: it adopts a sectoral approach to the relationship between cross-border capital flows and domestic credit growth and it studies how different macroprudential and financial policies affect that relationship in emerging market economies. Using novel datasets on both sectoral flows and policy measures, it finds that financial policy measures can mitigate domestic credit growth, not only directly, but also indirectly, through the reduction of the sensitivity of credit to capital inflows. Furthermore, the results underscore the importance of a granular sectoral approach in identifying the full range of connections between capital flows and credit growth, as well as the appropriate policy response. While, in general, macroprudential and foreign currency-based measures are better suited to mitigate the impact of banking sector flows, capital controls appear to lessen the impact of flows to non-financial corporates and other financial corporates. Splitting by borrowing sectors, macroprudential lending standards and measures targeted at household credit weaken the impact of inflows on household credit, while the latter also strengthen the relationship between NFC flows and NFC credit, suggesting a potential shift in composition.
    Keywords: capital flows, domestic credit, sectors, capital controls, macroprudential measures
    JEL: E51 F32 G15
    Date: 2022–08
  4. By: Warinthip Worasak; Nuwat Nookhwun; Pongpitch Amatyakul
    Abstract: This paper examines the risk-taking channel of monetary policy in the context of Thai corporate bond market. Based on newly-issued non-financial corporate bonds from 2001 to the third quarter of 2020, we find that low interest rates are associated with greater issuance of bonds with worse risk ratings, which is more pronounced for bonds from the property sector. In addition, these bonds tend to have longer maturity. However, we do not find evidence of compression of risk premium or underpricing of risks during these low-rate periods. We then examine whether any types of bond investors are prone to the search-for-yield behaviour. Using the Bank of Thailand's confidential debt securities holding dataset from 2013 onward, our results show that individuals, rather than banks and institutional investors, are the prime holder of high-risk bonds. Conditional on bond risk ratings, only two groups of bondholders appear to bias toward higher-yield bonds. These include individuals and other depository financial institutions, namely saving cooperatives and money market mutual funds. Our results point toward weak evidence of risk-taking among corporate bond investors during the low-rate environment.
    Keywords: Monetary policy; Interest rate; Risk taking; Search for yield; Corporate bond; Underpricing of risk; Excess bond premium
    JEL: E44 E52 G11 G12
    Date: 2022–08
  5. By: Chen Zhang; Ying Fang; Linlin Niu
    Abstract: China’s exchange rate reform, initiated in 2005, had the goal of switching from a fixed U.S. dollar (USD) peg to a floating mechanism with reference to a trade-weighted currency basket. Over a decade of gradual transition, the renminbi (RMB) has gained importance in the international monetary system and has shown higher flexibility in its dollar value. However, previous studies have demonstrated the inertia of the RMB in maintaining a de facto dollar peg, with little evidence of the up-to-date effectiveness of the official currency basket. We present a Bayesian time-varying coefficient regression on the currency peg or basket weight suitable for studying transition process. We show that the “8.11” reform in 2015 triggered an eventual anchor switching, driving down the dollar weight from 1 to around 0.3. Since 2016, the weight of the official basket has been double that of the USD. SVAR and TVP-VAR analysis, controlling for endogeneity, provide consistent evidence of this regime change, which has important implications for China and the global economy.
    Keywords: Renminbi, exchange rate regime, dollar peg, currency basket
    JEL: F31 F41 C11
    Date: 2022–08–24

This nep-ifn issue is ©2022 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.