nep-ifn New Economics Papers
on International Finance
Issue of 2022‒10‒24
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global Monetary and Financial Spillovers: Evidence from a New Measure of Bundesbank Policy Shocks By James Cloyne; Patrick Hürtgen; Alan M. Taylor
  2. The impact of risk cycles on business cycles: a historical view By Jón Daníelsson; Marcela Valenzuela; Ilknur Zer
  3. Trading with the Informed and against the Uninformed: Flows and Positioning in the Global Currency Market By Aldo Barrios; Rob Franolic; Davide Giovanardi; Michael Melvin
  4. Monetary Policy Cyclicality in Emerging Economies By Pierre De Leo; Gita Gopinath; Ṣebnem Kalemli-Özcan
  5. Know Your Customer: Informed Trading by Banks By Rainer Haselmann; Christian Leuz; Sebastian Schreiber
  6. External Wealth of Nations and Systemic Risk By Alin Marius Andries; Alexandra-Maria Chiper; Steven Ongena; Nicu Sprincean

  1. By: James Cloyne; Patrick Hürtgen; Alan M. Taylor
    Abstract: Identifying exogenous variation in monetary policy is crucial for investigating central bank policy transmission. Using newly-collected archival real-time data utilized by the Central Bank Council of the German Bundesbank, we identify unexpected changes in German monetary policy from 580 policy meetings between 1974 and 1998. German monetary policy shocks produce conventional effects on the German domestic economy: activity, prices, and credit decline significantly following a monetary contraction. But given Germany’s central role in the European Monetary System (EMS), we can also shed light on debates about the international transmission of monetary policy and the relative importance of the U.S. Federal Reserve for the global cycle during these years. We find that Bundesbank policy spillovers were much stronger in major EMS economies with Deutschmark pegs than in non-EMS economies with floating exchange rates. Furthermore, compared to monetary spillovers from the U.S., German spillovers were comparable or even larger in magnitude for both pegs and floats.
    JEL: E32 E52 F42 F44
    Date: 2022–09
  2. By: Jón Daníelsson; Marcela Valenzuela; Ilknur Zer
    Abstract: We investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality.
    Keywords: Stock market volatility; Uncertainty; Monetary policy independence; Financial instability; Risk-taking; Global financial cycles
    JEL: F30 F44 G15 G18 N10 N20
    Date: 2022–09–09
  3. By: Aldo Barrios; Rob Franolic; Davide Giovanardi; Michael Melvin
    Abstract: FX trade settlement data from CLS provides the most comprehensive view of the opaque market of OTC currency trades. We use the flows of investment funds and non-financial corporates and develop trading signals where the former reflects speculative strategies, while the latter trade for liquidity needs. The implication is we trade in the direction of the funds flows and trade against large corporate flows, which should be followed by price reversals. Trading with informed flows yields positive risk-adjusted performance. Incorporating the liquidity trades signal improves risk-adjusted performance and greatly lowers the tail risk of the model.
    Keywords: foreign exchange, currency flows, informed trading, currency investing
    JEL: F31 G15
    Date: 2022
  4. By: Pierre De Leo; Gita Gopinath; Ṣebnem Kalemli-Özcan
    Abstract: Conventional wisdom holds that monetary policy in emerging economies is procyclical, unlike in advanced economies. Using a large sample of countries from the mid-1990s onwards, we show that the conduct of monetary policy is not fundamentally different across these two groups of countries. Emerging and advanced economies alike lower their policy rates when economic activity decelerates, both unconditionally and following exogenous U.S. monetary policy tightening. We show that the common practice of using market rates, such as government bond rates, to proxy for the stance of monetary policy leads one to draw inaccurate conclusions about emerging economies’ monetary policy cyclicality due to inherent risk premia in those market rates.
    JEL: E0 F0 F3
    Date: 2022–09
  5. By: Rainer Haselmann; Christian Leuz; Sebastian Schreiber
    Abstract: This study analyzes information production and trading behavior of banks with lending relationships. We combine trade-by-trade supervisory data and credit-registry data to examine banks' proprietary trading in borrower stocks around a large number of corporate events. We find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced in situations when banks are likely to possess private information about their borrowers, and cannot be explained by specialized expertise in certain industries or certain firms. The results suggest that banks' lending relationships inform their trading and underscore the potential for conflicts of interest in universal banking, which have been a prominent concern in the regulatory debate for a long time. Our analysis illustrates how combining large data sets can uncover unusual trading patterns and enhance the supervision of financial institutions.
    JEL: G01 G14 G15 G18 G21 G24 G28 G38 K22
    Date: 2022–09
  6. By: Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Alexandra-Maria Chiper (Alexandru Ioan Cuza University of Iasi); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Alexandru Ioan Cuza University of Iasi)
    Abstract: External imbalances played a pivotal role in the run-up to the global financial crisis, being an important underlying cause of the ensuing turmoil. While current account (flow) imbalances have narrowed in the aftermath of the crisis, net international investment position (stock) imbalances still persist. In this paper, we explore the implications of countries’ net foreign positions on systemic risk. Using a sample composed of 450 banks located in 46 advanced, developing and emerging countries over the period 2000-2020, we document that banks can reduce their systemic risk exposure when the countries where they are incorporated maintain creditor positions vis-à-vis the rest of the world. However, only the equity components of the net international investment positions are responsible for this outcome, whereas debt flows do not contribute significantly. In addition, we find that the heterogeneity across countries is substantial and that only banks located in advanced markets that maintain their creditor positions have the potential to improve their resilience to system-wide shocks. Our findings are relevant for policy makers who seek to improve banks’ resilience to adverse shocks and to maintain financial stability.
    Keywords: External Wealth of Nations, External Imbalances, Net International Investment Position, Systemic Risk, Financial Stability
    JEL: F32 G21 G32
    Date: 2022–09

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