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on International Finance |
| By: | Karen K. Lewis; Edith X. Liu |
| Abstract: | When available financial securities allow investors to optimally diversify risk across countries, standard theory implies that exchange rates should reflect this behavior. However, exchange rates observed in the data deviate from these predictions. In this paper, we develop a framework to value the welfare costs of these exchange rate wedges, as disciplined by asset returns. This framework applies to a general class of asset pricing and exchange rate models. We further decompose the value of these wedges into components, showing that the ability of goods markets to respond to financial markets through exchange rate adjustment has significant implications for welfare. |
| Keywords: | Exchange rates and foreign exchange; Asset prices; Financial integration; Social costs |
| JEL: | F31 G15 G10 F41 F30 |
| Date: | 2022–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-75&r=ifn |
| By: | Carlos Cantù; Catherine Casanova; Rodrigo Alfaro; Fernando Chertman; Gerald Cisneros; Toni dos Santos; Roberto Lobato; Calixto Lopez; Facundo Luna; David Moreno; Miguel Sarmiento; Rafael Nivin |
| Abstract: | We explore the mechanism that links capital inflows from abroad with domestic bank lending. Five Latin American countries use their credit registry data to examine the changes in outstanding loans and prices that are charged by banks with different balance sheet characteristics. Our meta-analysis sums up their results. We find that high capital inflows generally induce weak banks to relax their lending standards. For the most vulnerable market segment, where weak banks lend to risky firms, only banks with low capital ratios tend to lend more and charge less during periods of high capital inflows. Financial stability concerns could arise, but they are limited as even low-capital banks are above the regulatory minimum. |
| Keywords: | credit registry data, international capital flows, bank lending, SME financing. |
| JEL: | E0 F0 F1 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1051&r=ifn |
| By: | Raphael Auer; Giulio Cornelli; Sebastian Doerr; Jon Frost; Leonardo Gambacorta |
| Abstract: | Prices for cryptocurrencies have undergone multiple boom-bust cycles, together with ongoing entry by retail investors. To investigate the drivers of crypto adoption, we assemble a novel database (made available with this paper) on retail use of crypto exchange apps at daily frequency for 95 countries over 2015–22. We show that a rising Bitcoin price is followed by the entry of new users. About 40% of these new users are men under 35, commonly identified as the most "risk-seeking" segment of the population. To establish a causal effect of prices on adoption, we exploit two exogenous shocks: the crackdown of Chinese authorities on crypto mining in mid2021 and the social unrest in Kazakhstan in early 2022. During both episodes price changes have a significant effect on the entry of new users. Results from a PVAR model corroborate these findings. Overall, back of the envelope calculations suggest that around three-quarters of users have lost money on their Bitcoin investments. |
| Keywords: | bitcoin, cryptocurrencies, cryptoassets, regulation, decentralised finance, DeFi, retail investment. |
| JEL: | E42 E51 E58 F31 G28 L50 O32 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1049&r=ifn |
| By: | Bittner, Christian; Bonfim, Diana; Heider, Florian; Saidi, Farzad; Schepens, Glenn; Soares, Carla |
| Abstract: | This paper studies how banks’ balance sheets and funding costs interact in the transmission of monetary-policy rates to banks’ credit supply to firms. To do so, we use credit registry data from Germany and Portugal together with the European Central Bank’s policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks’ funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks’ financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks’ funding costs reduces their ability to lever up and weakens their lending standards. JEL Classification: E44, E52, E58, E63, F45, G20, G21 |
| Keywords: | bank balance sheets, bank lending, bank risk taking, euro-area heterogeneity, transmission of monetary policy |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222745&r=ifn |
| By: | Fricke, Daniel; Jank, Stephan; Wilke, Hannes |
| Abstract: | Using a unique dataset on the sectoral ownership structure of euro area equity mutual funds, we study how different investor groups contribute to the negative performance externality from large outflows. Investment funds, as holders of mutual funds, are the main contributors to the flow externality. Insurers and households, in particular less financially-sophisticated ones, are the main receivers. These differences are due to investment funds reacting more strongly on past performance and displaying a more procyclical investment behavior compared to households and insurers. Our results raise consumer protection and financial stability concerns due to the trading activity of short-term oriented investors. |
| Keywords: | asset management,mutual funds,externalities,contagion,performance |
| JEL: | G10 G11 G23 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:412022&r=ifn |
| By: | Richard T. Baillie; Francis X. Diebold; George Kapetanios; Kun Ho Kim |
| Abstract: | We suggest a new single-equation test for Uncovered Interest Parity (UIP) based on a dynamic regression approach. The method provides consistent and asymptotically efficient parameter estimates, and is not dependent on assumptions of strict exogeneity. This new approach is asymptotically more efficient than the common approach of using OLS with HAC robust standard errors in the static forward premium regression. The coefficient estimates when spot return changes are regressed on the forward premium are all positive and remarkably stable across currencies. These estimates are considerably larger than those of previous studies, which frequently find negative coefficients. The method also has the advantage of showing dynamic effects of risk premia, or other events that may lead to rejection of UIP or the efficient markets hypothesis. |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2211.01344&r=ifn |