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

  1. Portfolio Capital Flows and the US Dollar Exchange Rate: Viewed from the Lens of Time and Frequency Dynamics of Connectedness By Mangal Goswami; Victor Pontines; Yassier Mohammed
  2. Constrained Liquidity Provision in Currency Markets By Wenqian Huang; Angelo Ranaldo; Andreas Schrimpf; Fabricius Somogyi
  3. The Influence of Global Inflation on Emerging Market Economies' Inflation By Arango-Castillo Lenin; Orraca María José; Molina Martínez G. Stefano
  4. Borrowing Constraints in Emerging Markets By Santiago Camara; Maximo Sangiacomo
  5. Working Paper 367 - Debt Distress and Recovery Episodes in Africa: Good Policy or Good Luck? By Chuku Chuku; Alexandre Kopoin
  6. Globalization and Heterogeneity: Evidence from Hollywood By Konrad Adler; Simon Fuchs

  1. By: Mangal Goswami; Victor Pontines; Yassier Mohammed
    Abstract: Using high-frequency, proprietary data on daily net non-resident portfolio flows to emerging markets, our study finds in the time domain connectedness framework that, to varying degrees, there is less interconnectedness in non-resident debt and equity portfolio flows to our sample of emerging market (EM) economies during normal times. In contrast, during times of uncertainty and stress, the interconnectedness of portfolio flows intensifies. This indicates the notion of asymmetry in the spillovers of these portfolio flows during periods of stress relative to normal times. More importantly, over most of the sample period, we find that shocks in the broad EM US dollar exchange rate can have important effects on these interconnections where, based on estimates of the net directional spillover index, the broad EM US dollar exchange rate is a net transmitter of shocks to debt and equity portfolio flows of the EM economies. Using the more recent frequency domain approach to connectedness, we find that the broad EM US dollar exchange rate is a net transmitter of shocks to the EM economies’ debt and equity flows with the impact of such shocks hitting portfolio capital flows within at least a week to 100 days. In addition to the importance of pre-emptive prudential policy levers, efforts toward better monitoring of risks can contribute to creditors and investors in EM economies becoming more resilient to global shocks, particularly, during times of US dollar appreciations when these portfolio flows tend to reverse.
    Keywords: Portfolio debt flows, portfolio equity flows, connectedness, directional spillover
    JEL: C58 F31 F41 G15
    Date: 2022–11
  2. By: Wenqian Huang (Bank for International Settlements); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Andreas Schrimpf (CREATES - Aarhus University; Bank for International Settlements (BIS) - Monetary and Economic Department); Fabricius Somogyi (D’Amore-McKim School of Business)
    Abstract: We study dealers’ liquidity provision in the currency market. We show that at times when dealers’ intermediation capacity is constrained their cost of liquidity provision increases disproportionately relative to dealer-provided volume. As a result, the elasticity of dealers’ liquidity provision weakens by at least 80% relative to periods when they are unconstrained. We identify constrained periods based on leverage ratios, Value-at-Risk measures, credit default spreads, and debt funding costs. We interpret our novel empirical findings within a parsimonious model that sheds light on the key mechanisms of how liquidity provision by dealers tends to weaken when intermediary constraints are tightening.
    Keywords: Currency markets, dealer constraints, market liquidity, foreign exchange, liquidity provision.
    JEL: F31 G12 G15
    Date: 2022–10
  3. By: Arango-Castillo Lenin; Orraca María José; Molina Martínez G. Stefano
    Abstract: We calculate global inflation as the first principal component of inflation in a sample of emerging market and advanced economies and find that it may account for an important fraction of headline and core inflation variance across countries. We then show that global inflation is correlated with international commodity price variation, the global economic cycle, and financial volatility, but that a large fraction of its variance is unaccounted for by these factors. Finally, we augment standard inflation forecasting models for ten emerging market economies with global inflation and find that doing so improves forecasting performance for headline inflation. We argue that this predictive potential stems from its correlation with commodity prices, output gap and global financial volatility, but also from the additional information that this variable contains regarding other inflation determinants worldwide.
    Keywords: Inflation;Principal Components;Forecasting and Prediction Methods
    JEL: E31 C38 C53
    Date: 2022–11
  4. By: Santiago Camara; Maximo Sangiacomo
    Abstract: Borrowing constraints are a key component of modern international macroeconomic models. The analysis of Emerging Markets (EM) economies generally assumes collateral borrowing constraints, i.e., firms access to debt is constrained by the value of their collateralized assets. Using credit registry data from Argentina for the period 1998-2020 we show that less than 15% of firms debt is based on the value of collateralized assets, with the remaining 85% based on firms cash flows. Exploiting central bank regulations over banks capital requirements and credit policies we argue that the most prevalent borrowing constraints is defined in terms of the ratio of their interest payments to a measure of their present and past cash flows, akin to the interest coverage borrowing constraint studied by the corporate finance literature. Lastly, we argue that EMs exhibit a greater share of interest sensitive borrowing constraints than the US and other Advanced Economies. From a structural point of view, we show that in an otherwise standard small open economy DSGE model, an interest coverage borrowing constraints leads to significantly stronger amplification of foreign interest rate shocks compared to the standard collateral constraint. This greater amplification provides a solution to the Spillover Puzzle of US monetary policy rates by which EMs experience greater negative effects than Advanced Economies after a US interest rate hike. In terms of policy implications, this greater amplification leads to managed exchange rate policy being more costly in the presence of an interest coverage constraint, given their greater interest rate sensitivity, compared to the standard collateral borrowing constraint.
    Date: 2022–11
  5. By: Chuku Chuku (International Monetary Fund); Alexandre Kopoin (African Development Bank)
    Abstract: Greater access to international capital markets has meant that many African countries now owe a significant share of their debt to private bondholders, traded in secondary debt markets around the world. Assessing sovereign debt challenges for the continent will have to take on different forms, expanding beyond the traditional definitions of debt distress to broader market-oriented measures that identify crises through movements in sovereign bond spreads. In this paper, we use duration models to identify recent debt dis-tress and recovery episodes in Africa from a market-oriented approach, pinning down the entry points, the duration, and exit points of recent debt crises in Africa’s frontier market economies. Using the identified debt distress episodes, we examine the role of the external global environment, the domestic policy environment, and the presence of an international financial institution (IFI)-supported programme in explaining the duration of debt distress and the process of recovery. Our results indicate that favourable external conditions combined with sound domestic policy and the presence of an IFI-supported pro-gram contribute to shorter episodes of bond market crisis. Specifically, higher commodity prices, lower global interest rates, stronger political institutions, more robust reserves, and lower levels of short-term debt shorten the duration of debt crises in Africa. Thus, both good policies and good luck have played complementary roles in facilitating recovery from debt distress in Africa.
    Keywords: Bond market, debt distress, duration models, recovery rates JEL classification: C41, E44, F34, G15
    Date: 2022–11–07
  6. By: Konrad Adler; Simon Fuchs
    Abstract: Linder (1961) conjectured that taste differences could impede trade flows. We extend Krugman (1980) to allow for producers that face taste heterogeneity with volatile demand. Consumers are characterized by different taste over product attributes and idiosyncratic risk. Firms face a portfolio type of problem where they trade off supplying the largest consumer groups against higher exposure to group-specific risk. We develop an empirical strategy to estimate consumer taste from observed market shares across multiple distinct markets of the same product, as well as the key parameters that pin down the firm’s portfolio choice problem. We apply our framework to estimate the impact of the rise of China on the global movies market and characterize the heterogeneous welfare effects across countries.
    Keywords: taste heterogeneity; volatility; gains from trade
    JEL: F11 F14
    Date: 2022–10–06

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