nep-ifn New Economics Papers
on International Finance
Issue of 2022‒12‒19
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The growing importance of investment funds in capital flows By Richard Schmidt; Pınar Yeşin
  2. What Happens in China Does Not Stay in China By William Barcelona; Danilo Cascaldi-Garcia; Jasper Hoek; Eva Van Leemput
  3. Protectionism, bilateral integration, and the cross section of exchange rate returns in US presidential debates By de Boer, Jantke; Eichler, Stefan; Rövekamp, Ingmar
  4. Sea Level Rise Exposure and Municipal Bond Yields By Paul Goldsmith-Pinkham; Matthew T. Gustafson; Ryan C. Lewis; Michael Schwert
  5. Bank lending rates and the remuneration for risk: evidence from portfolio and loan level data By Durrani, Agha; Metzler, Julian; Michail, Nektarios; Werner, Johannes Gabriel
  6. The Elusive Link Between FDI and Economic Growth By Agustin Benetrix; Hayley Pallan; Ugo Panizza

  1. By: Richard Schmidt; Pınar Yeşin
    Abstract: In this paper, we first document the growing importance of foreign-domiciled investment funds in countries’ portfolio liabilities over time and then show empirical evidence that cross-border fund flows are coincident with asset price movements. To measure the external liabilities of countries to foreign-domiciled funds, we complement conventional balance of payments and international investment position data with granular and real-time fund flows data. We find that the external exposure of countries to investment funds has been steadily increasing both for advanced and emerging market economies. Furthermore, we find that this increased external exposure is coincident with higher exchange rate fluctuations, lower bond yields and higher stock returns. Because sustainability-themed investment funds are growing faster than conventional investment funds, we also focus on Environmental, Social and Governance (ESG) funds and construct an index of sustainable finance that can distinguish between its domestic and cross-border components. Our index reveals that ESG funds domiciled in European countries tend to invest predominantly in domestic markets, whereas ESG investment in emerging market economies to a large extent originates from foreign-domiciled investment funds.
    Keywords: Investment funds, portfolio investment, fund flows, ESG funds, financial markets
    JEL: F32 G15 G23
    Date: 2022–11
  2. By: William Barcelona; Danilo Cascaldi-Garcia; Jasper Hoek; Eva Van Leemput
    Abstract: Spillovers from China to global financial markets have been found to be small owing to China's limited integration in the global financial system. In this paper, however, we provide evidence that China constitutes an important driver of the global financial cycle. We argue that because of China's importance for global consumption, stronger Chinese growth raises global growth prospects, inducing an increase in global risk sentiment and an expansion in global asset prices and global credit. Two contributions are key to this finding: (1) We construct a measure of China's credit impulse to identify Chinese policy-induced demand shocks. Our approach takes advantage of the fact that a primary tool of China's stabilization policy-encompassing monetary, fiscal, and regulatory policies-is controlling the amount of credit in the economy. Without China's credit impulse, it is difficult to discern global financial spillovers; (2) We estimate an alternative measure of Chinese GDP growth that captures its business cycle given data concerns about the smoothness of official GDP data. Without China's alternative GDP measure, it is difficult to attribute any global cycle movements to economic developments in China.
    Keywords: China; Growth; Credit Impulse; Global Financial Cycle; Global Business Cycle; Global Risk Sentiment; Commodity Prices
    JEL: C52 E50 F44
    Date: 2022–11–25
  3. By: de Boer, Jantke; Eichler, Stefan; Rövekamp, Ingmar
    Abstract: We study the impact of US presidential election TV debates on intraday exchange rates of 96 currencies from 1996 to 2016. Expectations about protectionist measures are the main transmission channel of debate outcomes. Currencies of countries with high levels of bilateral foreign trade with the US depreciate if the election probability of the protectionist candidate increases during the debate. We rationalize our results in a model where a debate victory of a protectionist candidate raises expectations about future tariffs and reduces future net exports to the US, resulting in relative depreciation of currencies with high bilateral trade integration.
    Keywords: Exchange Rates,US Presidential Elections,TV Debates,Protectionism,Bilateral Trade Integration
    JEL: F31 G15 G14 D72
    Date: 2022
  4. By: Paul Goldsmith-Pinkham; Matthew T. Gustafson; Ryan C. Lewis; Michael Schwert
    Abstract: Municipal bond markets begin pricing sea level rise (SLR) exposure risk in 2013, coinciding with upward revisions to worst-case SLR projections and accompanying uncertainty around these projections. The effect is larger for long-maturity bonds and is not solely driven by near-term flood risk. We use a structural model of credit risk to quantify the implied economic impact and distinguish the effects of underlying asset values and uncertainty. The SLR exposure premium exhibits a different trend from house prices and is unaffected by house price controls. Taken together, our results highlight the importance of climate uncertainty in driving municipal bond prices.
    JEL: G1
    Date: 2022–11
  5. By: Durrani, Agha; Metzler, Julian; Michail, Nektarios; Werner, Johannes Gabriel
    Abstract: We employ interest rates and expected loss probabilities from the 2021 EBA Stress Test dataset and euro area credit registries to examine whether the risk-return relationship holds in banking. After controlling for bank, loan, and debtor characteristics as well as macroeconomic conditions, results indicate that a risk-return relationship in bank lending is present but varies significantly across and within borrower segments. While bank lending rates appear to be quite responsive to risks towards households, results suggest that banks only significantly increase interest rates towards non-financial corporations that reside in the riskiest quantiles of the distribution. This potentially implies the presence of a cross-subsidization effect of credit risk. JEL Classification: E51, E52, E58
    Keywords: banking, credit register, interest rates, loans, risk-return
    Date: 2022–11
  6. By: Agustin Benetrix (IM-TCD, Trinity College Dublin); Hayley Pallan (World Bank); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper revisits the link between FDI and economic growth in emerging and developing economies. When we study the early decades of our sample, we find that there is no statistically significant correlation between FDI and growth for countries with average levels of education or financial depth. In line with previous contributions, we find that this correlation is positive and statistically significant for countries with sufficienty well-developed financial sectors or high levels of human capital. However, we also find that the link between FDI and growth varies over time. For more recent periods, we find a positive and statistically significant relationship between FDI and growth for the average country, with local conditions having a negative e ect on this link. We also develop a novel instrument aimed at addressing the endogeneity of FDI inflows. Instrumental variable estimates suggest that our results are unlikely to be driven by endogeneity.
    Keywords: FDI, Economic Growth, Human Capital, Financial Development
    JEL: F21 F43 C21 C26
    Date: 2022–11–30

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