nep-ifn New Economics Papers
on International Finance
Issue of 2023‒01‒30
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Yet it Endures: The Persistence of Original Sin By Barry Eichengreen; Ricardo Hausmann; Ugo Panizza
  2. One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes By Sangyup Choi; Kimoon Jeong; Jiseob Kim
  3. The Dollar’s Imperial Circle By Ozge Akinci; Gianluca Benigno; Serra Pelin; Jonathan Turek
  4. Do Actions Speak Louder than Words? A Foreign Exchange Intervention Analysis By Freddy A. Pinzón-Puerto; Mauricio Villamizar-Villegas
  5. Monetary policy when export revenues drop By Drago Bergholt; Øistein Røisland; Tommy Sveen; Ragnar Torvik

  1. By: Barry Eichengreen; Ricardo Hausmann (Center for International Development at Harvard University); Ugo Panizza
    Abstract: Notwithstanding announcements of progress, "international original sin" (the denomination of external debt in foreign currency) remains a persistent phenomenon in emerging markets. Although some middle-income countries have succeeded in developing markets in local-currency sovereign debt and attracting foreign investors, they continue to hedge their currency exposures through transactions with local pension funds and other resident investors. The result is to shift the locus of currency mismatches within emerging economies but not to eliminate them. Other countries have limited original sin by limiting external borrowing, passing up valuable investment opportunities in pursuit of stability. We document these trends, analyzing regional and global aggregates and national case studies. Our conclusion is that there remains a case for an international initiative to address currency risk in low- and middle-income economies so they can more fully exploit economic development opportunities.
    Keywords: original sin, currency mismatches, debt crises
    JEL: H63 F34 C82
    Date: 2022–11
  2. By: Sangyup Choi (Yonsei University); Kimoon Jeong (Yonsei University); Jiseob Kim (Yonsei University)
    Abstract: What accounts for contrasting economic paths between core and periphery countries in the euro area? Unlike many studies focusing on fiscal problems, we highlight the interplay of bank mortgage lending standards and imbalances created by the common monetary policy framework. To illustrate the mechanism, we derive a country-specific monetary policy stance gap and estimate the panel VAR model of core and periphery countries, respectively. While the widening monetary policy stance gap—the accommodative stance of the ECB given individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by sharply different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different paths in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, where macroprudential policies on mortgage credit are tightened and bank lending margin decreases, increase their cross-border lending to periphery countries, which could fuel excessive risk-taking in periphery countries.
    Keywords: Euro area; Mortgage credit; Monetary policy stance gap; Bank lending survey; Macroprudential policy; Cross-border banking flows; Panel VARs.
    JEL: E21 E32 E44 F52 G21
    Date: 2023–01
  3. By: Ozge Akinci; Gianluca Benigno; Serra Pelin; Jonathan Turek
    Abstract: In this paper we highlight a new channel through which dollar fluctuations can become a self-fulfilling pro-cyclical force. We call this mechanism “Imperial Circle” as it makes the dollar the dominant macroeconomic variable in the context of the current international monetary system. At the core of it, there is a fundamental asymmetry between the shrinking exposure of the “real” U.S. economy to global developments versus the growing global role of the U.S. dollar. Dollar appreciation leads to a decline in global economic activity, which in turn benefits, in relative terms, the dollar itself, reinforcing the initial appreciation and its effects.
    Keywords: Dynamic Stochastic General Equilibrium (DSGE) models; global supply chains; dollar currency pricing; trade; spillover
    JEL: E32 E44 F41
    Date: 2022–12–01
  4. By: Freddy A. Pinzón-Puerto; Mauricio Villamizar-Villegas
    Abstract: We revisit an old question but with a new identification strategy, namely the difference in exchange rate effects between announced (“vocal”) and secret (“dirty”) foreign exchange intervention. Using a Regression Discontinuity Design, we exploit a rule-based intervention mechanism enacted by the Central Bank of Colombia that, under observable and deterministic conditions, triggered either the issuance of FX options or the ability to exercise them. We take the former (issuance) as central bank announcements under a sharp setting, since the rule and information that triggered the issuance of options was public, and we take the latter (exercise) as secret trades under a fuzzy setting, since traders could have chosen (but were not required) to exercise their options in the following days after issuance. Our results indicate that, unconditionally, both announcements and secret trades carry similar effects. However, the effects of announcements are considerably amplified conditional on: (i) higher central bank credibility, (ii) less frequent announcements, and (iii) episodes of higher FX volatility. **** RESUMEN: Revisitamos una antigua pregunta, pero con una nueva estrategia de identificación, concretamente, la diferencia entre los efectos de las intervenciones cambiarias anunciadas (“vocales”) y secretas (“sucias”). Para esto estudiamos un mecanismo de intervención basado en reglas del Banco de la República que, bajo condiciones observables y deterministas, activó la emisión de opciones (call y put) o la capacidad de ejercerlas. Interpretamos la primera (emisión) como anuncios del Banco bajo un diseño de regresión discontinua sharp, ya que la regla y la información cambiaria que la activó eran públicas, e interpretamos los ejercicios de las opciones como operaciones secretas bajo un diseño de regresión discontinua fuzzy, ya que los agentes del mercado podían haber elegido (pero no estaban obligados) a ejercerlas en los días siguientes a su emisión. Nuestros resultados indican que, de forma no condicional, tanto los anuncios como la intervención secreta tienen efectos similares. Sin embargo, el impacto de los anuncios se amplifica cuando se condicionan a: (i) una alta credibilidad del banco central, (ii) anuncios menos frecuentes y (iii) episodios de mayor volatilidad cambiaria.
    Keywords: Foreign Exchange Intervention effectiveness, Regression Discontinuity Design, Announced Intervention, Secret Intervention, Intervención cambiaria, Regresión discontinua, Intervención con anuncios, Intervención secreta
    JEL: E58 F31 C22
    Date: 2023–01
  5. By: Drago Bergholt; Øistein Røisland; Tommy Sveen; Ragnar Torvik
    Abstract: We study how monetary policy should respond to shocks which permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We consider a permanent and negative shock to export revenues that requires a larger traded sector and a smaller non-traded sector in the new steady state. This reallocation calls for a change in relative prices during the transition, but may also lead to a period of high unemployment. We show how an appropriate monetary policy could mitigate the welfare costs of the transition by allowing the exchange rate to depreciate, and thereby allowing inflation to increase in the short run. Traditional monetary policy regimes, such as inflation targeting or a fixed exchange rate, would imply high unemployment and inefficiently slow transition. Stabilizing nominal wage growth, in contrast, would be close to the welfare-optimal monetary policy.
    Keywords: Structural Change, Dutch Disease, Monetary Policy
    JEL: E52 F41 O14
    Date: 2022–11

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