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on International Finance |
| By: | Damiano Sandri; Olivier Jeanne |
| Abstract: | We use a tractable model to show that emerging markets can protect themselves from the global financial cycle by expanding (rather than restricting) capital flows. This involves accumulating foreign liquid assets when global liquidity is high to then buy back domestic assets at a discount when global financial conditions tighten. Since the private sector does not internalize how this buffering mechanism reduces international borrowing costs, a social planner increases the size of capital flows relative to the laissez-faire equilibrium. The model also shows that foreign exchange interventions may be preferable to capital controls in less financially developed countries. |
| Keywords: | capital flows, foreign exchange reserves, sudden stop, capital flow management, capital controls |
| JEL: | F31 F32 F36 F38 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1069&r=ifn |
| By: | Christopher Clayton; Antonio Coppola; Amanda Dos Santos; Matteo Maggiori; Jesse Schreger |
| Abstract: | We document the rise of China in offshore capital markets. Chinese firms use global tax havens to access foreign capital both in equity and bond markets. In the last twenty years, China's presence went from raising a negligible amount of capital in these markets to accounting for more than half of equity issuance and around a fifth of global corporate bonds outstanding in tax havens. Using rich micro data, we show that a range of Chinese firms, including both tech giants and SOEs, use these offshore centers. We conclude by discussing the macroeconomic and financial stability implications of these patterns. |
| JEL: | F3 G10 G30 H87 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30865&r=ifn |
| By: | Egemen Eren; Semyon Malamud; Haonan Zhou |
| Abstract: | We document that firms in emerging markets borrow more in foreign currency when the local currency actually provides a better hedge in downturns. Motivated by this fact, we develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. Crucially, the nature of this equilibrium depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence for this signalling channel using a granular dataset including more than 4, 800 firms in 19 emerging markets between 2005 and 2021. Our results have implications for evaluating and mitigating risks arising from currency mismatches in corporate balance sheets. |
| Keywords: | foreign currency debt, corporate debt, signaling, exchange rates |
| JEL: | D82 F34 G01 G15 G32 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1067&r=ifn |
| By: | Park, Cyn-Young (Asian Development Bank); Shin, Kwanho (Department of Economics, Korea University) |
| Abstract: | This paper investigates whether the uncovered interest parity (UIP) will hold more firmly if the local currency bond markets (LCBMs) are more developed, and the presence of nonbank financial institutions (NBFIs) is expanded. Deviations in UIP decrease as LCBMs develop, while the patterns of the UIP premium in emerging markets increasingly resemble patterns in advanced economies. Capital flows respond more sensitively to the UIP premium for emerging markets when LCBMs are more developed. These suggest the development of LCBMs and NBFIs might induce more active cross-border carry trades and reduce UIP deviations. However, greater carry trade positions may increase a country’s exposure to market disruptions and exchange rate volatility. Empirical results show that gross portfolio debt inflows increase (decrease) when the exchange rate appreciates (depreciates). While LCBMs becoming more developed can mitigate the negative effect of the original sin redux hypothesis in advanced economies, this aggravates the impact of exchange rate depreciation in emerging markets. |
| Keywords: | uncovered interest parity; local currency bond markets; emerging economies; nonbank financial institutions; capital inflows |
| JEL: | E44 F34 F62 G12 G21 G23 |
| Date: | 2023–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0677&r=ifn |
| By: | Se-Jik Kim; Hyun Song Shin |
| Abstract: | This paper presents a "time-to-build" theory of supply chains which implies a key role for the financing of working capital as a determinant of supply chain length. We apply our theory to offshoring and trade, where firms strike a balance between the productivity gain due to offshoring against the greater financial cost due to longer supply chains. In equilibrium, the ratio of trade to GDP, inventories and productivity are procyclical and closely track financial conditions. |
| Keywords: | global value chains, offshoring, trade finance |
| JEL: | F23 F36 G15 G21 L23 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1070&r=ifn |