nep-ifn New Economics Papers
on International Finance
Issue of 2023‒02‒20
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global financial cycle and liquidity management By Damiano Sandri; Olivier Jeanne
  2. China in Tax Havens By Christopher Clayton; Antonio Coppola; Amanda Dos Santos; Matteo Maggiori; Jesse Schreger
  3. Signaling with debt currency choice By Egemen Eren; Semyon Malamud; Haonan Zhou
  4. The Development of Local Currency Bond Markets and Uncovered Interest Rate Parity By Park, Cyn-Young; Shin, Kwanho
  5. Theory of supply chains: a working capital approach By Se-Jik Kim; Hyun Song Shin

  1. 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
  2. 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
  3. 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
  4. 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
  5. 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

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