nep-ifn New Economics Papers
on International Finance
Issue of 2023‒05‒01
four papers chosen by
Jiachen Zhan
University of California,Irvine

  1. The U.S. Dollar as an International Currency and Its Economic Effects: Working Paper 2023-04 By Daniel Fried
  2. Foreign Exchange Swap Liquidity By Peteris Kloks; Edouard Mattille; Angelo Ranaldo
  3. The systemic instability of ballooning Global Liquidity as a symptom of the worsening of the Triffin Dilemma By Christian Ghymers
  4. Real exchange rate and international reserves in the era of financial integration. By Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin

  1. By: Daniel Fried
    Abstract: The U.S. dollar plays an important role as the most widely used currency in global goods, services, and financial markets. Strong international demand for U.S. dollars and dollar-denominated assets associated with the dollar’s status as an international currency has increased the value of the dollar in foreign exchange markets and the value of dollar-denominated assets in financial markets. As a result, the dollar’s status has contributed to persistent U.S. trade deficits and, by lowering interest rates, to increased access to credit for U.S. households, businesses, and the
    JEL: E58 F30 F31 F33
    Date: 2023–04–17
  2. By: Peteris Kloks (University of St. Gallen); Edouard Mattille (University of St. Gallen); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute)
    Abstract: This paper presents the first comprehensive examination of liquidity in the global foreign exchange (FX) swap market. Our analysis employs effective measures that assess both the tightness and depth of the global market. We identify three main findings: First, FX swap liquidity is fragmented across currencies, tenors, and time. Second, liquidity conditions worsen when dealers’ balance sheet capacity shrinks, especially at quarter-end reporting dates. However, we observe a simultaneous surge in short-term volumes; we rationalize this through a difference-in-differences analysis suggesting a demand channel for FX swaps during reporting windows. Third, we build a measure of pricing efficiency based on the law of one price and show that illiquidity impairs efficiency even during periods when dealers’ regulatory constraints are slack.
    Keywords: exchange swap, Global currency market, Market liquidity, Dealers, Price efficiency.
    JEL: C15 F31 G12 G15
    Date: 2023–03
  3. By: Christian Ghymers (IRELAC (Interdisciplinary Institute for the Relations between the European Union, Latin America and the Caribbean); ICHEC Brussels Management School)
    Abstract: The purpose of this paper is to draw attention to the link (still neglected by economists and policymakers) between the fragility of the liquidity situation and the Triffin Dilemma through the corollary of the “built-in destabiliser†. Indeed, the changes in the financial markets that explain most of the GL expansion have exacerbated the inner pro-cyclical character of financial markets by amplifying the endogenous reversibility of the creation of GL due to the narrowing of the ultimate availability of safe assets in US dollars, on which the inverted pyramid of GL is based, thus creating additional destabilising effects on the financial cycle. A common feature of this recurrent instability of GL and the IMS based on the dollar as the main reserve currency is the absence of a multilateral Lender-of-Last-Resort (LOLR) capable of regulating GL by issuing the optimal quantity of “safe assets†without causing geopolitical policy conflict or asymmetries, because a multilateral safe asset is not, by definition, a debt of any national economy but of the global system.
    Keywords: Liquidity instability, Global liquidity, Financial markets, Triffin dilemma
    JEL: E43 E52 F33 F30 F60 G15
    Date: 2021–11
  4. By: Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
    Abstract: The global financial crisis has brought increased attention to the consequences of international reserves holdings. In an era of high financial integration, we investigate the relationship between the real exchange rate and international reserves using nonlinear regressions and panel threshold regressions over 110 countries from 2001 to 2020. We find the buffer effect of international reserves is more pronounced in Europe and Central Asia above a threshold of 17% of international reserves over GDP. Our study shows the level of financial-institution development plays an essential role in explaining the buffer effect of international reserves. Countries with a low development of their financial institutions may manage the international reserves as a shield to deal with the negative consequences of terms-of-trade shocks on the real exchange rate. We also find the buffer effect is stronger in countries with intermediate levels of financial openness.
    Keywords: Real exchange rate, International reserves, Financial institutions.
    JEL: F15 F21 F32 F36 G20
    Date: 2023

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