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on International Finance |
| By: | Ron Alquist; Karlye Dilts Stedman; Robert Jay Kahn |
| Abstract: | We show theoretically and empirically that the dollar’s status as the global reserve currency can lead to economically significant changes in U.S. money market liquidity. We develop a model in which U.S. money market spreads respond to foreign central banks’ exchange-rate management decisions. Foreign central banks remove liquidity from U.S. money markets and cause spreads to widen by selling Treasuries to supply liquidity to their financial systems. Our analysis focuses on the major oil exporting countries with fixed exchange rates because their foreign-exchange market interventions are straightforward to characterize. Our regression analysis shows that shifts in the central banks’ demand for dollar liquidity related to oil price volatility are associated with significantly higher overnight spreads in domestic money markets. A one-standard deviation increase in the demand for dollar liquidity by a central bank in an oil-exporting country leads, on average, to three billion dollars of Treasury sales and a two to six basis point increase in U.S. money market spreads. At the same time, deposits held with the Federal Reserve increase in response to this higher oil-price volatility, which is consistent with the model’s predictions. This evidence indicates that the widespread use of the U.S. dollar as a reserve currency acts as a channel that can propagate funding shocks from the rest of the world to the United States. |
| Keywords: | central banking; markets |
| JEL: | E43 G12 G13 G23 |
| Date: | 2022–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:94751 |
| By: | Coppola, Antonio (Stanford U); Krishnamurthy, Arvind (Stanford U); Xu, Chenzi (Stanford U) |
| Abstract: | We provide a liquidity-based theory for the dominant use of the US dollar as the unit of denomination in global debt contracts. Firms need to trade their revenue streams for the assets required to extinguish their debt obligations. When asset markets are illiquid, as modeled via endogenous search frictions, firms optimally choose to denominate their debt in the unit of the asset that is easiest to obtain. This gives central importance to the denomination of government-backed assets with the largest safe, liquid, short-term float and to financial market institutions that facilitate safe asset creation. Equilibria with a single dominant currency emerge from a positive feedback cycle whereby issuing in the more liquid denomination endogenously raises its liquidity, incentivizing more issuance. We rationalize features of the current dollar-dominant international financial architecture and relate our theory to historical experiences, such as the prominence of the Dutch florin and pound sterling, the transition to the dollar, and the ongoing debate about the potential rise of the Chinese renminbi. |
| Date: | 2023–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4075 |
| By: | Nadia Accoto (Bank of Italy); Valerio Astuti (Bank of Italy); Costanza Catalano (Bank of Italy) |
| Abstract: | The Ultimate Host Economies (UHEs) of a given country are defined as the ultimate destinations of Foreign Direct Investment (FDI) originating in that country. Bilateral FDI statistics struggle to identify them due to the non-negligible presence of conduit jurisdictions, which provide attractive intermediate destinations for pass-through investments due to favorable tax regimes. At the same time, determining UHEs is crucial for understanding the actual paths followed by FDI among increasingly interdependent economies. In this paper, we first reconstruct the global FDI network through mirroring and clustering techniques, starting from data collected by the International Monetary Fund. Then we provide a method for computing an (approximate) distribution of the UHEs of a country by using a probabilistic approach to this network, based on Markov chains. More specifically, we analyze the Italian case. |
| Keywords: | foreign direct investment, ultimate host economies, Special Purpose Entities, network reconstruction, clustering, absorbing Markov chains |
| JEL: | C51 C60 F23 G15 |
| Date: | 2023–04 |
| URL: | https://d.repec.org/n?u=RePEc:bdi:opques:qef_760_23 |
| By: | Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch |
| Abstract: | This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent. |
| JEL: | F2 F33 F42 F65 G15 H63 N25 |
| Date: | 2023–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:31105 |