nep-ifn New Economics Papers
on International Finance
Issue of 2023‒05‒29
four papers chosen by
Jiachen Zhan
University of California,Irvine

  1. The US, Economic News, and the Global Financial Cycle By Christoph E. Boehm; Niklas Kroner
  2. A Theory of Net Capital Flows over the Global Financial Cycle By J. Scott Davis; Eric Van Wincoop
  3. From Carry Trades to Trade Credit: Financial Intermediation by Non-Financial Corporations By Bryan Hardy; Felipe Saffie
  4. Who holds sovereign debt and why it matters By Xiang Fang; Bryan Hardy; Karen Lewis

  1. By: Christoph E. Boehm; Niklas Kroner
    Abstract: We provide evidence for a causal link between the US economy and the global financial cycle. Using intraday data, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, the VIX, and commodity prices all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large - often comparable in size to the response of the S&P 500. Further, US macroeconomic news explains on average 23 percent of the quarterly variation in foreign stock markets. The joint behavior of stock prices, bond yields, and risk premia suggests that systematic US monetary policy reactions to news do not drive the estimated effects. Instead, the evidence points to a direct effect on investor’ risk-taking capacity. Our findings show that a byproduct of the United States' central position in the global financial system is that news about its business cycle has large effects on global financial conditions.
    Keywords: Global Financial Cycle; Macroeconomic announcements; International spillovers; Stock returns; VIX; Monetary Policy; High-frequency event study
    JEL: E44 E52 F40 G12 G14 G15
    Date: 2023–02–25
  2. By: J. Scott Davis; Eric Van Wincoop
    Abstract: We develop a theory to account for changes in net capital flows of safe and risky assets over the global financial cycle. We show empirically that countries that have a net debt of safe assets experience a rise in net outflows of safe assets (reduced accumulation of safe debt) during a downturn in the global financial cycle. This is accomplished through a rise in total net outflows and a drop in net outflows of risky assets. We develop a multi-country portfolio choice model that can account for these facts. The theory relies on cross-country heterogeneity in the share of an investor's portfolio invested in risky assets. A global drop in risky asset prices changes relative wealth across countries due to this heterogeneity, which leads to changes in net flows of safe and risky assets. The model is applied to 20 advanced countries and calibrated to reflect observed cross-country heterogeneity of net foreign asset positions of safe and risky assets. The implications of the calibrated model for net capital flows are quantitatively consistent with the data.
    Keywords: global financial cycle; capital flows; current account; Portfolio Heterogeneity
    JEL: F30 F40
    Date: 2023–05–06
  3. By: Bryan Hardy; Felipe Saffie
    Abstract: We use unique firm-level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency (FX) and lending in domestic currency, largely in the form of trade credit, accumulating currency risk in the process. We show at a quarterly frequency that the practice of borrowing in FX and extending trade credit is more prevalent when foreign currency borrowing is relatively cheaper than local currency borrowing, and it is associated with expansions in both gross trade credit and sales. Firms that were more active in carry-trades, accumulating currency risk, experienced larger reductions in investment and profits following a large depreciation event. Nevertheless, their extension of trade credit remained stable, insulating their trading partners from the shock. A firm-level panel for 20 emerging countries provide external validity for the link between carry trades and trade credit.
    JEL: E44 F30 G15 G30
    Date: 2023–04
  4. By: Xiang Fang; Bryan Hardy; Karen Lewis
    Abstract: This paper studies the impact of investor composition on the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, non-bank private, and official investors for 95 countries over 20 years. Private non-bank investors absorb disproportionately more sovereign debt supply than other investors. Moreover, non-bank investor demand is most responsive to the yield. Counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 6.7% increase in costs, but an outsize 9% increase if non-bank investors are absent. We conclude that these sovereigns are vulnerable to losing non-bank investors.
    Keywords: new borrowing, debt service, financial cycle, financial flows and real effects
    JEL: F34 G11 G15 F41
    Date: 2023–05

This nep-ifn issue is ©2023 by Jiachen Zhan. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.