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on International Finance |
| By: | Linda S. Goldberg |
| Abstract: | Global liquidity refers to the volumes of financial flows—largely intermediated through global banks and non-bank financial institutions—that can move at relatively high frequencies across borders. The amplitude of responses to global conditions like risk sentiment, discussed in the context of the global financial cycle, depends on the characteristics and vulnerabilities of the institutions providing funding flows. Evidence from across empirical approaches and using granular data provides policy-relevant lessons. International spillovers of monetary policy and risk sentiment through global liquidity evolve in response to regulation, the characteristics of financial institutions, and actions of official institutions around liquidity provision. Strong prudential policies in the home countries of global banks and official facilities reduce funding strains during stress events. Country-specific policy challenges, summarized by the monetary and financial trilemmas, are partially alleviated. However, risk migration across types of financial intermediaries underscores the importance of advancing regulatory agendas related to non-bank financial institutions. |
| Keywords: | global liquidity; global dollar cycle; trilemma; exchange market pressure; risk sensitivity; safe haven; capital flows; non-bank financial intermediaries; risk migration |
| JEL: | E44 F30 G15 G18 G23 |
| Date: | 2023–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:96353&r=ifn |
| By: | Stéphane Auray; Michael B. Devereux; Aurélien Eyquem |
| Abstract: | This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries. |
| JEL: | F30 F40 F41 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31302&r=ifn |
| By: | Flavia Corneli (Bank of Italy); Fabrizio Ferriani (Bank of Italy); Andrea Gazzani (Bank of Italy) |
| Abstract: | China has become a major player in the global economy. Our new and original database of Chinese macroeconomic surprises shows the significant impact they have on equity markets worldwide. These surprises also affect commodity prices, the US nominal effective exchange rate and the VIX Index. Finally, we establish that positive Chinese macroeconomic news is associated with the expansion of global trade and industrial production. Overall, we provide evidence of the growing role of the Chinese economy as a driving force for both the real and the financial global cycle. |
| Keywords: | global financial cycle, China macroeconomic announcements, international spillovers, commodity prices |
| JEL: | E44 F21 F40 G15 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_772_23&r=ifn |
| By: | Beck, Roland; Brüggemann, Axel; Eijking, Carlijn; Eller, Markus; Marsilli, Clement; Moder, Isabella; Naef, Alain; Landi, Valerio Nispi; Scheubel, Beatrice; Theofilakou, Anastasia; Wesołowski, Grzegorz; Berganza, Juan Carlos; Cezar, Rafael; Fuentes, Alberto; Alves, Joel Graça; Kreitz, Lilian; Sánchez, Luis Molina; Hove, Floriane Van Den |
| Abstract: | Large swings in cross-border capital flows can have consequences for domestic stability and open a channel for the transmission of shocks and spillovers across economies, including the euro area. Against this backdrop, the present paper reviews new evidence for the effectiveness of capital flow management policies in achieving macroeconomic and financial stability. Particular attention is paid to literature that has been used by the International Monetary Fund (IMF) to underpin its so-called Integrated Policy Framework, in which the roles of monetary, exchange rate, macroprudential and capital flow management policies are considered jointly. The literature published since the global financial crisis continues to affirm the effectiveness of capital flow management measures (CFMs) in addressing financial stability risks resulting from capital flow reversals; at the same time, however, it also continues to underscore that such policies should not substitute for warranted economic adjustments and structural reforms. Even so, recent literature also provides a case for considering, under certain circumstances, “precautionary” CFMs which could be applied to capital inflows to prevent a boom-and-bust cycle from being set in motion. This paper also highlights the need for further work on the long-term effects of such precautionary instruments, as well as their joint use with monetary policy instruments. Regarding capital flow management policies within the domain of central banks, the literature points to the usefulness of foreign exchange interventions (FXIs) in mitigating financial stability risks in countries with specific characteristics such as currency mismatches, borrowing constraints and shallow foreign exchange markets that are common to emerging market and developing economies alike. However, the literature also warns that such measures may reduce economic agents’ incentives to hedge against currency risks, with the result that unfavourable initial conditions beco JEL Classification: F32, F38 |
| Keywords: | capital controls, short-term capital movements |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023317&r=ifn |