nep-ifn New Economics Papers
on International Finance
Issue of 2023‒08‒14
six papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Trilemma revisited with dollar dominance in trade and finance By Vanessa Olakemi Dovonou
  2. Currency Risk Premiums: A Multi-horizon Perspective By Mikhail Chernov; Magnus Dahlquist
  3. Analysis of Indian foreign exchange markets: A Multifractal Detrended Fluctuation Analysis (MFDFA) approach By R. P. Datta
  4. Credit Allocation and Macroeconomic Fluctuations By Karsten Müller; Emil Verner
  5. Drivers of cross-border bank claims: The role of foreign-owned banks in emerging countries By Sophie Brana; Dalila Chenaf-Nicet; Delphine Lahet
  6. The Dollar in an Era of International Retrenchment By Ryan Chahrour; Rosen Valchev

  1. By: Vanessa Olakemi Dovonou (University of Orleans)
    Abstract: This paper explores the impact of the US dollar dominance on monetary and exchange rate policies in 51 advanced and developing countries from 1999 to 2021. We introduce a global exposure index to measure countries’ dependence on the US dollar. Our study reveals that the dominant currency framework creates a global monetary cycle driven by the US dollar, exposing non-U.S. economies to the U.S. monetary policy. However, we show that countries can reduce their exposure to the U.S. monetary policy by accumulating reserves and intervening in foreign exchange.
    Keywords: Dominant currency, Trade invoicing, foreign currency-denominated, Trilemma.
    JEL: F
    Date: 2023
  2. By: Mikhail Chernov; Magnus Dahlquist
    Abstract: We review the literature on multi-horizon currency risk premiums. We show how the multi-horizon implications arise from the classic present-value relationship. We further show how these implications manifest themselves in the interaction between bond and currency risk premiums. This link is strengthened by explicitly accounting for stochastic discount factors. Information about currency risk premiums at different horizons presents a wealth of new evidence and challenges for existing models.
    JEL: E43 E52 F31 G12 G15
    Date: 2023–06
  3. By: R. P. Datta
    Abstract: The multifractal spectra of daily foreign exchange rates for US dollar (USD), the British Pound (GBP), the Euro (Euro) and the Japanese Yen (Yen) with respect to the Indian Rupee are analysed for the period 6th January 1999 to 24th July 2018. We observe that the time series of logarithmic returns of all the four exchange rates exhibit features of multifractality. Next, we research the source of the observed multifractality. For this, we transform the return series in two ways: a) We randomly shuffle the original time series of logarithmic returns and b) We apply the process of phase randomisation on the unchanged series. Our results indicate in the case of the US dollar the source of multifractality is mainly the fat tail. For the British Pound and the Euro, we see the long-range correlations between the observations and the thick tails of the probability distribution give rise to the observed multifractal features, while in the case of the Japanese Yen, the origin of the multifractal nature of the return series is mostly due to the broad tail.
    Date: 2023–06
  4. By: Karsten Müller; Emil Verner
    Abstract: We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.
    JEL: E0 F30 G01 G02
    Date: 2023–06
  5. By: Sophie Brana (University of Bordeaux); Dalila Chenaf-Nicet (University of Bordeaux); Delphine Lahet (University of Bordeaux)
    Abstract: Studies of the determinants of cross-border bank claims are based on the economic situations of the lending and borrowing countries – the traditional push/pull macroeconomic factors – but fail to take into account the situation of the international banks that are at the origin of these flows and the presence of their subsidiaries in emerging countries. They also fail to explain the huge decrease in cross-border bank flows after the 2008 global financial crisis. In this paper, we analyze the determinants of cross-border bank claims on a panel of 28 emerging countries for three cases and transitional countries (claims on all sectors, claims on the nonbank sector, and interbank loans) and explicitly integrate banking determinants. Thus, we account for the financial situation of international lender banks and the existence of foreign locations in emerging countries as a potential pull stabilizing factor. We show that the presence of foreign banks in emerging countries is clearly a factor of attraction for cross-border bank claims. It remains when we explicitly take into account the 2008 crisis but to a lower extent and in favor of interbank loans. This may be proof of support from the international parent banks to their affiliates. Last, the financial situation of international banks, notably their liquidity and ability to respect prudential rules, also plays a role in their financing strategies in emerging countries.
    Keywords: cross-border bank claims; subsidiaries; global banks; emerging countries; Lasso method
    JEL: G
    Date: 2023
  6. By: Ryan Chahrour; Rosen Valchev
    Abstract: Recent trends suggest the world economy may be tending towards an equilibrium with two distinct trading blocs, each internally integrated, but with significant isolation between the blocs. This paper uses a quantitative theory to explore how far this bifurcation would need to go to pose a threat to the special role of the dollar in international exchange. The theory emphasizes the joint determination of countries' portfolio choices and trading currency. We find that unilateral protectionism on the part of the US could modestly reinforce the dollar's dominant role, but that policies directly supporting the Chinese yuan's use in trade could end the dollar's continued dominance if implemented over a long-enough period. Tit-for-tat responses between just the US and China would likely leave the dollar's role essentially unchanged. If both countries coordinate protectionist policies within their trading blocs, however, a transition away from global dollar dominance becomes far more likely.
    JEL: E44 F02 F33 F41 G15
    Date: 2023–06

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