nep-ifn New Economics Papers
on International Finance
Issue of 2023‒08‒21
four papers chosen by
Jiachen Zhan, University of California,Irvine

  1. The Transmission of Global Risk By Martin Bodenstein; Pablo A. Cuba-Borda; Albert Queraltó
  2. Granular Corporate Hedging Under Dominant Currency By Laura Alfaro; Mauricio Calani; Liliana Varela
  3. Dash for Dollars By Ambrogio Cesa-Bianchi; Robert Czech; Fernando Eguren-Martin
  4. The Heterogeneous Effects of Carbon Pricing: Macro and Micro Evidence By Brendan Berthold; Ambrogio Cesa-Bianchi; Federico Di Pace; Alex Haberis

  1. By: Martin Bodenstein; Pablo A. Cuba-Borda; Albert Queraltó
    Abstract: Turmoil in the banking sector in the U.S. and Europe in early 2023 brought jitters to financial markets and increased concerns about a global risk-off event. Risk-off episodes—periods of increased global risk aversion—are characterized by sharp increases in credit spreads, high volatility in equity markets, and appreciation of reserve currencies
    Date: 2023–06–27
  2. By: Laura Alfaro (Harvard Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)); Mauricio Calani (Central Bank of Chile); Liliana Varela (London School of Economics (LSE); Centre for Economic Policy Research (CEPR))
    Abstract: This paper shows that, in a world dominated by vehicle currencies, firms engaging in international operations retain currency risk and hedge it real and financially. We employ a unique dataset covering the universe of trade credit, international trade, foreign currency debt, and FX derivatives contracts with firms’ census data in Chile (2005-2018). We document that operational hedging is quantitatively limited, as different maturity, frequency, and amount of FX operations make it difficult to net these exposures. The granular firms complement real hedging using FX financial instruments, which improve their cash flow management and promote their trade and growth.
    Keywords: Operational Hedging, FX hedging, FX derivatives, cash flow, foreign currency debt, currency mismatch, trade credit, dominant currency
    JEL: F14 F2 F31 F38 F4 G30
    Date: 2023–02
  3. By: Ambrogio Cesa-Bianchi (Bank of England; Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)); Robert Czech (Bank of England; Centre for Macroeconomics (CFM)); Fernando Eguren-Martin (SPX Capital; Centre for Macroeconomics (CFM))
    Abstract: We document a ‘dash for dollars’ in corporate bond markets during the Covid-19 turmoil period. Within-firm variation of corporate bond spreads and transaction volumes reveals that US dollar-denominated bonds experienced larger spread increases and selling pressures relative to non-dollar bonds. To interpret these findings, we quantify the importance of two different hypotheses linked to the dollar’s hegemony in the international financial system, namely its superior liquidity and its dominance as a funding currency. Our results highlight the importance of the funding hypothesis, which suggests that investors sold their dollar-denominated assets to meet immediate dollar obligations.
    Keywords: Corporate Bonds, Heterogeneity, Credit spreads, Liquidity, Dash-for-cash, Dollar demand, Covid-19, Trading volumes
    JEL: E44 E58 G01 G12 G15 G18 G23
    Date: 2023–04
  4. By: Brendan Berthold (University of Lausanne); Ambrogio Cesa-Bianchi (Bank of England; Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM)); Federico Di Pace (Bank of England); Alex Haberis (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: This paper investigates the economic effects of carbon pricing policies using a panel of countries that are members of the EU Emissions Trading System. Carbon pricing shocks lead, on average across countries, to a decline in economic activity, higher inflation, and tighter financial conditions. These average responses mask a large degree of heterogeneity: the effects are larger for higher carbon-emitting countries. To sharpen identification, we exploit granular firm-level data and document that firms with higher carbon emissions are the most responsive to carbon pricing shocks. We develop a theoretical model with green and brown firms that accounts for these empirical patterns and sheds light on the transmission mechanisms at play.
    Keywords: Business Cycles, Carbon Pricing Shocks, Heterogeneity, Asset Prices
    JEL: E32 E50 E60 H23 Q54
    Date: 2023–07

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