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on International Finance |
| By: | Alexander Rodnyansky; Yannick Timmer; Naoki Yago |
| Abstract: | This paper studies the spillovers of US monetary policy and the mitigating role of foreign exchange interventions (FXI) by combining deviations from a daily FXI policy rule with high-frequency US monetary policy shocks, daily exchange rates, and firm-level stock prices, as well as firm-level balance sheet variables across several countries. We first present evidence that–without interventions– contractionary US monetary policy shocks spill over through a balance sheet channel: foreign exchange rates depreciate and stock prices fall, driven by those firms with US dollar debt. However, when countries counter-intervene, the spillover of US monetary policy tightening is muted. FXIs entirely offset the depreciation of the domestic exchange rate and the reduction in stock price for firms with US dollar debt, suggesting that “intervening against the Fed" protects economies from the adverse spillover of US monetary policy tightening through the balance sheet channel of exchange rates. |
| Keywords: | foreign exchange intervention, monetary policy spillovers, balance sheet channel, exchange rates, dollar debt |
| JEL: | E44 E52 F31 F32 F41 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10575&r=ifn |
| By: | Jeffrey A. Frankel |
| Abstract: | Written on the 50th anniversary of floating exchange rates, this paper deals with possible alternatives to a unipolar dollar-based system. It considers (1) measures of international currency use; (2) potential challengers to the dollar; (3) network externalities; and (4) the plausibility of gold and digital currencies, as alternatives to regular currencies. On the one hand, network externalities operate in favor of the status quo: the dollar as the single leading international currency. On the other hand, the danger of abuse of exorbitant privilege – for example, by debasing the currency or repeated use of sanctions – operates in favor of challengers. A good guess is that the dollar will continue to lose market share slowly to others, but will remain in the lead. |
| JEL: | F33 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31476&r=ifn |
| By: | David Beers; Obiageri Ndukwe; Karim McDaniels; Alex Charron |
| Abstract: | Until recently, few efforts were made to systematically measure and aggregate the nominal value of the different types of sovereign government debt in default. To help fill this gap, the Bank of Canada (BoC), in partnership with the Bank of England (BoE), developed a comprehensive database of sovereign defaults in 2014. The database is posted on the Bank of Canada’s website and updated annually. The BoC–BoE database draws on datasets published by various public and private sector sources. It combines elements of these, together with new information, to develop comprehensive estimates of stocks of government obligations in default. These include bonds and other marketable securities, bank loans and official loans, valued in US dollars, for the years 1960 to 2022 on both a country-by-country and a global basis. In addition, we include country and global data on estimated stocks of domestic arrears—late payments by governments—also valued in US dollars. For most countries, data are from 2000 to 2022. Regular updates of the BoC–BoE database help researchers analyze the economic and financial effects of individual sovereign defaults and, importantly, the impact on global financial stability of episodes involving multiple sovereign defaults. |
| Keywords: | Debt management; Development economics; Financial stability; International financial markets |
| JEL: | F F34 G G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocatr:124&r=ifn |
| By: | Matias D. Cattaneo; Richard K. Crump; Weining Wang |
| Abstract: | Beta-sorted portfolios—portfolios comprised of assets with similar covariation to selected risk factors—are a popular tool in empirical finance to analyze models of (conditional) expected returns. Despite their widespread use, little is known of their statistical properties in contrast to comparable procedures such as two-pass regressions. We formally investigate the properties of beta-sorted portfolio returns by casting the procedure as a two-step nonparametric estimator with a nonparametric first step and a beta-adaptive portfolios construction. Our framework rationalizes the well-known estimation algorithm with precise economic and statistical assumptions on the general data generating process. We provide conditions that ensure consistency and asymptotic normality along with new uniform inference procedures allowing for uncertainty quantification and general hypothesis testing for financial applications. We show that the rate of convergence of the estimator is non-uniform and depends on the beta value of interest. We also show that the widely used Fama-MacBeth variance estimator is asymptotically valid but is conservative in general and can be very conservative in empirically relevant settings. We propose a new variance estimator, which is always consistent and provide an empirical implementation which produces valid inference. In our empirical application we introduce a novel risk factor—a measure of the business credit cycle—and show that it is strongly predictive of both the cross-section and time-series behavior of U.S. stock returns. |
| Keywords: | nonparametric estimation; partitioning; beta pricing models; portfolio sorting; partition; kernel regression; smoothly varying coefficients |
| JEL: | C12 C14 G12 |
| Date: | 2023–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:96510&r=ifn |