nep-ifn New Economics Papers
on International Finance
Issue of 2023‒09‒18
five papers chosen by
Jiachen Zhan, University of California,Irvine

  1. A Theory of Capital Flow Retrenchment By J. Scott Davis; Eric Van Wincoop
  2. Anomaly Detection in Global Financial Markets with Graph Neural Networks and Nonextensive Entropy By Kleyton da Costa
  3. Risk Management and Derivatives Losses By Vicente García Averell; Calixto López Castañon; Gabriel Levin-Konigsberg; Hillary Stein
  4. Exchange rate misalignment and external imbalances: what is the optimal monetary policy response? By Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
  5. A heterogeneous-firm model of trade and growth with country-specific credit constraints By Ryoji Ohdoi; Kazuo Mino; Yunfang Hu

  1. By: J. Scott Davis; Eric Van Wincoop
    Abstract: The empirical literature shows that gross capital inflows and outflows both decline following a negative global shock. However, to generate a positive co-movement between gross inflows and outflows, the theoretical literature relies on asymmetric shocks across countries. We present a model where there is heterogeneity across investors within countries, but there are no asymmetries across countries. We show that a negative global shock (rise in global risk-aversion) generates an identical drop in gross inflows and outflows. The within-country heterogeneity relates to the willingness of investors to hold risky assets and foreign assets.
    Keywords: capital flows; retrenchment; Portfolio Heterogeneity
    JEL: F30 F40
    Date: 2023–08–24
  2. By: Kleyton da Costa
    Abstract: Anomaly detection is a challenging task, particularly in systems with many variables. Anomalies are outliers that statistically differ from the analyzed data and can arise from rare events, malfunctions, or system misuse. This study investigated the ability to detect anomalies in global financial markets through Graph Neural Networks (GNN) considering an uncertainty scenario measured by a nonextensive entropy. The main findings show that the complex structure of highly correlated assets decreases in a crisis, and the number of anomalies is statistically different for nonextensive entropy parameters considering before, during, and after crisis.
    Date: 2023–08
  3. By: Vicente García Averell; Calixto López Castañon; Gabriel Levin-Konigsberg; Hillary Stein
    Abstract: Even though financial risk management has the ability to generate value, the use of financial derivatives among nonfinancial corporations remains limited. We identify a channel that contributes to this limited use: the decoupling of derivatives losses and operational gains. Specifically, firms ex post consider their operational profits separately from their derivatives profits. We explore this phenomenon among firms in Mexico. We use the universe of US dollar Mexican peso currency derivatives transactions in Mexico along with customs data to construct a unique data set on operational exchange rate exposure and financial hedging. We find that contrary to a rational and frictionless benchmark, performance in previous derivatives transactions predicts future derivatives use. Using a regression kink design to measure the impact of decoupling on risk management, we find that when losses from previous transactions increase 1 percentage point, firms become 4.24 percentage points less likely to take out a new derivatives position within 90 days. We provide further evidence that is consistent with decoupling and supports rejecting a net worth channel.
    Keywords: risk management; exchange rates; financial hedging; narrow framing; loss aversion
    JEL: G32 F31
    Date: 2023–07–01
  4. By: Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
    Abstract: How should monetary policy respond to excessive capital in•ows that appreciate the currency and widen the external de•cit? Using the workhorse two-country open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities attenuate ERPT. Excessive capital in•ows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand. JEL Classification: E44, E52, E61, F41, F42
    Keywords: asset markets and risk sharing, currency misalignment, exchange rate pass-through, international policy cooperation, optimal targeting rules, trade imbalances
    Date: 2023–08
  5. By: Ryoji Ohdoi (School of Economics, Kwansei Gakuin University); Kazuo Mino (Kyoto Institute of Economic Research, Kyoto University); Yunfang Hu (Graduate School of Economics, Kobe University)
    Abstract: This study constructs a two-country endogenous growth model with heterogeneous firms and asymmetric countries, where the asymmetry lies in the degree of financial frictions. The tradable intermediate goods sector consists of heterogeneous firms and requires specific goods for entry. These goods are produced by heterogeneous entrepreneurs facing credit constraints due to financial frictions. Using this framework, we derive the following results analytically. First, a permanent credit crunch in one country facilitates the exit of intermediate goods firms in that country; meanwhile, it decreases the profitability of exports of the other country’s intermediate goods firms, causing exporters to switch to selling their goods domestically. Second, under no international lending and borrowing, the credit crunch reduces the growth rates of both countries not only in the long run but also during the transition to a new balanced growth path. We also compare the long-run effects under such a financial autarky and financial integration.
    Keywords: Banks; Endogenous growth; Heterogeneous firms; Asymmetric countries; Financial frictions; Country-specific credit crunch
    JEL: F12 F43 O16 O41
    Date: 2023–08

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