nep-ifn New Economics Papers
on International Finance
Issue of 2023‒10‒16
thirteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Whispers of Chaos: Intervention on the Mexican Dollar Quotes in Japan, 1869-1885 By Yokoyama, Kazuki
  2. Capital Inflows and Income Inequality:Evidence from Panel VAR Approach By Jinyeong Yun
  3. Banks’ portfolio of government debt and sovereign risk By António Afonso; José Alves; Sofia Monteiro
  4. Hedging, market concentration and monetary policy: a joint analysis of gilt and derivatives exposures By Pinter, Gabor; Walker, Danny
  5. The market for sharing interest rate risk: quantities behind prices By Khetan, Umang; Neamțu, Ioana; Sen, Ishita
  6. Unbalanced Financial Globalization By Damien Capelle; Bruno Pellegrino
  7. The International Monetary System and International Financial System as an Analogy to the Copernican Heliocentric system: A simple multi-layers network model with simultaneous regime changes By Michael D. Bordo; Cécile Bastidon
  8. Permanent and Transitory Monetary Shocks around the World By Javier Garcia Cicco; Patricio Goldstein; Federico Sturzenegger
  9. A Theory of Safe Asset Creation, Systemic Risk, and Aggregate Demand By Levent Altinoglu
  10. Russia-Ukraine war and G7 debt markets: Evidence from public sentiment towards economic sanctions during the conflict By Zunaidah Sulong; Mohammad Abdullah; Emmanuel J. A. Abakah; David Adeabah; Simplice Asongu
  11. Declining Business Dynamism in Europe: The Role of Shocks, Market Power, and Technology By Filippo Biondi; Sergio Inferrera; Matthias Mertens; Javier Miranda
  12. Credit Supply Shocks and Firm Dynamics: Evidence from Brazil By Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James E. Rauch
  13. Extending the Frontiers of Financial Development for Sustainability of the MENA States: The Roles of Resource Abundance and Institutional Quality By Stephen T. Onifade; Bright A. Gyamfi; Ilham Haouas; Simplice A. Asongu

  1. By: Yokoyama, Kazuki
    Abstract: In the 19th century, Japan was one of the nations where the Mexican dollar had a lasting presence. The Meiji government introduced the yen as a new domestic currency during the 1870s and began tightening regulations on yogin trading, which involved the foreign exchange of Mexican and Japanese silver currencies. The statistical evidence provided in this paper illustrates that the risk of yogin trading saw a substantial rose as a result of the intensified intervention by the Meiji government. The policies to control yogin quotes proved to be unsuccessful. The prioritization of financial security led to a policy intervention characterized by inconsistency, enabling the reintroduction of speculative transactions that had been banned earlier.
    Keywords: yogin trading, speculation, intervention.
    JEL: G15 N25
    Date: 2023–09–01
  2. By: Jinyeong Yun (University of Giessen)
    Abstract: In this paper, I document empirical evidence that an external shock in capital inflows leads to an increase in income inequality in advanced economies and causes a decline in income inequality in emerging market economies. I estimate a panel VAR model with an annual dataset on 53 countries over the period 1990-2020 to study the effects of capital inflows on income inequality within countries. To distinguish the external capital inflow shocks driven by global financial conditions from other shocks, I identify the structural external shocks to capital inflows using sign restrictions. The analysis is performed separately in advanced and emerging market economies since the two groups show significant differences in the level of economic development and the degree of capital market openness. The results are statistically and economically significant. By income class, a capital inflow shock increases primarily the income share of the rich in advanced economies and the poorest half in emerging market economies. These empirical findings suggest that capital inflows have different impacts on income inequality across countries, and policymakers should pay attention to the possibility of adverse distributional effects of capital inflows.
    Keywords: Capital inflows, Income inequality, Panel VAR, Sign restrictions
    JEL: D63 F32 F38
    Date: 2023
  3. By: António Afonso; José Alves; Sofia Monteiro
    Abstract: We analyze domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989-2022, applying panel regressions and quantile analysis. We conclude that an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign ratings also increase (decrease) the share of commercial (central) banks’ holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis.
    Keywords: Banking; Sovereign Debt; Sovereign risk; Financial crisis; Ratings.
    JEL: C21 E58 G24 G32 H63
    Date: 2023–10
  4. By: Pinter, Gabor (Bank of England); Walker, Danny (Bank of England)
    Abstract: We use granular data sets – merged across the UK government bond, interest rate swap, options and futures markets – to estimate exposures to interest rate risk at the sector level and for individual funds within the same sector. We focus on non-bank financial intermediaries (NBFIs) such as insurance companies, pension funds, asset managers and hedge funds. We find that NBFIs tend to use derivatives to amplify bond market exposures to interest rate risk, rather than to hedge them. Moreover, interest rate derivatives usage is highly concentrated among a few investors, which could increase the aggregate consequences of idiosyncratic shocks to these investors. We show that this market concentration impedes the monetary policy transmission to asset prices. We also find that monetary policy loosening (tightening) causes NBFIs to take on more (less) interest rate risk via derivatives, consistent with the risk-taking channel of monetary policy.
    Keywords: Interest rate risk; hedging; swaps; options; gilts; futures; NBFI
    JEL: D40 E50 E52 G10 G20 G23
    Date: 2023–07–21
  5. By: Khetan, Umang (University of Iowa); Neamțu, Ioana (Bank of England); Sen, Ishita (Harvard Business School)
    Abstract: We study the extent of interest rate risk sharing across the financial system. We use granular positions and transactions data in interest rate swaps, covering over 60% of overall swap activity in the world. We show that pension and insurance (PF&I) sector emerges as a natural counterparty to banks and corporations: overall, and in response to decline in rates, PF&I buy duration, whereas banks and corporations sell duration. This cross-sector netting reduces the aggregate net demand that is supplied by dealers. However, two factors impede cross-sector netting and add to dealer imbalances across maturities. (i) PF&I, bank and corporate demand is segmented across maturities. (ii) Large volumes are traded by hedge funds, who behave like banks in the short end and like PF&I in the long end. This worsens segmentation, exposing dealers to a steepening or flattening of the yield curve in addition to residual duration risk. Consistent with this, we find that demand pressure, in particular hedge funds’ trades, impact swap spreads across maturities. We also document that long-tenor pension fund trades are less likely to be centrally cleared, adding counterparty credit risk to demand imbalances.
    Keywords: Interest rate risk; OTC derivatives; hedge funds; pension funds; insurance companies; banks; non-financial corporations; demand elasticities; counterparty credit risk
    JEL: G11 G12 G15 G21 G22 G23 G24 G32
    Date: 2023–07–21
  6. By: Damien Capelle; Bruno Pellegrino
    Abstract: We examine the impact of the last five decades of financial globalization on world GDP and income distribution, using a novel multi-country dynamic general equilibrium model that incorporates a demand system for international assets. We introduce, estimate and validate new country-level measures of inward and outward Revealed Capital Account Openness (RKO), derived from wedge accounting. The implementation of our framework requires only minimal data, which is available as early as 1970 (national income accounts, external assets and liabilities positions). Our RKO wedges reveal enormous heterogeneity in the pace of capital account liberalization, with richer countries liberalizing much faster than poorer ones. We call this pattern Unbalanced Financial Globalization. We then simulate a counterfactual trajectory of the world economy where the RKO wedges are fixed at their pre-globalization levels. We find that unbalanced financial globalization led to a worsening of capital allocation, a 2.8% lower world GDP, a 12% rise in the cross-country dispersion of GDP per capita, lower wages in poorer countries and lower cost of capital in high-income countries. These findings starkly contrast with the predictions of standard models of financial markets integration, where capital account barriers decline symmetrically across countries. In a counterfactual scenario where countries open their capital account in a symmetric or convergent fashion, we find diametrically opposite effects: significant improvements in capital allocation efficiency and lower cross-country inequality, higher wages in poor countries, etc... Our results highlight the pivotal role played by country heterogeneity in shaping the real consequences of capital markets integration.
    Keywords: capital flows, capital allocation, capital misallocation, globalization, international finance, open economy
    JEL: F20 F30 F40 F60
    Date: 2023
  7. By: Michael D. Bordo; Cécile Bastidon
    Abstract: The evolution of the IMS and IFS in the past several hundred years can be viewed through the lens of the Copernican heliocentric system developed over 500 years ago. We trace out the evolution across regimes of the IMS and IFS in terms of network representations of the Copernican system. We provide a simple, fully testable theoretical model whose assumptions are based on these representations. The IMS and IFS are described by a two-layer graph whose three key features (hub, core, distances) are affected by nonlinear joint regime changes linked to a technological, institutional, geopolitical and regulatory environment variable. We conclude with a discussion of some perspectives of the future of the international monetary and financial systems. Our analysis is based on economic history, theory and some resonant concepts from astrophysics.
    JEL: C3 C82 E42 F33 G15 N2
    Date: 2023–09
  8. By: Javier Garcia Cicco (Universidad de San Andrés); Patricio Goldstein (Columbia University); Federico Sturzenegger (Universidad de San Andrés)
    Abstract: The effects of monetary policy on output and inflation have been at the center of macroeconomic debate for decades. Uribe (2022) argues, by looking at the US, that a better characterization of these effects can be obtained by splitting monetary policy into transitory and permanent shocks. He finds that transitory monetary contractions reduce inflation and output as in traditional New Keynesian models, whereas long termincreases in the inflation rate increase output in the short run. In this paper we extend the analysis to other countries in the world and show that its conclusions can roughly be extended to this larger set. We also broaden the analysis by lifting the overidentifying assumption of superneutrality. We find that although superneutrality does not strictly hold, deviations from it are very small. An increase in long run inflation can slightly improve output but this effect quickly dwindles as inflation increases and eventually becomes negative. Our results provide new evidence to the standard tenets of monetary policy: monetary policy is unable to move output and has negative side effects if it is allowed to increase beyond the range typically defended by central banks.
    Date: 2023–09
  9. By: Levent Altinoglu
    Abstract: This paper presents a theory of safe asset creation and the interactions between systemic risk and aggregate demand. The creation of private safe assets by financial intermediaries requires them to take leverage, which generates a risk of future crisis (systemic risk) in which intermediaries liquidate assets to service their debt. In contrast, the creation of public safe assets by the government does not generate systemic risk as the government's power to tax allows it to better absorb losses. The level of systemic risk determines the neutral rate of interest through households' precautionary saving and aggregate demand. The model features a two-way interaction between systemic risk and aggregate demand. Monetary and fiscal policy can stabilize aggregate demand and reduce systemic risk by altering the mix of private and public safe assets held by savers. When monetary policy is constrained, the economy can enter a risk-driven stagnation trap in which economic stagnation arises due to excessive systemic risk. Macroprudential policies which reduce systemic risk can stimulate aggregate demand.
    Keywords: Financial crises; Safe assets; Systemic risk; Fiscal policy; Macroprudential policy; Unconventional monetary policy; Demand-driven recession
    JEL: E44 G01 G21 E58 G28 G18
    Date: 2023–09–22
  10. By: Zunaidah Sulong (Universiti Sultan Zainal Abidin, Malaysia); Mohammad Abdullah (Universiti Sultan Zainal Abidin, Malaysia); Emmanuel J. A. Abakah (University of Ghana Business School, Accra Ghana); David Adeabah (University of Ghana Business School, Accra Ghana); Simplice Asongu (Yaoundé, Cameroon)
    Abstract: War-related expectations cause changes to investors’ risks and returns preferences. In this study, we examine the implications of war and sanctions sentiment for the G7 countries’ debt markets during the Russia-Ukraine war. We use behavioral indicators across social media, news media, and internet attention to reflect the public sentiment from 1st January 2022 to 20th April 2023. We apply the quantile-on-quantile regression (QQR) and rolling window wavelet correlation (RWWC) methods. The quantile-on-quantile regression results show heterogenous impact on fixed income securities. Specifically, extreme public sentiment has a negative impact on G7 fixed income securities return. The wavelets correlation result shows dynamic correlation pattern among public sentiment and fixed income securities. There is a negative relationship between public sentiment and G7 fixed income securities. The correlation is time-varying and highly event dependent. Our additional analysis using corporate bond data indicates the robustness of our findings. Furthermore, the contagion analysis shows public sentiment significantly influence G7 fixed income securities spillover. Our findings can be of great significance while framing strategies for asset allocation, portfolio performance and risk hedging.
    Keywords: Russia-Ukraine war, economic sanctions, G7 debt, fixed income securities, quantile approaches
    Date: 2023–01
  11. By: Filippo Biondi (KU Leuven and Research Foundation Flanders (FWO)); Sergio Inferrera (Queen Mary University of London); Matthias Mertens (Halle Institute for Economic Research (IWH) and the Competitiveness Research Network (CompNet)); Javier Miranda (Halle Institute for Economic Research (IWH) and the Competitiveness Research Network (CompNet))
    Abstract: We study the changing patterns of business dynamism in Europe after 2000 using novel micro-aggregated data that we collect for 19 European countries. In all of them, we document a decline in job reallocation rates that concerns most economic sectors. This is mainly driven by dynamics within sectors, size classes, and age classes rather than by compositional changes. Large and mature firms show the strongest decline in job reallocation rates. Simultaneously, the shares of employment and sales of young firms decline. Consistent with US evidence, firms’ employment changes have become less responsive to productivity. However, the dispersion of firms’ productivity shocks has decreased too. To enhance our understanding of these patterns, we derive a firm-level framework that relates changes in firms’ productivity, market power, and technology to job reallocation and firms’ responsiveness.
    Keywords: Business dynamism, productivity, responsiveness of labor demand, market power, European cross-country data, technological change
    JEL: D24 J21 J23 J42 L11 L25
    Date: 2023–10–25
  12. By: Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James E. Rauch
    Abstract: We explore how financial constraints distort the entry decisions among otherwise productive entrepreneurs and limit growth of promising young firms. A model of liquidity-constrained entrepreneurs suggests that the easing of credit constraints can induce more entry of firms with greater long-run growth potential than the easing of conventional entry barriers would bring about. We explore this growth mechanism using a large-scale program to expand the supply of credit to small and medium enterprises in Brazil. Local credit supply shocks generate greater firm entry but also greater exit with no effect on short-run employment growth in the formal sector. However, credit expansions increase average capability among entering firms, which enter at larger size, survive longer, and grow faster. These firm dynamics are more pronounced in areas with weaker credit markets ex ante and consistent with local bank branches using cheap targeted credit lines to expand lending more broadly. Our findings provide new evidence on the general equilibrium effects of credit supply expansions.
    JEL: D21 D22 D92 L25 L26 M13 O12
    Date: 2023–09
  13. By: Stephen T. Onifade (KTO Karatay University, Konya, Turkey); Bright A. Gyamfi (Ä°stanbul Ticaret University, Turkey); Ilham Haouas (Abu Dhabi, UAE); Simplice A. Asongu (Johannesburg, South Africa)
    Abstract: Resource abundance characterizes economies within the MENA region from North Africa to the Middle East. As such, to improve financial development (FD) for regional economic sustainability, this study provides a comprehensive analysis of the roles of natural resources abundance and institutional quality indicators on the region’s FD while underscoring the inflationary levels and general economic growth trends amidst rising globalization. The adopted empirical strategy (CS-ARDL and AMG) is employed for potential cross-sectional dependency (CD) and slope homogeneity in the regional data spanning over two decades (2000-2020). Unlike the extant literature, two separate regional FD indicators were considered for an insightful analysis namely, banking financial services via domestic credit to private sector, and financial stability via the Z-score values showing the tendencies of default in a country's banking structure. Regardless of the FD indicator, the results reveal that natural resources, growth trends, and inflationary levels significantly spur long-run regional FD thereby invalidating the financial resource curse hypothesis in the region. Furthermore, both institutional quality levels and globalization produced detrimental impacts on FD levels. However, the interaction between institutional quality levels and natural resources shows a desirable FD-stimulating effect in the region, noticeably when FD is proxied by the Z-score. Thus, implying that stronger institutions are crucial for MENA’s overall financial stability vis-Ã -vis reduction in the risk of default in the banking system. Hence, policy recommendations including the strengthening of institutional capacities among others, were suggested to regional authorities towards harnessing resources for sustainable regional FD.
    Keywords: Natural resources, Financial development, Institutions, MENA region, Sustainable growth
    JEL: Q33 P48 E44 O53 O55
    Date: 2023–01

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