nep-ifn New Economics Papers
on International Finance
Issue of 2023‒10‒23
twelve papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Granular banking flows and exchange-rate dynamics By Bippus, Balduin; Lloyd, Simon; Ostry, Daniel
  2. Financial Shock Transmission to Heterogeneous Firms: The Earnings-Based Borrowing Constraint Channel By Livia Chiţu; Magdalena Grothe; Tatjana Schulze; Ine Van Robays
  3. Identifying Macroeconomic Resilience to External Shocks in Emerging and Developing Countries: Lessons from the Global Shocks of 2020-2022 By Liliana Rojas-Suarez
  4. Foreign exchange hedging using regime-switching models: the case of pound sterling By Lee, Taehyun; Moutzouris, Ioannis C; Papapostolou, Nikos C; Fatouh, Mahmoud
  5. Financial asymmetries, risk sharing and growth in the EU By Eleonora Cavallaro; Ilaria Villani
  6. Revenue Effects of the Global Minimum Tax: Country-by-Country Estimates By Mona Barake; Theresa Neef; Paul-Emmanuel Chouc; Gabriel Zucman
  7. Cross-Border Risks of a Global Economy in Mid-Transition By Etienne Espagne; William Oman; Jean-François Mercure; Romain Svartzman; Ulrich Volz; Hector Pollitt; Gregor Semieniuk; Emanuele Campiglio
  8. Delays in Climate Transition Can Increase Financial Tail Risks: A Global Lesson from a Study in Mexico By Mr. Dimitrios Laliotis; Sujan Lamichhane
  9. External Crisis Vulnerability in Latin America and the Caribbean By Cavallo, Eduardo A.; Fernández-Arias, Eduardo
  10. Debt Relief: The Day After, Financing Low-Income Countries By Grégory Donnat; Anna Tykhonenko
  11. Foreign Shocks as Granular Fluctuations By Julian Di Giovanni; Andrei A Levchenko; Isabelle Mejean
  12. European business cycles and economic growth, 1300-2000 By Broadberry, Stephen; Lennard, Jason

  1. By: Bippus, Balduin (University of Cambridge); Lloyd, Simon (Bank of England); Ostry, Daniel (Bank of England)
    Abstract: Using data on the external assets and liabilities of global banks based in the UK, the world’s largest centre for international banking, we identify exogenous cross-border banking flows by constructing novel granular instrumental variables. In line with the predictions of a new granular international banking model, we show empirically that cross-border flows have a significant causal impact on exchange rates. A 1% increase in UK-based global banks’ net external US dollar-debt position appreciates the dollar by 2% against sterling. While we estimate that the supply of dollars from abroad is price-elastic, our results suggest that UK-resident global banks’ demand for dollars is price-inelastic. Furthermore, we show that the causal effect of banking flows on exchange rates is state dependent, with effects twice as large when banks’ capital ratios are one standard deviation below average. Our findings showcase the importance of banks’ risk-bearing capacity for exchange-rate dynamics and, therefore, for insulating their domestic economies from global financial shocks.
    Keywords: Capital flows; exchange rates; financial frictions; granular instrumental variables; international banking
    JEL: E00 F00 F30
    Date: 2023–09–22
  2. By: Livia Chiţu; Magdalena Grothe; Tatjana Schulze; Ine Van Robays
    Abstract: We study the heterogeneous impact of jointly identified monetary policy and global risk shocks on corporate funding costs. We disentangle these two shocks in a structural Bayesian Vector Autoregression framework and investigate their respective effects on funding costs of heterogeneous firms using micro-data for the US. We tease out mechanisms underlying the effects by contrasting traditional financial frictions arising from asset-based collateral constraints with the recent earnings-based borrowing constraint hypothesis, differentiating firms across leverage and earnings. Our empirical evidence strongly supports the earnings-based borrowing constraint hypothesis. We find that global risk shocks have stronger and more heterogeneous effects on corporate funding costs which depend on firms' position within the earnings distribution.
    Keywords: Corporate spreads; earnings-based borrowing constraint; heterogeneous firms; monetary policy shocks; global risk shocks
    Date: 2023–09–15
  3. By: Liliana Rojas-Suarez (Center for Global Development)
    Abstract: This paper uses a straightforward Resilience Indicator, constructed from a small set of economic and institutional variables, to show that by 2019, prior to the COVID-19 pandemic and subsequent global shocks, it was possible to identify emerging markets and developing countries that would encounter serious economic and financial problems if an external shock were to materialize. The list of developing countries identified as less resilient in 2019 using this simple methodology closely aligns with the World Bank’s 2022 compilation of countries in distress or at high risk of external debt distress. Furthermore, the emerging market economies that this indicator identified as the least resilient in 2019 were countries that had either defaulted or were teetering on the edge of default by 2022. Identifying countries that are most vulnerable to large external shocks can assist policymakers and the international community in directing their efforts towards crisis prevention, thereby avoiding the detrimental consequences of financial crises on development.
    Keywords: Emerging markets, developing countries, financial crisis, debt, defaults, economic resilience, external shocks
    JEL: E60 F32 F34 G01 G15 H60 H63
    Date: 2023–10–05
  4. By: Lee, Taehyun (Bayes Business School, Faculty of Finance); Moutzouris, Ioannis C (Bayes Business School, Faculty of Finance); Papapostolou, Nikos C (Bayes Business School, Faculty of Finance); Fatouh, Mahmoud (Bank of England)
    Abstract: We develop a four-state regime-switching model for optimal foreign exchange (FX) hedging using forward contracts. The states reflect four possible market conditions, defined by the direction and magnitude of deviation of the prevailing FX spot rate from its long-term trends. The model’s performance is tested for five currencies against pound sterling for various horizons. Our analysis compares the hedging outcomes of the proposed model to those of other frequently used hedging approaches. The empirical results suggest that our model demonstrates the highest level of risk reduction for the US dollar, euro, Japanese yen and Turkish lira and the second-best performance for the Indian rupee. The risk reduction is significantly higher for lira, which suggests that the proposed model might be able to provide much more effective hedging for highly volatile currencies. The improved performance of the model can be attributed to the adjustability of the estimation horizon for the optimal hedge ratio based on the prevailing market conditions. This, in turn, allows it to better capture fat‑tail properties frequently observed in FX returns. Our findings suggest that FX investors tend to use short-term memory (focus more on recent price movements) during low market conditions (relative to trend) and long-term memory in high ones. It would be also useful to build a better understanding of how investor behaviour depends on market conditions and mitigate the adverse behavioural implications of short-term memory, such as panic.
    Keywords: Regime switching; foreign exchange hedging; hedging effectiveness; high‑volatility currencies; forward hedging
    JEL: G13 G15
    Date: 2023–09–22
  5. By: Eleonora Cavallaro (University of Rome, Sapienza); Ilaria Villani (European Central Bank)
    Abstract: We focus on the structural and stability dimensions of financial development and build an index to benchmark EU financial systems against their potential to enhance resilient growth and international risk sharing. We have the following results. (i) Based on the transitional dynamics of the index over 2000-2019, EU financial systems are converging towards a clustered pattern; (ii) our measure of financial development is highly significant in growth regressions, suggesting that greater openness, market-based financing, and equity positions, longer debt maturities, and enhanced stability are key to stable growth; (iii) financial asymmetries have implications for the heterogeneous vulnerability to domestic output shocks: the risk sharing mechanism is more effective in financially resilient economies that benefit by the contribution of the capital market channel, while a larger fraction of the GDP shocks remains unsmoothed in less resilient economies that feature a considerable down-seizing of the saving channel in the post-global financial crisis.
    Keywords: Financial resilience, financial asymmetries, growth, volatility, risk sharing
    JEL: F
    Date: 2023
  6. By: Mona Barake (EU Tax - EU Tax Observatory); Theresa Neef (EU Tax - EU Tax Observatory); Paul-Emmanuel Chouc (EU Tax - EU Tax Observatory); Gabriel Zucman (EU Tax - EU Tax Observatory, UC Berkeley - University of California [Berkeley] - UC - University of California)
    Abstract: In October 2021, 136 countries and jurisdictions agreed on the swift implementation of a major reform of the international corporate tax system. In this note, we present simulations of the revenue effects of the global minimum tax of 15% laid out in this agreement. We base our analysis on the most recent country-by-country statistics released by the OECD.
    Date: 2021–10
  7. By: Etienne Espagne; William Oman; Jean-François Mercure; Romain Svartzman; Ulrich Volz; Hector Pollitt; Gregor Semieniuk; Emanuele Campiglio
    Abstract: This paper analyzes the cross-border risks that could result from a decarbonization of the world economy. We develop a typology of cross-border risks and their respective channels. Our qualitative and quantitative scenario analysis suggests that the mid-transition – a period during which fossil-fuel and low-carbon energy systems co-exist and transform at a rapid pace – could have profound stability and resilience implications for global trade and the international financial system.
    Keywords: Climate change; transition risks; cross-border risks; trade; international money and finance.
    Date: 2023–09–08
  8. By: Mr. Dimitrios Laliotis; Sujan Lamichhane
    Abstract: This paper explores a novel forward-looking approach to study the financial stability implications of climate-related transition risks. We develop an integrated micro-macro framework with a new class of scenario called delayed-uncertain pathways. An additional stochastic financial modeling layer via a jump-diffusion process is considered to capture continuously changing risks, as well as the potential of large/sudden shocks in the financial markets. We applied this approach to study transition risks in the Mexican financial sector. But the implications are global in scope, and the framework is easily adaptable to other countries. We quantify the projections of future distributions of various risk metrics and, hence, the evolving tail risks due to compounding effects from delays in transitioning to a low-carbon economy and the consequent uncertainty of the future policy path. We find that the longer the delays in transition, the larger the future tail financial risks, which could be material to the overall system.
    Keywords: Climate change; transition risk; greenhouse gas emissions; financial stability; stress testing; default risk; jump-diffusion; mapping CGE model sector; tail risk; NAICS sector classification; probabilities of default; vulnerability indicator; Credit risk; Global
    Date: 2023–08–25
  9. By: Cavallo, Eduardo A.; Fernández-Arias, Eduardo
    Abstract: This paper assesses the vulnerability of Latin American and Caribbean (LAC) economies to external crises. It shows that while the average LAC economy has made significant strides to reduce vulnerability to crises to its historical minimum, there is still considerable room for improvement, compared to both advanced and non-advanced economies. When compared to other non-advanced economies, the average LAC economy displays a higher level of vulnerability, mainly due to slower improvements in portfolio composition and less accumulation of international reserves since 2000. Advanced economies have lower exposure to external risk factors and a structural resilience advantage to prevent exposure from leading to crises. This analysis highlights the need for LAC economies to focus more on enhancing their risk-mitigating strategies concerning the composition of their external portfolios and reserves accumulation, which will provide a stronger buffer against external shocks and promote overall economic resilience.
    Keywords: External crisis;Financial crisis;External balance sheet;International reserves;Macroeconomic imbalances;External debt;Foreign Direct Investment;External assets and liabilities
    JEL: F30 F34 G01 G15 H63
    Date: 2023–07
  10. By: Grégory Donnat (Université Côte d’Azur); Anna Tykhonenko
    Abstract: In this paper, we investigate the factors of external public indebtedness for Low-Income Countries (LICs) and, as a modeling technique, we employ the iterative Bayesian shrinkage procedure to handle the differences between countries in panel data. Some LICs have benefited from two debt relief programs, the Heavily Indebted Poor Countries (HIPC) initiatives and the Multilateral Debt Relief Initiative (MDRI). We explore whether these debt reductions affect the access to external financing and credit markets of HIPCs. First, our estimation method highlights various debt dynamics across LICs from 1988 to 2018. Second, our results highlight a change in the relationships between external public indebtedness and its factors after the HIPC and MDRI. Unlike past debt reductions, most HIPCs keep borrowing, mainly from private creditors, even if the debt-to-GDP ratio increases. HIPCs’ access to credit markets does not suffer from a potential risk-aversion on the part of lenders, and is facilitated by their attractiveness to private investors.
    Keywords: Debt Relief, external financing, low-income countries, Bayesian shrinkage estimator
    JEL: H
    Date: 2023
  11. By: Julian Di Giovanni (Federal Reserve Bank of New York, CEPR - Center for Economic Policy Research - CEPR); Andrei A Levchenko (University of Michigan System, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research, CEPR - Center for Economic Policy Research - CEPR); Isabelle Mejean (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR)
    Abstract: This paper uses a dataset covering the universe of French firm-level value added, imports, and exports over the period 1995-2007 and a quantitative multi-country model to study the international transmission of business cycle shocks at both the micro and the macro levels. Because the largest firms are the most likely to trade internationally, foreign shocks are transmitted to the domestic economy primarily through the large firms. We first document a novel stylized fact: larger French firms are significantly more sensitive to foreign GDP growth. We then implement a quantitative framework calibrated to the full extent of the observed heterogeneity in firm size, exporting, and importing. We simulate the propagation of foreign shocks to the French economy and report one micro and one macro finding. At the micro level heterogeneity across firms predominates: 45 to 75% of the impact of foreign fluctuations on French GDP is accounted for by the "foreign granular residual"-the term capturing the larger firms' greater responsiveness to the foreign shocks. At the macro level, firm heterogeneity attenuates the impact of foreign shocks, with the GDP responses 10 to 20% larger in a representative firm model compared to the baseline model.
    Keywords: granularity, shock transmission, aggregate fluctuations, input linkages, international trade
    Date: 2023–04–27
  12. By: Broadberry, Stephen; Lennard, Jason
    Abstract: The modern business cycle features long expansions combined with short recessions and is thus related to the emergence of sustained economic growth. It also features significant international co-movement and is therefore associated with growing market integration and globalisation. When did these patterns first appear? This paper explores the changing nature of the business cycle using historical national accounts for nine European economies between 1300 and 2000. For the sample as a whole, the modern business cycle emerged at the end of the eighteenth century.
    Keywords: business cycle; economic growth; Europe
    JEL: N10 E32 O47
    Date: 2023–10–01

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