nep-ifn New Economics Papers
on International Finance
Issue of 2023‒10‒30
fifteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. U.S. Monetary Policy Shocks and Bank Lending in Latin America: Evidence of an International Bank Lending Channel By Giraldo, Carlos; Giraldo, Iader; Gomez-Gonzalez, Jose E.; Uribe, Jorge M.
  2. Macroprudential Policies and Capital Controls Over Financial Cycles By Maria Arakelyan; Adam Gersl; Mr. Martin Schindler
  3. Measuring Persistent Global Economic Factors with Output, Commodity Price, and Commodity Currency Data By Arabinda Basistha; Richard Startz
  4. Asymmetric Spillovers in ASEAN Bond Markets By Yahya, Muhammad; Luo, Tianqi; Uddin , Gazi Salah; Park, Donghyun; Tian, Shu; Jayasekera, Ranadeva
  5. Runs and Flights to Safety: Are Stablecoins the New Money Market Funds? By Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
  6. A financial conditions index for Iceland By Eysteinn Einarsson; Stella Einarsdottir; Tomas Dan Halldorsson; Vedis Sigridur Ingvarsdottir
  7. Less-Cash or More-Cash? Determinants and Trends of Currency in Circulation in a Panel of 17 Economies By Kumar Chandrakamal Pramod Kumar
  8. Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries By Aizenman , Joshua; Uddin, Gazi Salah; Luo , Tianqi; Jayasekera , Ranadeva; Park, Donghyun
  9. Who’s Borrowing and Lending in the Fed Funds Market Today? By Gara Afonso; Gonzalo Cisternas; Brian Gowen; Jason Miu; Josh Younger
  10. The Risk of External Financial Crisis By Cavallo, Eduardo A.; Fernández-Arias, Eduardo
  11. U.S. Interest Rates and Emerging Market Currencies: Taking Stock 10 Years After the Taper Tantrum By Nira Harikrishnan; Benjamin Silk; Emre Yoldas
  12. Global Flight to Safety, Business Cycles, and the Dollar By Martin Bodenstein; Pablo A. Cuba-Borda; Nils M. Gornemann; Ignacio Presno; Andrea Prestipino; Albert Queraltó; Andrea Raffo
  13. Modeling Collateralization and Its Economic Significance By Lee, David
  14. Variations in Pass-Through from Global Agricultural Commodity Prices to Domestic Food Inflation By Daniel Hyun; Jacky Lee
  15. The pass-through of market interest rates to bank interest rates By Sergio Mayordomo; Irene Roibás

  1. By: Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya)
    Abstract: We examine the impact of U.S. monetary policy shocks on bank lending in five major Latin American countries where large U.S. banks have limited presence. Our analysis covers annual balance sheet data from 2000 to 2021 for all banks in these nations, utilizing a recently developed measure of U.S. monetary policy shocks by Bu et al. (2021). Our findings reveal the existence of an international bank lending channel, with a one-percentage-point increase in the Fed funds rate resulting in an average 80.6 basis-point reduction in domestic bank loan growth in these countries. Liquidity and solvency emerge as crucial factors driving variations in lending behavior among Latin American banks, with banks exhibiting stronger liquidity and solvency profiles experiencing higher loan supply growth rates. This international bank lending channel persists even in countries with minimal U.S. bank presence, leading to constrained cross-border lending activities.
    Keywords: International bank lending channel; U.S. monetary policy shocks; loan growth; Latin America;
    JEL: E51 E52 E59 G21
    Date: 2023–10–04
  2. By: Maria Arakelyan; Adam Gersl; Mr. Martin Schindler
    Abstract: In this paper we assess the effectiveness of macroprudential policies and capital controls in supporting financial stability. We construct a large and granular dataset on prudential and capital flow management measures covering 53 countries during 1996-2016. Conditional on a credit boom, we study the impact of these policy measures on the probability of the credit boom ending in a bust. Our analysis suggests that macroprudential tools are effective from this perspective. If credit booms are accompanied by capital flow surges, in addition to macroprudential tools, capital controls on money market instruments including cross-border interbank lending tend to contribute to reducing the likelihood of a credit bust.
    Keywords: Macroprudential measures; capital controls; financial stability; credit cycles; capital control measure; credit bust; Net policy tightening; credit growth; boom episode; Credit booms; Macroprudential policy; Macroprudential policy instruments; Capital inflows; Global
    Date: 2023–08–25
  3. By: Arabinda Basistha (West Virginia University); Richard Startz (University of California, Santa Barbara)
    Abstract: In this study we use monthly G7 industrial production data, commodity price index data, and commodity currency exchange rate data in a dynamic factor model to examine the global economic factors useful for commodity price prediction. We differentiate between the dynamic factors by specifying a persistent factor and a non-persistent factor, both as a single global factor using all data and as factors for each category of data. The in-sample predictive performances of the three persistent factors together are better than the non-persistent factors and the single global factors. Out-of-sample outcomes based on forecast combinations also support the presence of predictive information in the persistent factors for overall commodity prices and for most sub-categories of commodity price indexes relative to their means. The gains in forecast accuracy are heterogeneous; ranging from 5 to 7 percent in the 1 to 6 months horizon for the overall commodity prices to a high of around 20 percent for fertilizers in the 12 month horizon in the recent sample. We further show that the information in the persistent factors, especially in the commodity currency exchange rate based persistent factor, can be integrated with other global measures to further improve the predictive performances of the global measures.
    Keywords: Dynamic factor model, industrial production, commodity price, commodity currency
    JEL: C51 C53 F62 Q02
    Date: 2023–10
  4. By: Yahya, Muhammad (Inland Norway University of Applied Sciences); Luo, Tianqi (Trinity College Dublin); Uddin , Gazi Salah (Linköping University); Park, Donghyun (Linköping University); Tian, Shu (Asian Development Bank); Jayasekera, Ranadeva (Trinity College Dublin)
    Abstract: The financial markets of members of the Association of Southeast Asian Nations (ASEAN) have become increasingly integrated with regional and global markets. ASEAN economies also exhibit strong trade connectedness and interdependence with regional and global business cycles. Such connectedness can foster the spread of global shocks to ASEAN members and distress local financial markets. Global shocks, such as financial crises or commodity price changes, can have asymmetric and nonlinear effects on other financial and commodity markets around the world. This paper aims to estimate and evaluate the intensity and directionality of bond market connectedness between ASEAN and major regional and global markets. Furthermore, we aim to identify factors impacting the interconnectedness dynamics among these markets. This study derives an uncertainty connectedness measure grounded on the attributes of static and dynamic dependence frameworks and empirically evaluates its role in transmitting or receiving shocks based on various information spillover and contagion channels. The findings of this study have important implications for market participants, regulators, and policymakers.
    Keywords: asymmetric spillover; uncertainty; connectedness; ASEAN
    JEL: E52 E58 F42
    Date: 2023–10–10
  5. By: Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
    Abstract: Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similarly to money market fund investors, stablecoin investors engage in flight to safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds, run risk has historically materialized only in prime funds, with stablecoins, runs occurred in different stablecoin types across the 2022 and 2023 episodes. We also show that, similar to intrafamily flows in money market funds, stablecoin flows tend to be within blockchains. Finally, for stablecoins, we estimate a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate.
    Keywords: stablecoins; money market mutual funds; financial stability; crypto assets; runs; liquidity transformation
    JEL: G10 G20 G23
    Date: 2023–09–01
  6. By: Eysteinn Einarsson; Stella Einarsdottir; Tomas Dan Halldorsson; Vedis Sigridur Ingvarsdottir
    Abstract: In this paper we remedy the lack of formalized relations between financial health and economic activity via a Financial Conditions Index for Iceland (FCI). We use a broad spectrum of financial information including price, spread, volatility and quantity variables, for the period 2002-2023. Variable selection is in line with broad consensus in the relevant literature. In addition, we include variables that are shown to have prediction properties vis-à-vis growth of real GDP over the horizon of two and four quarters ahead. The FCI is constructed using principal component analysis and is normalized such that a positive value indicates that financial conditions are looser than the historical average, while a negative value suggest that financial conditions are tighter than the historical average. We show that fluctuations and extreme events in historical real economic activity is captured by the FCI, implying that it is potentially a leading indicator of GDP developments.
    JEL: E44 E52 E61
    Date: 2023–09
  7. By: Kumar Chandrakamal Pramod Kumar (Institute of Economic Studies, Charles University, Prague, Czech Republic)
    Abstract: Digital payments are growing rapidly, and the use of cash seems to be declining, at least in advanced economies in Europe and the U.S. However, the literature on payment systems provides an interesting perspective- cash, or currency, when measured as a percentage of the gross domestic product, has not been falling as clearly as might be intuited. Contrarily, many economies face an increase in currency in circulation rates. This paper discusses this topic in literature and explores the determinants of currency in circulation in a panel of 17 countries between 2001-2022 and whether determinants from prior literature are also significant across a group of heterogeneous countries. Interest rates are found to affect the demand for cash significantly and negatively, while tax revenues have a significantly positive impact. Some measures of financial development are also considered but are found to not have any strong explanatory power. Country fixed effects regression analysis suggests that determining what type of economies may have higher or lower currency in circulation is a complex matter requiring more detailed investigation.
    Keywords: Currency in circulation, Monetary demand, Panel data, Fixed-effects regression, Interest rates, tax revenue
    JEL: E12 E41 E50 E51
    Date: 2023–10
  8. By: Aizenman , Joshua (University of Southern California); Uddin, Gazi Salah (Linköping University); Luo , Tianqi (Trinity College Dublin); Jayasekera , Ranadeva (Trinity College Dublin); Park, Donghyun (Asian Development Bank)
    Abstract: This paper examines whether prudential policies help to reduce sovereign bond vulnerability to global spillover risk in ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand). We measure sovereign vulnerability within a risk connectedness network among sovereign bonds. The direct effect is that markets with tighter prudential policies have significantly smaller spillovers from the Treasury yield shocks of other regional and global economies. The sum of indirect and direct effects indicates that prudential policies reduce sovereign spillover risk in the long term. These findings suggest prudential policies have dual efficiency in sovereign risk regulation and Treasury internationalization
    Keywords: sovereign bond; prudential policy; risk networks; connectedness; ASEAN
    JEL: E52 E58 F42
    Date: 2023–10–10
  9. By: Gara Afonso; Gonzalo Cisternas; Brian Gowen; Jason Miu; Josh Younger
    Abstract: The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate set in the market for uncollateralized short-term lending and borrowing of central bank reserves in the U.S. Since the global financial crisis, the market for federal funds has changed markedly. In this post, we take a closer look at who is currently trading in the federal funds market, as well as the reasons for their participation.
    Keywords: fed funds; reserves; Interbank market; monetary policy; Federal Open Market Committee (FOMC)
    JEL: E5 G1 G2
    Date: 2023–10–10
  10. By: Cavallo, Eduardo A.; Fernández-Arias, Eduardo
    Abstract: This paper explores the empirical determinants of external crises on a world panel dataset of 62 countries over the fifty-year period 1970-2019 and estimates their risk trade-offs with the aim of informing macrofinancial prudential policies. The determinants include countries external balance sheets, macroeconomic imbalances, and structural and global factors. It finds that information on the composition of gross positions in countries external financial portfolios is required to gauge the risk of external crisis: debt liabilities are the riskiest component, FDI liabilities are half as risky, and FDI assets are the most protective. Macroeconomic imbalances increase risk but are usually not the key drivers of crises. Adverse global shocks significantly leverage domestic risks. International reserves are powerful risk mitigants that provide high insurance value. The evidence shows that advanced economies are structurally more resilient to withstand exposure to weak external portfolios, macroeconomic imbalances, and global shocks. For the average country the risk of external crisis is on a declining trend mainly driven by improvements in the composition of external portfolio assets magnified by increasing financial integration as well as rising international reserves.
    Keywords: External crisis;Financial crisis;Macroeconomic imbalances;External debt;Foreign Direct Investment;External assets and liabilities;External balance sheet;International reserves
    JEL: F30 F34 G01 G15 H63
    Date: 2022–11
  11. By: Nira Harikrishnan; Benjamin Silk; Emre Yoldas
    Abstract: In 2013, a shift in expectations of market participants for the timing of the tapering of the Federal Reserve's asset purchases, and its ramifications for normalization of U.S. monetary policy, led to sharp increases in longer-term U.S. Treasury yields and volatility in broader financial markets. The episode came to be known as the "taper tantrum" because the strong market reaction came in response to Federal Reserve communications that were largely consistent with market analysts' expectations.
    Date: 2023–10–04
  12. By: Martin Bodenstein; Pablo A. Cuba-Borda; Nils M. Gornemann; Ignacio Presno; Andrea Prestipino; Albert Queraltó; Andrea Raffo
    Abstract: We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents’ preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and especially abroad. An adverse GFS shock lowers global GDP and inflation, widens global corporate credit spreads, and appreciates the dollar. These effects are very close to those obtained from a structural VAR which uses the excess bond premium (Gilchrist and Zakrajšek, 2012) as proxy for global flight to safety.
    Keywords: Econometrics and economic theory; International economics; Macroeconomic activity
    JEL: E32 F30 H22
    Date: 2023–10–02
  13. By: Lee, David
    Abstract: ABSTRACT This article presents a new model of collateralization. We study the economic impact of collateralization on the plumbing of the financial system. The model gives an integrated view of different collateral arrangements. We show that the effect of collateral on asset prices is significant. Our study shows that a poorly designed collateral agreement can actually increase credit risk. We find evidence that collateral posting regimes that are originally designed and utilized for contracts subject to bilateral credit risk (e.g., a swap) may not work properly for contracts subject to multilateral credit risk (e.g., a CDS) in the presence of default correlations. These findings contradict the prevailing beliefs in financial markets about collateralization.
    Keywords: collateralization, collateral posting, credit support annex, credit risk modeling, the plumbing of financial system, derivatives valuation subject to credit risk.
    JEL: G12 G17 G24 O11 O16
    Date: 2023–09–23
  14. By: Daniel Hyun; Jacky Lee
    Abstract: This paper examines factors that affect the transmission of fluctuations in global agricultural commodity prices to domestic food inflation. Using panel regressions on data from 53 advanced and emerging-market countries, we investigate how factors such as local crop production conditions, the extent of food industry development and the net agricultural trade status interact with global agricultural prices to affect pass-through to local food prices. Results show that pass-through varies significantly based on these factors. Pass-through decreases during better-than-normal crop conditions, highlighting the importance of local production. Countries with less-developed food industries experience higher pass-through, likely due to the greater importance of raw commodities in diets and less-complex supply chains. Interestingly, net exporters of agricultural commodities exhibit greater pass-through, potentially due to strategic trade adjustments that take advantage of global supply and demand dynamics. These variations in pass-through suggest potential avenues for managing food price inflation in response to shocks to global food prices under different scenarios.
    Keywords: Inflation and prices; International topics
    JEL: E31 Q02 Q11 Q17 Q18
    Date: 2023–10
  15. By: Sergio Mayordomo (BANCO DE ESPAÑA); Irene Roibás (BANCO DE ESPAÑA)
    Abstract: The pass-through of market interest rates to the financial conditions of households and firms is an essential element in the monetary policy transmission mechanism. In this paper, we analyse how this transmission is playing out in the current hiking cycle in the euro area and in Spain, as compared to previous cycles. We find that the pass-through to the interest rates on retail time deposits is slower than in previous hiking cycles in both jurisdictions. Moreover, a slower pass-through is also observed for mortgages in Spain. We then show there is significant heterogeneity in this pass-through across euro area countries, especially for mortgages and retail time deposits. This heterogeneity is driven by both bank and country characteristics. More specifically, in the case of deposits, we find that almost half of the difference between the remuneration of retail time deposits in Spain and the euro area is driven by differences across banking sectors in the need to raise funds through deposits to supply credit.
    Keywords: monetary policy, interest rate pass-through, bank lending channel, loans, retail deposits, heterogeneity.
    JEL: E43 E47 E50 E51 E52 E58 E59 E65 G17 G21
    Date: 2023–10

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