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on International Finance |
| By: | Lu\'is A. V. Cat\~ao; Jan Ditzen; Daniel Marcel te Kaat |
| Abstract: | We show that fluctuations in the ratio of non-core to core funding in the banking systems of advanced economies are driven by a handful of global factors of both real and financial natures, with country-specific factors playing no significant roles. Exchange rate flexibility helps insulate the non-core to core ratio from such global factors but only significantly so outside periods of major global financial disruptions, as in 2008-2009. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.11552&r=ifn |
| By: | Sangyup Choi (Yonsei University); Jiri Havel (University of Rochester) |
| Abstract: | We study the influence of local geopolitical risk on U.S. cross-border portfolio investment, covering the period from 1994 to 2021. We uncover significant heterogeneity between advanced and emerging market destinations, revealing that local geopolitical risk exerts a dampening effect on U.S. purchases of bonds and equities solely within emerging markets, while having no discernible impact on advanced markets. We identify poor institutional quality as the primary driver behind the heightened sensitivity of portfolio investment to geopolitical risk in emerging markets, thereby signaling potential implications for financial stability. Moreover, our analysis reveals a noteworthy phenomenon where U.S. investment in emerging market bonds experiences a considerable decline in response to the geopolitical risk within other emerging markets in close geographical proximity, displaying a robust contagion effect. However, such contagions do not manifest in cross-border equity investment. Notably, these contagion effects are observed exclusively among emerging markets, providing valuable insights into investors’ portfolio adjustments in the face of elevated geopolitical risk. |
| Keywords: | Geopolitical risk; Foreign portfolio investment; Emerging markets; Institutional quality; Trilemma; Contagion |
| JEL: | E44 F21 F51 G11 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2023rwp-221&r=ifn |
| By: | Sangyup Choi; Kimoon Jeong; Jiseob Kim |
| Abstract: | This paper underscores the underappreciated role of bank mortgage lending standards in conjunction with imbalances stemming from the common monetary policy framework as drivers of divergent economic trajectories in the euro area’s core and periphery countries. To illustrate the mechanism, we compute a country-specific monetary policy stance gap and estimate the panel VAR model of credit and macroeconomy for each group. While the widening gap—the accommodative stance of the ECB relative to individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by markedly different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different responses in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, subject to tighter macroprudential policies and reduced profit margins, increase cross-border lending to periphery countries, enabling them to relax lending standards toward mortgage loans. |
| Keywords: | Euro area, mortgage credit, monetary policy stance gap, bank lending survey, macroprudential policy, cross-border banking flows |
| JEL: | E21 E32 E44 F52 G21 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-56&r=ifn |
| By: | Carl White |
| Abstract: | Elevated funding costs and tightening credit markets point to the need for bankers and bank supervisors to remain vigilant. |
| Keywords: | credit markets |
| Date: | 2023–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:l00001:96742&r=ifn |
| By: | Mr. Pragyan Deb; Julia Estefania-Flores; Melih Firat; Davide Furceri; Siddharth Kothari |
| Abstract: | This paper revisits the transmission of monetary policy by constructing a novel dataset of monetary policy shocks for an unbalanced sample of 33 advanced and emerging market economies during the period 1991Q2-2023Q2. Our findings reveal that tightening monetary policy swiftly and negatively impacts economic activity, but the effects on inflation and inflation expectations takes time to fully materialize. Notably, there exist significant heterogeneities in the transmission of monetary policy across countries and time, depending on structural characteristics and cyclical conditions. Across countries, monetary policy is more effective in countries with flexible exchange rate regime, more developed financial systems, and credible monetary policy frameworks. In addition, we find that monetary policy transmission is stronger when uncertainty is low, financial conditions are tight and monetary policy is coordinated with fiscal policy—that is, when the stances move in the same direction. |
| Keywords: | Monetary policy transmission; heterogeneity; inflation; statedependence |
| Date: | 2023–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/204&r=ifn |
| By: | Giovanni Borraccia; Mr. Raphael A Espinoza; Vincenzo Guzzo; Romain Lafarguette; Fuda Jiang; Vina Nguyen; Miguel A. Segoviano; Mr. Philippe Wingender |
| Abstract: | We develop a new measure of financial conditions (FCs) that targets the growth of financial liabilities using the partial least square methodology. We then estimate financial condition indexes (FCIs) across European economies, both at the aggregate and sectoral levels. We decompose the changes in FCs into several factors including credit availability and costs, price of risk, policy stance, and funding constraints. Our results show that FCs loosened during the pandemic thanks to policy support but started to tighten significantly since mid-2021. Using the inverse probability weighting method over the sample period from 2000 to 2023, we find that a shift from a neutral to a tight FCI regime such as the ongoing episode for most European countries will on average lower output and inflation by 2.2 percent and 0.7 percentage points respectively and increase unemployment by 0.3 percentage points over a three-year horizon. |
| Keywords: | Financial condition index; partial least square; funding constraints; credit availability and costs; price of risk; policy stance; inverse probability weighting; financial conditions in Europe; FCI regime; IMF working paper 2023/209; FCI indicator; measure of financial conditions; Inflation; Asset prices; Monetary tightening; Credit; Financial cycles; Europe; Global |
| Date: | 2023–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/209&r=ifn |
| By: | Canan Yildirim (ESC [Rennes] - ESC Rennes School of Business); Adnan Kasman (Adnan Menderes Üniversitesi); Fazelina Sahul Hamid (USM - Universiti Sains Malaysia) |
| Abstract: | The change in crossborder financial intermediation and rise in regional banking have consequences for competitive conduct in emerging countries' banking markets. Using data from the Association of Southeast Asian Nations countries' banks during 2011–2018, we examine the nexus between foreign ownership and banks' market power by controlling for the heterogeneity of foreign banks concerning their countries of origin (advanced vs. emerging and regional vs. nonregional). We find that the increasing presence of foreign banks from advanced countries is associated with lower bank market power because of higher marginal costs and lower price–cost margins of the domestic banks. However, the increasing presence of emerging countries' banks is associated with higher bank market power because of lower marginal costs and prices of domestic lenders. Our findings have implications for policies regarding bank competitiveness and promoting regional banking integration because domestic banks conduct differently under increased participation levels of advanced and emerging country foreign banks. |
| Keywords: | Bank market power, Foreign ownership, Regional banks, ASEAN |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03419478&r=ifn |
| By: | Vivek Sharma |
| Abstract: | This paper presents a model in which firms have endogenously-persistent lending relationships with banks which compete both on interest rates and collateral requirements. The economy features an endogenously-evolving lending standard which is subject to an exogenous shock. A shock to bank lending standards in this model leads to a spike in spread, drop in bank credit and amplification of macroeconomic volatility. These effects are higher at greater intensity and persistence of the lending relationships. This work shines a spotlight on how shocks to lending standards can have wider macroeconomic implications and shows how financial shocks can affect real economy. |
| Keywords: | Lending Standards, Deep Habits in Banking, Macroeconomic Fluctuations |
| JEL: | E32 E44 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-55&r=ifn |
| By: | Celso Brunetti; Nathan Foley-Fisher; Stéphane Verani |
| Abstract: | Financial intermediaries manage myriad interest rate risk exposures. We propose a new method to measure financial intermediaries' residual interest rate risk using high-frequency financial market data. Our method exploits all available high-frequency information and is valid under extremely weak assumptions. Applying the method to U.S. life insurers, we find their interest rate risk management strategies are generally effective. However, life insurers are more sensitive to changes in long-term interest rates than property and casualty insurers. We show that the term premium helps to explain the difference in sensitivities between the two types of insurer. |
| Keywords: | Financial institutions; Interest rate risk management; High-frequency financial econometrics; Subsampling; Life insurers |
| JEL: | G20 C58 |
| Date: | 2023–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-67&r=ifn |
| By: | Gustavo Joaquim; Bernardus Doornik; GJosé Renato Haas Ornelas |
| Abstract: | We use heterogeneous exposure to large bank mergers to estimate the effect of bank competition on both financial and real variables in local Brazilian markets. Using detailed administrative data on loans and firms, we employ a difference-in- differences empirical strategy to identify the causal effect of bank competition. Following M&A episodes, spreads increase and there is persistently less lending in exposed markets. We also find that bank competition has real effects: a 1% increase in spreads leads to a 0.2% decline in employment. We develop a tractable model of heterogeneous firms and concentration in the banking sector. In our model, the semi-elasticity of credit to lending rates is a sufficient statistic for the effect of concentration on credit and output. We estimate this elasticity and show that the observed effects in the data and predicted by the model are consistent. Among other counterfactuals, we show that if the Brazilian lending spread were to fall to the world level, output would increase by approximately 5%. |
| Keywords: | bank competition, mergers and acquisitions, lending, spreads, output |
| JEL: | G21 G34 E44 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1134&r=ifn |
| By: | Philipp Roderweis; Jamel Saadaoui; Francisco Serranito |
| Abstract: | An unintended by-product of asset purchases by the European Central Bank (ECB) has been a huge increase in excess reserves, leading to a structural liquidity surplus in the banking sector of the euro area. These exogenously imposed excess reserves imply higher balance sheet costs, forcing banks to offset these costs by changing their lending behavior. We observe this effect particularly in periods of low-interest rates. Thus, we identify a shock that represents an exogenous imposition of excess reserves on banks. We then employ linear and nonlinear local projection methods to analyze how lending changes in the context of unconventional monetary policy. We find that excess reserves injected by the ECB crowd out certain types of credit. An increase in excess liquidity does not stimulate lending to nonfinancial corporations in the euro area. On the contrary, it tends to discourage it while amplifying household credit for consumption and housing, as well as loans to financial corporations. Impulse response analysis via smooth local projection methods highly confirms these findings. |
| Keywords: | excess reserves, bank lending channel, bank balance sheet costs, local projection, smooth local projection. |
| JEL: | C32 E44 E51 E52 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2023-34&r=ifn |
| By: | Kuusi, Tero; Ali-Yrkkö, Jyrki |
| Abstract: | Abstract We examine how the Covid-19 shock was transmitted from the foreign, upstream parts of value chains to domestic (downstream) production. After categorizing global value chains based on their home-producer industry and country, we quantify the multiplier effect of the transmitted shock on the entire value chain by considering changes in home production. The upstream shock was measured using world input-output data, and our analysis relies on the upstream dependence on the early shock in China during 1-4/2020, employing a differences-in-differences research setup. Our findings reveal that the impact was large: For every percentage point of dependence on the Chinese value chain, there was a 1.3 percent larger contraction in domestic production. In essence, the multiplier effect of the manufacturing contraction amplified the direct foreign shock by an order of magnitude. These effects varied across industries and regions, with the most substantial multiplier effects observed in highly digitalized, high-R&D industries, particularly in the EU and North America. Furthermore, we provide evidence on the dynamics of adjustment. |
| Keywords: | Global value chains, Shock, Infection, Covid-19, Transmission, Transmit, Linkage |
| JEL: | F21 F23 F13 F62 L24 |
| Date: | 2023–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:rif:wpaper:109&r=ifn |
| By: | Chris Redl |
| Abstract: | This paper provides a decomposition of GDP and its deflator into demand and supply driven components for 12 Asian countries, the US and Europe, following the forecast error-based methodology of Shapiro (2022). We extend that methodology by (1) considering a wide range of statistical forecasting models, using the optimal model for each country and (2) provide a measure idiosyncratic demand and supply movements. The latter provides, for example, a distinction between aggregate demand driven inflation and, inflation driven by large shocks in only a small number of sectors. We find that lockdowns in 2020 are explained by a mix of demand and supply shocks in Asia, but that idiosyncratic demand shocks played a significant role in some countries. Supply factors played an important role in the post-COVID recovery, primarily in 2021, with demand factors becoming more important in 2022. The mix of shocks during the sharp increase in inflation in 2021-22 differs by country, with large and advanced economies generally experiencing more supply shocks (China, Australia, Korea), while emerging markets saw significant demand pressures pushing up prices (Indonesia, Malaysia, Philippines, Vietnam, Thailand). We illustrate the usefulness of the industry level shocks in two applications. Firstly, we consider whether industry supply shocks have created demand-like movements in aggregate prices and quantities, so-called Keynesian supply shocks. We find evidence for this mechanism in a minority of countries in our Asia sample, as well for Europe and the USA, but that these results are driven by the COVID-19 event. Secondly, we use the granularity of the industry shocks to construct country-level GDP shocks, driven by idiosyncratic movements at the industry level, to study cross country growth spillovers for the three large economic units in our sample: China, Europe and the US. |
| Keywords: | Inflation; Demand; Supply; Machine Learning; Spillovers |
| Date: | 2023–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/203&r=ifn |
| By: | Amy Smaldone; Mark L. J. Wright |
| Abstract: | An analysis looks at whether developing countries are facing pressures similar to those in the 1980s, when higher interest rates helped trigger a wave of defaults in sovereign debt. |
| Keywords: | sovereign debt; default; developing countries |
| Date: | 2023–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:l00001:96745&r=ifn |
| By: | Melih Firat; Otso Hao |
| Abstract: | What are the contributions of demand and supply factors to inflation? To address this question, we follow Shapiro (2022) and construct quarterly demand-driven and supply-driven inflation series for 32 countries utilizing sectoral Personal Consumption Expenditures (PCE) data. We highlight global trends and country-specific differences in inflation decompositions during critical periods such as the great financial crisis of 2008 and the recent inflation surge since 2021. Validating our inflation series, we find that supply-driven inflation is more reactive to oil shocks and supply chain pressures, while demand-driven inflation displays a more pronounced response to monetary policy shocks. Our results also suggest a steeper Phillips curve when inflation is demand-driven, holding significant implications for effective policy design. |
| Keywords: | Inflation decomposition; demand vs supply; Phillips curve; monetary policy; supply chain pressures |
| Date: | 2023–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/205&r=ifn |