nep-ifn New Economics Papers
on International Finance
Issue of 2023‒12‒04
twelve papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Trade Uncertainty and U.S. Bank Lending By Ricardo Correa; Julian di Giovanni; Linda S. Goldberg; Camelia Minoiu
  2. Volatility Connectedness on the Central European Forex Markets By Peter Albrecht; Evžen Kočenda; Evžen Kocenda
  3. Developments in Corporate Bond Spreads at Issuance By Kaori Ochi; Mitsuhiro Osada
  4. The Effects of the Federal Reserve Chair’s Testimony on Interest Rates and Stock Prices By Matthew V. Gordon; Kurt Graden Lunsford
  5. Institution Transfers, The Marshall Plan, Europe, and Ukraine: An Analytical Narrative By Atin Basuchoudhary; Andreas Freytag; Troy Siemers
  6. The Impact of Chinese Regulation of Limitation on Currency Transactions (LCT) on Sydney Housing Prices By Song Shi; Xunpeng Shi
  7. Stress-testing inflation exposure: Systemically significant prices and asymmetric shock propagation in the EU28 By Ipsen, Leonhard; Aminian, Armin; Schulz-Gebhard, Jan
  8. Daily Momentum and New Investors in an Emerging Stock Market By Zhenyu Gao; Wenxi Jiang; Wei A. Xiong; Wei Xiong
  9. Is high debt constraining monetary policy? Evidence from inflation expectations By Luis Brandao-Marques; Marco Casiraghi; Gaston Gelos; Olamide Harrison; Güneş Kamber
  10. Explaining the stylized facts of foreign exchange markets with a simple agent-based version of Paul de Grauwe's chaotic exchange rate model By Mignot, Sarah; Westerhoff, Frank H.
  11. Less debt, more schooling? Evidence from cross-country micro data By Marin Ferry; Marine de Talancé; Miguel Niño-Zarazúa
  12. Profitability, valuation and resilience of global banks - a tight link By John Caparusso; Leonardo Ulf Lewrick; Nikola Tarashev

  1. By: Ricardo Correa; Julian di Giovanni; Linda S. Goldberg; Camelia Minoiu
    Abstract: This paper uses U.S. loan-level credit register data and the 2018–2019 Trade War to test for the effects of international trade uncertainty on domestic credit supply. We exploit cross-sectional heterogeneity in banks’ ex-ante exposure to trade uncertainty and find that an increase in trade uncertainty is associated with a contraction in bank lending to all firms irrespective of the uncertainty that the firms face. This baseline result holds for lending at the intensive and extensive margins. We document two channels underlying the estimated credit supply effect: a wait-and-see channel by which exposed banks assess their borrowers as riskier and reduce the maturity of their loans, and a financial frictions channel by which exposed banks facing relatively higher balance sheet constraints contract lending more. The decline in credit supply has real effects: firms that borrow from more exposed banks experience lower debt growth and investment rates. These effects are stronger for firms that are more reliant on bank finance.
    Keywords: trade uncertainty; bank loans; trade finance; global value chains; trade war
    JEL: F34 F42 G21
    Date: 2023–11–01
  2. By: Peter Albrecht; Evžen Kočenda; Evžen Kocenda
    Abstract: We provide a comprehensive assessment of volatility connectedness between the currencies of Central European (CE) countries using high-frequency data from 2009 to 2022. We assess asymmetries in connectedness (not investigated for CE currencies before) and document domination of the negative volatility, especially during periods of economic distress. We further bring the first statistical evidence based on a formal bootstrap-after-bootstrap procedure of Greenwood-Nimmo et al. (2023) that increases in connectedness are linked with systematic events, and identify the impact of specific domestic and global shocks. We find that for eight out of eight endogenously selected global events, there was an increase in connectedness within a maximum of one business month from the event's occurrence. Finally, we show that the connectedness is linked with its potential drivers: uncertainty, liquidity, and economic activity whose impacts differ substantially. Our results are robust with respect to a volatility measure and provide direct policy implications for portfolio composition and hedging.
    Keywords: volatility connectedness, Central European currencies, asymmetries in volatility connectedness, bootstrap-after-bootstrap procedure, portfolio composition and hedging
    JEL: C58 F31 F65 G01 G15
    Date: 2023
  3. By: Kaori Ochi (Bank of Japan); Mitsuhiro Osada (Bank of Japan)
    Abstract: Firms' financing environment in terms of commercial paper, corporate bond, and bank lending is one of the spillover channels of monetary policy. In particular, this article overviews the recent developments in corporate bond spreads in the primary markets, focusing mainly on the period from mid-2022 to early 2023 when we witnessed the spread widening. A quantitative time-series analysis using issue-by-issue data suggests that the widening of corporate bond spreads was caused by (1) increased demand for working capital in response to rising commodity prices and (2) spillover effects of tightening foreign financial conditions, reflecting monetary policy tightening by foreign central banks, and was likely affected by (3) a decline in the degree of functionality of the Japanese government bond (JGB) market.
    JEL: G12 E44 E58
    Date: 2023–11–14
  4. By: Matthew V. Gordon; Kurt Graden Lunsford
    Abstract: We study how congressional testimony about monetary policy by the Chair of the Board of Governors of the Federal Reserve System affects interest rates and stock prices. First, we study testimony associated with the Federal Reserve’s Monetary Policy Reports (MPRs) to Congress. Testimony for a particular MPR is usually given on two days, one day for each chamber of Congress. We separately study the first day and second day of MPR testimony. We also study testimonies not associated with MPRs but that are still related to monetary policy. We find that first-day MPR testimonies cause the largest movements in interest rates and generate negative co-movement between interest rates and stock prices. Testimonies not associated with MPRs have similar but weaker effects. Second-day MPR testimonies cause the smallest movements in interest rates and generate no co-movement between interest rates and stock prices.
    Keywords: Eurodollar future; event study; forward guidance; S&P 500; Treasury note
    JEL: E43 E52 E58 G12 G14
    Date: 2023–11–13
  5. By: Atin Basuchoudhary (Virginia Military Institute); Andreas Freytag (Friedrich Schiller University, Jena; and University of Stellenbosch, and CESifo Research Network, and STIAS); Troy Siemers (Virginia Military Institute)
    Abstract: This paper offers an analytical narrative based on an assurance game with two separate populations in an evolutionary setting. In our model, Donors and Recipients are two populations; let us call them Europe and Ukraine. The donor population has two types. A proportion of this population wants to promote a Marshall Plan-type model for the recipient state, and another prefers isolationism. A proportion of the population of the recipient state also intends to coordinate a Marshall Plan-type economic integration. In contrast, others prefer foreign aid but view further integration as a violation of sovereignty (or, with Ukraine, may be afraid of further Russian attacks from this integration). Marshall plan type coordination provides the highest payoffs through, e.g., the peace dividend, better institutions in Ukraine, widened European integration trade links, or global financial integration. Coordination is costly because it requires substantial institutional change on both sides. We use simulations to track outcomes given that European support for Ukraine and Ukrainian desire for aid may be endogenous. Further, we show how these endogenous outcomes respond to political shocks in Europe that affect European support for Ukraine and implicitly the lack of support for Ukraine.
    Keywords: Institutional Transfer, Institutional Coordination, Evolutionary Game Theory, Ukraine War, Foreign Aid
    JEL: P41 C73
    Date: 2023–11–10
  6. By: Song Shi; Xunpeng Shi
    Abstract: Foreign capital and buyers are often blamed for pushing up housing prices and reducing the supply of affordable housing in Australia. We examine this issue by assessing the impact of Chinese macroprudential policies, such as the limitation on currency transactions (LCT), on Sydney housing prices. Using propensity score matching and difference-in-differences techniques, we find that the LCT policy issued by the People’s Bank of China in 2017 had a strongly negative impact (about -3%) on housing prices in suburbs with larger concentrations of Chinese residents, which are measured by multiple cutoff points—hereafter, Chinese suburbs—in Sydney, Australia. The results are consistent with home bias abroad, which implies that Chinese capital for residential real estate overseas most likely flows to predominately Chinese neighbourhoods in the destination city. We also find evidence that the relationship between this Chinese macroprudential policy and overseas housing prices is more direct to Chinese suburbs, with little impact on housing prices outside Chinese neighbourhoods within the studied period.
    Keywords: capital flight; Chinese buyers; foreign investment; limitation on currency transactions
    JEL: R3
    Date: 2023–01–01
  7. By: Ipsen, Leonhard; Aminian, Armin; Schulz-Gebhard, Jan
    Abstract: Building on the seminal paper of Weber et al. (2022), we provide a stress-test framework of inflation exposure and apply it to the EU28. This adds a yet unrecognised dimension to the latest calls for supply chain stress-tests. We address both the ex- and internal dimensions of inflation exposure for the former EU28 countries within global production networks via a Leontief price model. Using data from the World Input Output Database, we confirm the existence of systemically significant sectors for the overall price level in the EU28, EU periphery and core, respectively. We show that while the direct price effects of various sectors on the respective consumption shares are significant, about two-thirds of the overall effects are indirect and thus a result of higher-order propagation within the production network. It crystallizes that two properties (size and centrality) may render a sector systemically significant. Breaking down the geographical component, we show that the indirect effect is even larger for peripheral countries, which points to a higher exposure to world market prices. By tracing individual shock trajectories, we confirm this hypothesis: price volatility originating from the core countries impacts the peripheral countries more than vice versa. In addition to this, our method to recover consumption substitution effects shows that substitution is much more limited in the European periphery. Overall, we show consumers in peripheral countries are relatively more exposed to price volatility.
    Keywords: inflation, stress-test, input-output analysis, Europe
    Date: 2023
  8. By: Zhenyu Gao; Wenxi Jiang; Wei A. Xiong; Wei Xiong
    Abstract: Despite the dominance of retail investors in the Chinese stock market, there’s a conspicuous absence of price momentum in weekly and monthly returns. This study uncovers the presence of price momentum in daily returns and, through a systematic analysis of trading heterogeneity among investors, links daily momentum to the attention and trading activities of new investors—a phenomenon particularly significant in emerging stock markets. Furthermore, our findings indicate the existence of daily price momentum in various other emerging markets, contrasting with its relative scarcity in developed ones.
    JEL: G02 G4 G40
    Date: 2023–11
  9. By: Luis Brandao-Marques; Marco Casiraghi; Gaston Gelos; Olamide Harrison; Güneş Kamber
    Abstract: This paper examines whether high public debt levels pose a challenge to containing inflation. It does so by assessing the impact of public debt surprises on inflation expectations advanced- and Emerging Market Economies. It finds that debt surprises raise long-term inflation expectations in Emerging Market Economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in countries with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in Emerging Market Economies with high and dollarized debt levels, and weaker monetary policy frameworks.
    Keywords: inflation expectations, monetary policy, fiscal dominance, debt
    JEL: E31 E41 E52 E62
    Date: 2023–11
  10. By: Mignot, Sarah; Westerhoff, Frank H.
    Abstract: We propose a simple agent-based version of Paul de Grauwe's chaotic exchange rate model. In particular, we assume that each speculator follows his own technical and fundamental trading rule. Moreover, a speculator's choice between these two trading philosophies depends on his individual assessment of current market circumstances. Our agent-based model setup is able to explain a number of important stylized facts of foreign exchange markets, including bubbles and crashes, excess volatility, fat-tailed return distributions, serially uncorrelated returns and volatility clustering. A stability and bifurcation analysis of its deterministic skeleton provides us with useful insights that foster our understanding of exchange rate dynamics.
    Keywords: Foreign exchange markets, exchange rates, chartists and fundamentalists, agent-based computational economics, stability and bifurcation analysis
    JEL: D84 F31 G14
    Date: 2023
  11. By: Marin Ferry (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel, LEDA-DIAL - Développement, Institutions et Modialisation - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Marine de Talancé (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel, LEDA-DIAL - Développement, Institutions et Modialisation - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Miguel Niño-Zarazúa
    Abstract: Soaring levels of public debt in low-income countries are fuelling concerns about their ability to achieve the Sustainable Development Goals, such as free access to primary education. In the late 1990s and 2000s, international financial institutions introduced a series of debt relief initiatives aimed to restore debt sustainability among highly indebted countries. This study examines the impact of these initiatives on primary school attendance. We exploit the temporal variation in the implementation of these policies, in combination with individual-level data from 177 Demographic and Health Surveys covering more than 1.5 million school-age children from 44 low-income countries to implement difference-in-differences and spatial difference-in-discontinuity estimators. Results suggest that debt relief initiatives, by freeing up additional public resources, have significantly contributed to increasing primary school attendance in heavily indebted countries. Impact heterogeneity analysis also shows that debt relief has been effective at reducing wealth-based, intergenerational, religious, ethnic and spatial inequalities in education. Our results provide robust evidence to assert that debt relief, in combination with other financing sources, can contribute to improving educational outcomes in highly indebted poor countries.
    Keywords: Debt relief, Education, Financing for development
    Date: 2022–03
  12. By: John Caparusso; Leonardo Ulf Lewrick; Nikola Tarashev
    Abstract: We derive a tight link between the profitability, valuation and resilience of global systemically important banks (G-SIBs). We measure profitability using return on equity (ROE), valuation with the price-to-book ratio and resilience through the capital headroom above regulatory requirements ("management buffer"). We find that price-to-book ratios increase in analysts' ROE forecasts and in banks' management buffers. We also document that low-valued G-SIBs maintain management buffers by reducing risk-weighted assets and cater to investors by paying out their entire profits. However, the resilience of low-valued G-SIBs could prove precarious as they frequently incur substantial losses that trigger significant negative stock-market reactions.
    Keywords: financial stability, price-to-book ratio, banking regulation
    JEL: G21 G28 C25
    Date: 2023–11

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