nep-ifn New Economics Papers
on International Finance
Issue of 2023‒12‒11
thirteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. International portfolio frictions By Wenxin Du; Alessandro Fontana; Petr Jakubik; Ralph S J Koijen; Hyun Song Shin
  2. What Drives Sectoral Differences in Currency Derivate Usage in a Small Open Economy? Evidence from Supervisory Data By Zuzana Gric; Jan Janku; Simona Malovana
  3. Global and local drivers of Bitcoin trading vis-à-vis fiat currencies By Di Casola, Paola; Habib, Maurizio Michael; Tercero-Lucas, David
  4. A deep dive into the capital channel of risk sharing in the euro area By Martín Fuentes, Natalia; Born, Alexandra; Bremus, Franziska; Kastelein, Wieger; Lambert, Claudia
  5. Foreign Exchange Implications of CBDCs and Their Integration via Bridge Coins By Alexis Derviz
  6. Risk, monetary policy and asset prices in a global world By Bekaert, Geert; Hoerova, Marie; Xu, Nancy R.
  7. US monetary policy spillovers to European banks By Jung, Alexander
  8. Lost in Information: National Implementation of Global Tax Agreements By Alstadsæter, Annette; Casi, Elisa; Miethe, Jakob; Stage, Barbara M. B.
  9. Who bears the costs of inflation? Euro area households and the 2021–2022 shock By Pallotti, Filippo; Paz-Pardo, Gonzalo; Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L.
  10. Trade and Welfare Under Alternative Exchange Rate Regimes By Singh, Rajesh
  11. Cross-country Spillovers in Interbank Liquidity Crises By Singh, Rajesh; Hasan, Mohammad
  12. Pandemic-Era Inflation Drivers and Global Spillovers By Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim
  13. The pass through of monetary policy to euro area bank interest rates By Kyriaki G. LouKa; Nektarios A. Michail

  1. By: Wenxin Du; Alessandro Fontana; Petr Jakubik; Ralph S J Koijen; Hyun Song Shin
    Abstract: We study patterns and implications of global asset allocations of European insurers and banks using newly available supervisory data. We show that the total assets of insurance companies and pension funds (ICPF) far exceed the amount of government bonds outstanding in Europe, and that countries with a large ICPF sector tend to have a large corporate bond market. Despite high levels of international investments, the characteristics of domestic financial markets still loom large in insurers’ and banks’ portfolio allocation, with two newly documented international portfolio frictions playing a prominent role. First, when investing abroad, insurers and banks do not offset attributes of the domestic markets (such as the composition of fixed-income markets, interest rates, and sovereign credit risk), which we label “domestic projection bias.” Second, subsidiaries of multinational groups act like local entities, which we label the “going native bias.” We propose a theoretical framework to explain our empirical findings and discuss the broader policy implications for European capital market deepening and integration, monetary policy transmission and financial stability, and a multi-sectoral approach to regulatory design.
    Keywords: Banks, insurance companies, pension funds, portfolio choice, fixed income, home bias
    JEL: G2 G11 G15 G21 G22 G28
    Date: 2023–10
  2. By: Zuzana Gric; Jan Janku; Simona Malovana
    Abstract: Using a sample of nearly 980, 000 new derivative transactions from about 1, 700 unique institutions, we explore sectoral differences in currency derivatives usage in the Czech financial sector from 2020 to 2022. We find that larger financial institutions, institutions that are part of complex financial groups, and institutions with higher foreign exposure are more likely to engage in currency derivative transactions. Contrary to other studies, we find that financially stable institutions use currency derivatives more frequently, reflecting the long-term stability of the Czech financial system. However, the significance of key characteristics varies across financial segments. Banks are less sensitive to changes in leverage, while liquidity is crucial for investment funds.
    Keywords: Currency derivatives, EMIR, FX derivatives, GLEIF, market-based finance
    JEL: F30 G15 G23 G32
    Date: 2023–10
  3. By: Di Casola, Paola; Habib, Maurizio Michael; Tercero-Lucas, David
    Abstract: We analyse the drivers of Bitcoin transactions against 44 fiat currencies in the largest peer-to-peer crypto exchanges. Momentum and volatility in the cryptoasset market, as well as volatility and liquidity in global financial markets do matter for Bitcoin trading. There is suggestive evidence of a global crypto cycle driven by speculative motives. However, in emerging and developing economies (EMDEs), Bitcoin seems to offer also transactional benefits, since trading increases when the value of the domestic currency is unstable. Proxies of banking depth and digitalisation are negatively correlated with the currency loadings on the global factor, indicating that crypto-assets may offer a speculative alternative to traditional finance when this is not available, especially in EMDEs where the share of younger risk-prone population is higher. Our results clearly point to potential financial stability risks from cryptoisation in EMDEs with low levels of financial development and unstable fiat currencies. JEL Classification: E42, F21, F24, F32, F38, G15, O33
    Keywords: Bitcoin, digital currencies, financial development, peer-to-peer exchanges
    Date: 2023–11
  4. By: Martín Fuentes, Natalia; Born, Alexandra; Bremus, Franziska; Kastelein, Wieger; Lambert, Claudia
    Abstract: This paper investigates the contribution of capital markets to international risk sharing in the euro area over the 2000Q1-2021Q1 period. It provides three main contributions: First, the estimation of country-specific vector autoregressions (VAR) shows that shock absorption through capital markets remains modest, particularly in the southern euro area. Second, we analyse the geographical patterns of the capital channel. While risk sharing between southern and northern euro area countries led the improvements in income smoothing at the beginning of the 2000s, intra-regional capital flows supported income smoothing in the recent past. Third, based on a panel threshold VAR, we analyse how the composition of external capital positions impacts the capital channel. Long-term portfolio debt assets and liabilities as well as equity liabilities significantly improved income smoothing. The effect is more pronounced for northern countries, in line with their larger cross-border portfolios, when compared to the southern countries. Regarding foreign direct investment, only northern countries benefited from inward positions. JEL Classification: C23, E62, G11, G15
    Keywords: capital channel, CMU, external financial structure, international risk sharing, panel threshold vector autoregression (TVAR) model
    Date: 2023–11
  5. By: Alexis Derviz
    Abstract: When several central banks decide to introduce CBDCs, interoperability requirements create demand for a common payment infrastructure and a joint digital accounting unit (bridge coin). Many attributes of the latter resemble those of private digital currencies. At the same time, the CBDC-embracing authorities actively contribute to elevating digital wallets to the position of a household technology. Private agents discover ways to make domestic and foreign payments in the (digital) currency of their choice irrespective of the CBDC-issuing authorities' intentions. In such a world, will fiat currencies and the central banks that issue them be sidetracked by the bridge coin, or are old and new forms of international transactions able to coexist? What changes await the traditional FX market? These questions are addressed in a two-country, twogood, two-currency DSGE model with a global digital currency (digicoin). Under a certain structure of FX transaction costs, all three partial FX markets coexist and the use of fiat currency in foreign trade is unlikely to be eliminated completely as long as the bridge coin operator is unable to become a global banker as well.
    Keywords: Bridge coin, cash in advance, CBDC, digital currency, FX market
    JEL: C61 C63 D58 E02 E59 G23
    Date: 2023–07
  6. By: Bekaert, Geert; Hoerova, Marie; Xu, Nancy R.
    Abstract: We study how monetary policy and risk shocks affect asset prices in the US, the euro area, and Japan, differentiating between “traditional” monetary policy and communication events, each decomposed into “pure” and information shocks. Communication shocks from the US spill over to risk in the euro area and vice versa, but traditional US shocks show no spillover effects to risk. Both monetary policy and communication shocks spill over to stocks, with euro area information spillovers being particularly strong. US spillovers are consistent with global CAPM intuition whereas euro area spillovers are larger. Importantly, we document a strong global component of risk shocks which is not driven by monetary policy. JEL Classification: E44, E52, G12, G20, E32
    Keywords: central bank communications, global financial cycle, interest rate, international spillovers, monetary policy, risk, stock returns, trilemma
    Date: 2023–11
  7. By: Jung, Alexander
    Abstract: The Federal Reserve’s (Fed) monetary policy announcements have created massive spillovers to global financial markets. Based on daily data for the sample from 1999 to 2019, this study finds that the Fed’s monetary policy announcements created significant international spillovers to bond yields and stock prices of European banks and non-financial corporations (NFCs), while changes in uncertainty around the expected Fed policy path and Fed information effects constituted critical additional dimensions of these spillover effects. International spillovers to bond yields of banks and NFCs were similar, while stock prices of European banks responded somewhat stronger than those of NFCs. The significant spillovers from the Fed’s forward guidance to European bond yields show that central bank communication is very relevant for international transmission. In relation to earlier studies emphasizing strong QE-related spillovers, this study suggests that Fed QE announcements created only small spillovers on bond yields and stock prices of European banks and NFCs. JEL Classification: E44, E52, F42, G14, G21
    Keywords: high-frequency event study, instrumental variables, local projections, monetary policy shocks, monetary policy uncertainty
    Date: 2023–11
  8. By: Alstadsæter, Annette (School of Economics and Business, Norwegian University of Life Sciences); Casi, Elisa (Dept. of Business and Management Science, Norwegian School of Economics); Miethe, Jakob (Dept. of Economics, University of Munich); Stage, Barbara M. B. (WHU – Otto Beisheim School of Management)
    Abstract: This paper studies how national implementation shapes individual responses to global agreements by looking at the introduction of the multilateral standard for automatic information exchange on financial assets, i.e., the Common Reporting Standard (CRS). We utilize rich micro-level data on all bank transfers to Norway. This provides us with unparalleled detail on hidden ownership structures. These data show a significant increase in cash repatriation from tax havens post-CRS implementation. Yet, we document substantial heterogeneity in responses down to a null result if CRS enforcement is weak. Relying on macroeconomic data on cross-border bank deposits, we employ model averaging techniques to establish the most important characteristics of the receiving countries that make the CRS more effective. Our results suggest that a highly digitized tax administration triggers twice the drop in tax haven deposits compared to a tax administration relying on paper tax returns. These results have implications for global policy initiatives more broadly.
    Keywords: Global Tax Agreements; Tax Evasion; Financial Flows; Tax Enforcement
    JEL: F42 G21 H26
    Date: 2023–11–13
  9. By: Pallotti, Filippo; Paz-Pardo, Gonzalo; Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L.
    Abstract: We measure the heterogeneous welfare effects of the recent inflation surge across households in the Euro Area. A simple framework illustrating the numerous channels of the transmission mechanism of surprise inflation to household welfare guides our empirical exercise. By combining micro data and aggregate time series, we conclude that: (i) country-level average welfare costs –expressed as a share of 2021–22 income– were larger than a typical recession, and heterogeneous, e.g., 3% in France and 8% in Italy; (ii) this inflation episode resembles an age-dependent tax, with the elderly losing up to 20%, and roughly half of the 25–44 year-old winning; (iii) losses were quite uniform across consumption quantiles because rigid rents served as a hedge for the poor; (iv) nominal net positions are the key driver of heterogeneity across-households; (v) the rise in energy prices generated vast variation in individual-level inflation rates, but unconventional fiscal policies were critical in shielding the most vulnerable households. JEL Classification: D12, D14, D31, E21, E52, E58
    Keywords: consumption, fiscal support, household heterogeneity, housing, inflation, labor income, net nominal positions, redistribution
    Date: 2023–11
  10. By: Singh, Rajesh
    Abstract: This paper compares the welfare under two standard alternative exchange rate regimes, fixed and flexible, in a stochastic dynamic general equilibrium two-country setting. Conventional wisdom holds that countries often prefer low exchange-rate variability to stabilize trade. This may explain the observed `fear of floating' in emerging markets -- although most of them claim to adopt a flexible system, in reality they often intervene to peg. We show that under incomplete capital markets a fixed exchange rate regime unambiguously increases trade and improves welfare. This provides a potential explanation for the observed exchange rate policies in emerging markets.
    Date: 2023–11–06
  11. By: Singh, Rajesh; Hasan, Mohammad
    Abstract: Financially integrated economies observe a cross-country credit boom prior to financial recessions and a bust afterwards. This paper presents a two-country real business cycle model with banking sector where privately known intermediation efficiency of banks make them heterogeneous and gives rise to an interbank market. Overaccumulation of assets or low productivity in one country may lead to credit freeze in both financially integrated countries due to the existence of moral hazard and asymmetric information in the interbank market. A “sail together” financial integration may go into a “sink together” interbank credit freeze.
    Date: 2023–11–01
  12. By: Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim
    Abstract: We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation.
    JEL: F40
    Date: 2023–11
  13. By: Kyriaki G. LouKa (Central Bank of Cyprus); Nektarios A. Michail (Central Bank of Cyprus)
    Abstract: We examine the transmission of monetary policy to bank interest rates in the euro area, using rolling 10-year samples. The results suggest that the pass through of policy rates to bank interest rates was relatively stable prior to the use of unconventional monetary policy measures, in which case the multiplier increased, especially for housing and short-term NFCs loans. It appears that Quantitative Easing (QE) operations allow for bank lending rates to further decline, however, this could lead to higher lending in those particular loan categories, with certain repercussions to the economy. In addition to the excess liquidity created by asset purchases, other factors such as credit risk and house price growth also appear to impact the pass through.
    Keywords: pass through, deposit beta, error correction, euro area, asset purchases
    JEL: E43
    Date: 2023–08

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