nep-ifn New Economics Papers
on International Finance
Issue of 2023‒12‒18
twelve papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Dollar and government bond liquidity: evidence from Korea By Jieun Lee
  2. The Channels of International Comovement By Omar Barbiero
  3. Agricultural Commodities' Price Transmission From International to Local Markets in Developing Countries By EMEDIEGWU Lotanna; ROGNA Marco
  4. Have Preferences Become More Similar Worldwide? By Rainer Kotschy; Uwe Sunde; Rainer Franz Kotschy
  5. Spain, Split and Talk: Quantifying Regional Independence By Hanna Adam; Mario Larch; Jordi Paniagua
  6. Beyond Borders: Assessing the Influence of Geopolitical Tensions on Sovereign Risk Dynamics By António Afonso; José Alves; Sofia Monteiro
  7. Financing solutions to foster industrial decarbonisation in emerging and developing economies By Joseph Cordonnier; Deger Saygin
  8. Financial development, income inequality and institutional quality: A multi-dimensional analysis By Huynh, Cong Minh; Tran, Hoai Nam
  9. Large Language Models in Finance: A Survey By Yinheng Li; Shaofei Wang; Han Ding; Hang Chen
  10. Natural Rate of Interest in a Small Open Economy with Application to CEE Countries By Maciej Stefański
  11. Tickets to the global market: First US patent awards and Chinese firm exports By Robin Kaiji Gong; Yao Amber Li; Kalina Manova; Stephen Teng Sun
  12. Global tax hubs By Baistrocchi, Eduardo

  1. By: Jieun Lee
    Abstract: Using unique tick-by-tick data from an exchange, this paper examines the relationship between the US dollar and liquidity in the Korean government (Treasury) bond market. We find that a strong US dollar deteriorates the Treasury market's liquidity by increasing the bid-ask spread and the price impact and lowering market depth. The effects of fluctuations in the broad US dollar index on Treasury market liquidity become more pronounced when funding liquidity conditions are tighter, when banks' total capital ratio is lower with greater foreign currency risk, or when there is a larger sell-off of Korean Treasury bonds by foreign investors. The empirical evidence supports the financial channel of exchange rates affecting Treasury market liquidity. In particular, a strong dollar as a global risk factor is likely to limit the market intermediation capacity of emerging market dealers through the currency exposures of borrowers or dealers and thus tighten market conditions.
    Keywords: dollar, exchange rate, Treasury bond liquidity, funding liquidity, foreign investors
    JEL: E58 F34 G12
    Date: 2023–11
  2. By: Omar Barbiero
    Abstract: How does exposure to international markets affect returns and cash flow comovements? Foreign bond owners, lenders, affiliates, investors, customers, and suppliers all transmit country shocks to companies. Most multinationals have many of these exposures simultaneously within the same foreign market. Returns and cash flows of two companies comove when exposed to the same country through the same channel. Within-country exposure through different channels is generally associated with lower comovement, in line with an operational hedging strategy. This evidence can help reconcile how, on average, increased market integration does not lead to increased comovement.
    Keywords: returns comovement; business cycle; multinationals; FDI; international financing; supply chain; foreign exposure
    JEL: E44 F21 F23 F34 G11 G15
    Date: 2023–10–01
  3. By: EMEDIEGWU Lotanna; ROGNA Marco (European Commission - JRC)
    Abstract: The transmission of commodities prices from the international to local markets is an interesting and deeply investigated topic. A fast and strong link between the two levels of the market is seen by economists as a sign of local market efficiency, allowing actors to respond fast to signals coming from the international market. However, the empirical evidence on the topic is very mixed, ranging from a very weak linkage between the two market prices to a high-speed and almost complete transmission. The present paper aims to advance the knowledge on the topic by focusing on the price transmission of four main cereals – maize, rice, sorghum, and wheat – in 23 developing and fragile economies. Employing a recent World Bank dataset with prices for several local markets in select countries, we estimate panel vector autoregressions (PVAR) to analyze the pass-through effects of international price shocks on local food prices. We find evidence for a relatively strong price transmission elasticity for all commodities except sorghum. Furthermore, the observed transmission of shocks is almost immediate. We present the policy implications for these findings.
    Date: 2023–11
  4. By: Rainer Kotschy; Uwe Sunde; Rainer Franz Kotschy
    Abstract: Recent evidence shows substantial heterogeneity in time, risk, and social preferences across and within populations; yet little is known about the dynamics of preference heterogeneity across generations. We apply a novel identification strategy based on dyadic differences in preferences using representative data for 80, 000 individuals from 76 countries. Our results document that, among more recent birth cohorts, preferences are more similar across countries and gender gaps in preferences are smaller within countries. This decline in preference heterogeneity across cohorts relates to country-specific differences in preference endowments, population composition, and socioeconomic conditions during formative years, and points at global cultural convergence.
    Keywords: patience, willingness to take risks, trust, prosociality, cohort effects
    JEL: D01 J10 J11
    Date: 2023
  5. By: Hanna Adam; Mario Larch; Jordi Paniagua
    Abstract: We quantify the economic impact of a potential secession of Catalonia from Spain. Using a novel dataset of trade flows between 17 Spanish sub-national regions and 142 countries, we estimate effects of different levels of borders on trade flows and uncover heterogeneity in country-to-country, region-to-country, region-to-region, as well as EU border effects. We use a general equilibrium analysis to understand the consequences of a potential Catalan secession, considering the associated political uncertainty. In counterfactual experiments, we impose new borders on Catalan trade, potentially within or outside the EU, resulting in a welfare decline for Catalonia and the remaining Spanish regions.
    Keywords: international trade, regional trade, border effects, regional independence
    JEL: F10 F13 F14 H77 R12
    Date: 2023
  6. By: António Afonso; José Alves; Sofia Monteiro
    Abstract: We assess the impact of geopolitical risk and world uncertainty on the sovereign debt risk of 26 European Economies during the period 1984-2022, through the implementation of OLS-Fixed Effects regressions and the Generalized Method of Moments (GMM). We find that geopolitical tensions and global uncertainty in border countries contribute to the rise of European country’s sovereign risk as measured by 5- and 10-year Credit Default Swaps (CDS) and bond returns. Moreover, this interconnection is more pronounced during turbulent times such as the subprime crisis. Lastly, we found that geopolitical tensions in other country’ groups such as South America and Asia have a significant impact on the government risks of European countries.
    Keywords: FGeopolitical Risk; World Uncertainty; Political Tensions; Sovereign Risk; European Economy; GMM; Subprime crisis
    JEL: C23 E44 G32 H63
    Date: 2023–11
  7. By: Joseph Cordonnier; Deger Saygin
    Abstract: Industry decarbonisation is a cornerstone to reach net-zero emissions by this mid-century. The diversity of industrial activities, processes and products, the complexity of global industrial value chains, and the international competition make industry decarbonisation a challenging objective. Annual investments in low-carbon technologies for industry decarbonisation need to increase by a factor of three to five by 2030 compared to current levels to align industrial emissions with net-zero pathways. This paper analyses available financing solutions to scale up investments at pace, especially in emerging and developing economies where industrial production is growing rapidly whilst available finance is limited. It highlights de-risking and financial instruments and models that can help accelerate investments and draws lessons from twelve financing industry decarbonisation case studies which demonstrate how private capital can be mobilised.
    Keywords: climate change, climate mitigation, de-risking instruments, economic instruments, financial instruments, greenhouse gas emissions, industry decarbonisation, industry value chains, low-carbon technologies
    JEL: G23 L60 O14 Q54 Q56 Q58
    Date: 2023–11–29
  8. By: Huynh, Cong Minh; Tran, Hoai Nam
    Abstract: Ambiguous impacts of financial development on income inequality in the literature imply that the impacts can be affected by other variables and may depend on different dimensions of financial development. This paper studies the effects of financial development with multi-dimensional analysis (financial depth, financial access and financial efficiency) of two main categories (financial institutions and financial markets) and institutional quality on income inequality in 30 Asian countries in the period 2000 – 2019. Results show that the financial institutions development (FI), the financial institutions access (FIA), the financial institutions efficiency (FIE), and the financial markets access (FMA) reduce income inequality; but the overall financial development (OFD), the financial markets development (FM), the financial institutions depth (FID), and the financial markets depths (FMD) increase it. Notably, better institutional quality not only lessens income inequality, but also moderates the effects of financial development on income inequality. Specifically, the improvement of institutional quality strengthens the beneficial effects of FI, FIA, FIE, and FMA on income inequality. Meanwhile, OFD, FM, FID, and FMD initially exacerbate income inequality until respective thresholds of institutional quality, and then beyond those levels of IQ, these indicators of financial development reduce income inequality. Results are robust with various estimators. These findings strongly support the importance of financial development with multi-dimensions and institutional reform in Asian countries as they have both direct and indirect impacts on income inequality through their mutual interactions.
    Keywords: Asian countries; Financial development; Income inequality; Institutional quality.
    JEL: D31 D53 E02 O16 P48
    Date: 2022–05–07
  9. By: Yinheng Li; Shaofei Wang; Han Ding; Hang Chen
    Abstract: Recent advances in large language models (LLMs) have opened new possibilities for artificial intelligence applications in finance. In this paper, we provide a practical survey focused on two key aspects of utilizing LLMs for financial tasks: existing solutions and guidance for adoption. First, we review current approaches employing LLMs in finance, including leveraging pretrained models via zero-shot or few-shot learning, fine-tuning on domain-specific data, and training custom LLMs from scratch. We summarize key models and evaluate their performance improvements on financial natural language processing tasks. Second, we propose a decision framework to guide financial professionals in selecting the appropriate LLM solution based on their use case constraints around data, compute, and performance needs. The framework provides a pathway from lightweight experimentation to heavy investment in customized LLMs. Lastly, we discuss limitations and challenges around leveraging LLMs in financial applications. Overall, this survey aims to synthesize the state-of-the-art and provide a roadmap for responsibly applying LLMs to advance financial AI.
    Date: 2023–09
  10. By: Maciej Stefański
    Abstract: This paper extends the Laubach-Williams (2003) framework, which is widely used to estimate the natural rate of interest, to make it more suitable for studying small open economies. The model is augmented with consumer inflation expectations, foreign output gap, the exchange rate, energy prices and a lending spread. It also uses survey data to improve the accuracy of output gap and potential growth estimates. This model is subsequently applied to CEE countries (Poland, Czechia and Hungary) and the euro area. The natural interest rate is found to be relatively volatile and pro-cyclical; it fell following the global financial crisis, but rebounded in recent years; however, while it remains lower than before the crisis, it is positive for all analysed economies. The model gives more precise and robust estimates than the standard Laubach-Williams framework, but ex-post revisions remain substantial.
    Keywords: natural interest rate, small open economy, CEE, Kalman filter
    JEL: E43 E52 C32
    Date: 2023–09
  11. By: Robin Kaiji Gong; Yao Amber Li; Kalina Manova; Stephen Teng Sun
    Abstract: We investigate how international patent activity enables firms from emerging economies to thrive in the global marketplace. We match Chinese customs data to US patent records and leverage the quasi-random assignment of USPTO patent examiners to identify the causal effect of a US patent grant on the subsequent export performance of Chinese firms. Successful first-time patent applicants achieve significantly higher export growth, compared to otherwise similar first-time applicants that failed. This effect operates only in small part through market protection for technologically patent-related products in the US and is largely driven by expansion in other markets. The response across destinations and products reveals that a US patent award signals the Chinese firm's capacity to produce high-quality products and credibility to honor contracts, mitigating information frictions in international trade. There is little evidence for the relaxation of financial constraints or the promotion of follow-on innovation.
    Keywords: patent rights, innovation, export performance, trade, market protection, asymmetric information, signalling
    Date: 2023–11–21
  12. By: Baistrocchi, Eduardo
    Abstract: Global tax hubs are the black boxes of the international tax regime (ITR). The driving forces of their strategic interaction with other building blocks of the ITR remain undertheorized. This paper offers the first theory of tax hubs as a two-sided global marketplace. It argues that tax hubs are the matchmakers of the ITR. Indeed, international investors, tax hubs and endpoint jurisdictions play different yet interrelated roles within the same ecosystem, i.e., the two-sided platform. The theory is positive rather than normative. It aims to explain how the creeping marketization of the ITR, as part of international law, has been frequently instrumented worldwide over the last century. The paper provides a stress test to the theory’s explanatory power and its limitations. The conceptual framework of this piece rests on antitrust law and economic concepts.
    JEL: F3 G3 J1
    Date: 2023–08–21

This nep-ifn issue is ©2023 by Jiachen Zhan. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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