nep-ifn New Economics Papers
on International Finance
Issue of 2024‒01‒01
fourteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Local Currency Sovereign Debt Markets, Global Financial Conditions and the Role of Foreign Investors By Guilherme Suedekum
  2. Currencies of External Balance Sheets By Mr. Cian Allen; Deepali Gautam; Luciana Juvenal
  3. Implications of Asset Market Data for Equilibrium Models of Exchange Rates By Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
  4. Risk-On Risk-Off: A Multifaceted Approach to Measuring Global Investor Risk Aversion By Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
  5. Global spillovers from multi-dimensional US monetary policy By Georgiadis, Georgios; Jarociński, Marek
  6. The Financial Collapse of Capitalism. By Blaber, Richard Michael
  7. The Impact of Economic Sanctions on International Migration By Jerg Gutmann; Pascal Langer; Matthias Neuenkirch
  8. Profit Shifting of Multinational Corporations Worldwide By Javier Garcia-Bernardo; Petr Jansky
  9. Imperfect Information and Hidden Dynamics By Paul Levine; Maryam Mirfatah; Joseph Pearlman; Stylianos Tsiaras
  10. International sanctions and limits of Lerner Symmetry By Itskhoki, Oleg; Mukhin, Dmitry
  11. Multi-Layer Spillovers between Volatility and Skewness in International Stock Markets Over a Century of Data: The Role of Disaster Risks By Matteo Foglia; Vasilios Plakandaras; Rangan Gupta; Elie Bouri
  12. Global Value Chain Disruptions and Firm Survival During COVID-19: An Empirical Investigation By Sasidaran Gopalan; Ketan Reddy
  13. Sticky Prices or Sticky Wages? An Equivalence Result By Bilbiie, F. O.; Trabandt, M.
  14. Doombot: a machine learning algorithm for predicting downturns in OECD countries By Thomas Chalaux; David Turner

  1. By: Guilherme Suedekum (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper studies how the presence of foreign investors in local currency sovereign debt markets contributes to the transmission of global financial conditions to emerging market economies. My estimations indicate that the higher the share of local currency government bonds held by foreign investors, the more sensitive the credit risk of these bonds becomes to global financial shocks. When foreign investors’ holdings reach 45 percent, the credit risk of local currency government bonds becomes as sensitive to global financial shocks as the credit risk of foreign currency government bonds. I also explore exogenous foreign investor outflows caused by an unanticipated announcement of country weight rebalancing in the J.P. Morgan GBI-EM Global Diversified index in March 2014. Countries that experienced foreign investor outflows also experienced a decrease in the sensitivity of their local currency sovereign debt markets to changes in global financial conditions.
    Keywords: Emerging Market Economies; Local Currency Sovereign Debt; Credit Risk; Global Financial Conditions
    JEL: F34 G15 H63
    Date: 2023–11–30
  2. By: Mr. Cian Allen; Deepali Gautam; Luciana Juvenal
    Abstract: This paper assembles a comprehensive dataset of the currency composition of countries’ external balance sheets for 50 economies over the period 1990–2020. We document the following findings: (i) the US dollar and the euro still dominate global external balance sheets; (ii) there were striking changes in the currency composition across countries since the 1990s, with many emerging markets having moved from short to long positions in foreign currency, thus moving away from the so-called “original sin”; (iii) financial and tradeweighted exchange rates are weakly correlated, suggesting the commonly used trade indices do not adequately reflect the wealth effects of currency movements, and (iv) the large wealth transfers across countries during COVID-19 and the global financial crises increased global imbalances in the former, and reduced them in the latter.
    Keywords: currency composition; international investment position; foreign currency exposure
    Date: 2023–11–17
  3. By: Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
    Abstract: We characterize the relation between exchange rates and their macroeconomic fundamentals without committing to a specific model of preferences, endowment or menu of traded assets. When investors can trade home and foreign currency risk-free bonds, the exchange rate appreciates in states that are worse for home investors than foreign investors. This prediction is at odds with the empirical evidence and can only be overturned if the deviations from U.I.P. are large and exchange rates are highly predictable. Without bond Euler equation wedges, it is impossible to match the empirical exchange rate cyclicality (the Backus-Smith puzzle) and the deviations from U.I.P. (the Fama puzzle) as well as the lack of predictability (the Meese-Rogoff puzzle). To relax this trade-off, we need Euler equation wedges consistent with a home currency bias, home bond convenience yields or financial repression.
    JEL: F31 G12
    Date: 2023–11
  4. By: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
    Abstract: This paper defines risk-on risk-off (RORO), an elusive terminology in pervasive use, as the variation in global investor risk aversion. Our high-frequency RORO index captures time-varying investor risk appetite across multiple dimensions: advanced economy credit risk, equity market volatility, funding conditions, and currency dynamics. The index exhibits risk-off skewness and pronounced fat tails, suggesting its amplifying potential for extreme, destabilizing events. Compared with the conventional VIX measure, the RORO index reflects the multifaceted nature of risk, underscoring the diverse provenance of investor risk sentiment. Practical applications of the RORO index highlight its significance for international portfolio reallocation and return predictability.
    JEL: F21 F31 F36 G11 G15 G17
    Date: 2023–11
  5. By: Georgiadis, Georgios; Jarociński, Marek
    Abstract: We estimate spillovers from US monetary policy for different measures in the Federal Reserve’s toolkit. We make use of novel measures of exogenous variation in conventional rate policy, forward guidance and large-scale asset purchases (LSAPs) based on high-frequency asset-price surprises around Federal Open Market Committee meetings. The identification relies on relatively weak assumptions and accounts for the possible presence of residual endogenous components—such as central bank information effects—in these monetary policy surprises. We find that: (i) forward guidance and LSAPs trigger much larger spillovers than conventional rate policy; (ii) spillovers transmit predominantly through financial channels centering on global investors’ risk appetite and manifest in changes in equity prices, bond spreads, capital flows and the dollar exchange rate; (iii) LSAPs trigger immediate international portfolio re-balancing between US and advanced-economy bonds, but generally entail only rather limited term premium spillovers;(iv) both forward guidance and LSAPs entail trade-offs for emerging-market-economy central banks, either between stabilizing output and prices or between additionally ensuring financial stability in terms of capital inflows. JEL Classification: F42, E52, C50
    Keywords: central bank information effects, high-frequency identification, Monetary policy spillovers, US monetary policy shocks
    Date: 2023–12
  6. By: Blaber, Richard Michael
    Abstract: This paper will argue that the current level of international debt is a huge ‘bubble’ waiting to burst, and that, if and when it does so, the entire financial structure of global capitalism will collapse, taking capitalism, as such, with it. The mechanism of this collapse, if it occurs, will be a collapse of the international banking system, and complete loss of confidence on the exchange markets in any form of reserve currency – either the US dollar or any putative replacement for it.
    Date: 2023–11–23
  7. By: Jerg Gutmann; Pascal Langer; Matthias Neuenkirch
    Abstract: In this first empirical analysis of how sanctions affect international migration, we apply two estimation strategies, a panel difference-in-differences model and an event study approach. Our dataset covers 79, 791 dyad-year observations, reflecting migration flows from 157 origin countries to 32 destination countries between 1961 and 2018. The data supports that UN and joint EU-US sanctions increase emigration from target countries by around 20 percent. Our event study results of joint EU-US sanctions imply a gradual increase in emigration over the course of a sanction episode. The impact of UN sanctions on international migration is smaller and less persistent. Moreover, the effects are driven by target countries with fewer political rights and civil liberties, where emigration substitutes for the costly voicing of dissent. Finally, our results do not support systematic gender differences in the effect of sanctions on migration.
    Keywords: Gender Differences, International Sanctions, Migration
    JEL: F22 F51 J16 O15
    Date: 2023
  8. By: Javier Garcia-Bernardo (1Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czechia; Department of Methodology & Statistics, Utrecht University, the Netherlands; Centre for Complex Systems Studies, Utrecht University, the Netherlands); Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We exploit the new country-by-country reporting data of multinational corporations, with unparalleled country coverage, to reveal the distributional consequences of profit shifting. We estimate that multinational corporations worldwide shifted over $850 billion in profits in 2017, primarily to countries with effective tax rates below 10%. Countries with lower incomes lose a larger share of their total tax revenue due to profit shifting. We further show that a logarithmic function is better suited for capturing the non-linear relationship between profits and tax rates than linear or quadratic functions. Our findings highlight effective tax rates’ importance for profit shifting and tax reforms.
    Keywords: multinational corporation, corporate taxation, profit shifting, effective tax rate, country-by-country reporting, global development
    JEL: F23 H25 H26 H32
    Date: 2023–12
  9. By: Paul Levine (University of Surrey); Maryam Mirfatah (King’s College London); Joseph Pearlman (City University); Stylianos Tsiaras (Ecole Polytechnique Federale de Lausanne)
    Abstract: We study central bank liquidity provisions to the banking sector in a DSGE model estimated for the Euro Area with financial frictions on the supply and demand side of credit. We show that liquidity provisions, as in the ECB’s recent Long Term Refinancing Operations, can be welfare-enhancing or welfare-reducing when both these financial frictions exist. They relax the banks’ leverage constraint and induce banks to provide more credit. This reduces the credit spread facing firms and increases investment, but this comes at the cost of implementing the liquidity policy. We compute a welfare optimized liquidity rule for the central bank responding to output, inflation and the interest rate spread that can increase welfare in comparison with the case of no liquidity provision. Crucially, this result is conditional on a high level of central bank monitoring of the its loanable funds to banks.
    JEL: C11 E44 E52 E58 E61
    Date: 2023–11
  10. By: Itskhoki, Oleg; Mukhin, Dmitry
    Abstract: After a wave of globalization, trade wars and financial sanctions again become frequent tools of international policymaking, leading to an increased interest in the consequences and effectiveness of international sanctions. Itskhoki and Mukhin (2022b) show that Lerner symmetry provides an important benchmark with import and export sanctions equivalent in terms of their effects on allocations and welfare. This abstracts from several practical issues, including the timing of sanctions, interactions between trade and financial restrictions, and the effects of sanctions on the financial sector. We incorporate these features to study their implications and emphasize points of departure from Lerner symmetry.
    JEL: F12 F13 F32 F34 F51
    Date: 2023–05–01
  11. By: Matteo Foglia (Department of Economics and Finance, University of Bari ``Aldo Moro", Italy); Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Komotini, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Elie Bouri (School of Business, Lebanese American University, Lebanon)
    Abstract: Measuring risk lies at the core of the decision-making process of every financial market participant and monetary authority. However, the bulk of literature treats risk as a function of the second moment (volatility) of the return distribution, based on the implicit unrealistic assumption that asset return are normally distributed. In this paper, we depart from centred moments of distribution by examining risk spillovers involving robust estimates of second and third moments of model-implied distributions of stock returns derived from the quantile autoregressive distributed lag mixed-frequency data sampling (QADL-MIDAS) method. Using a century of data on the stock indices of the G7 and Switzerland over the period May 1917 to February 2023 and applying the multilayer approach to spillovers, we show the following. Firstly, the risk spillover among stock markets is significant within each layer (i.e. volatility and skewness) and across the two layers. Secondly, geopolitical risks have the power to shape both risk layer values, based on an out-of-sample forecasting exercise involving machine-learning methods. Interestingly, the multi-layer approach offers a comprehensive and nuanced view of how risk information is transmitted across major stock markets, while global measures of geopolitical risk affect risk spillovers at shorter horizons up to 6 months, while, at longer horizons, the forecasting exercise is dominated by market-specific characteristics.
    Keywords: Risk spillover, advanced stock markets, multi-layer spillover approach, machine learning, geopolitical risks, forecasting
    JEL: C22 C32 C53 G15
    Date: 2023–12
  12. By: Sasidaran Gopalan (College of Business and Economics, United Arab Emirates University, Abu Dhabi, United Arab Emirates); Ketan Reddy (Indian Institute of Management Raipur, Raipur, India)
    Abstract: Despite the rapid acceleration of countries participating in global value chains (GVCs) over the last three decades, global GVC participation rates have plateaued since the global financial crisis (GFC) and worsened with the onset of the coronavirus disease (COVID-19) pandemic. Themassive supply chain disruptions induced by the pandemic not only appeared to expose the vulnerabilities of GVCs, largely because of concentration risks, but also contributed to a dramatic decline in trade flows globally. As countries around the world emerge from the shadows of the pandemic, there is growing academic and policy interest in deciphering how countries should build effective strategies that facilitate firm survival, especially viewed from the lens of resilience and robustness. Considering this background, in this paper, we propose to make a twofold contribution to this literature. First, we undertake a comprehensive firm-level investigation (in a cross-country setting) to ascertain whether firms engaged in GVCs relative to non-GVC firms exhibited better survival instincts during the COVID-19 pandemic. Second, we uncover the heterogeneity of the shock across sectors and industries, considering the varied sectoral/industrial exposure to the COVID-19 pandemic. We document that GVC firms showcased greater robustness and resilience during the pandemic phase compared with other firms. Our results also show that the degree of resilience and robustness varies significantly by industry.
    Keywords: Global value chains; firm survival; resilience; COVID-19
    Date: 2023–08–29
  13. By: Bilbiie, F. O.; Trabandt, M.
    Abstract: We show an equivalence result in the standard representative agent New Keynesian model after demand shocks: assuming sticky prices and flexible wages yields identical allocations for GDP, consumption, labor, inflation and interest rates to the opposite case flexible prices and sticky wages. This equivalence result arises if the price and wage Phillips curves-slopes are identical and generalizes to any pair of price and wage Phillips curve slopes such that their sum and product are identical. Nevertheless, the cyclical implications for profits and wages are substantially different. We discuss how the equivalence breaks when these factor-distributional implications matter for aggregate allocations, e.g. in New Keynesian models with heterogeneous agents, endogenous firm entry, and non-constant returns to scale in production.
    Keywords: inflation, Interest Rate, New Keynesian Model, Observational Equivalence, Output, Sticky Prices, Sticky Wages
    JEL: E10 E30 E50
    Date: 2023–10–20
  14. By: Thomas Chalaux; David Turner
    Abstract: This paper describes an algorithm, “DoomBot”, which selects parsimonious models to predict downturns over different quarterly horizons covering the ensuing two years for 20 OECD countries. The models are country- and horizon-specific and are automatically updated as the estimation sample period is extended, so facilitating out-of-sample evaluation of the algorithm. A limited combination of explanatory variables is chosen from a much larger pool of potential variables that include those that have been most useful in predicting downturns in previous OECD work. The most frequently selected variables are financial variables, especially those relating to credit and house prices, but also include equity prices and various measures of interest rates (such as the slope of the yield curve). Business cycle variables -- survey measure of capacity utilisation, industrial production, GDP and unemployment -- are also selected, but more frequently at very short horizons. The variables selected do not just relate to the domestic economy of the country being considered, but also international aggregates, consistent with findings from previous OECD work. The in-sample fit of the models is very good on standard performance metrics, although the out-of-sample performance is less impressive. The models do, however, provide a clear out-of-sample early warning of the Global Financial Crisis (GFC), especially when considered collectively, although they do generate ‘false alarms’ just ahead of the crisis. The models are less good at predicting the euro area crisis out-of-sample, but it is clear from the evolution of the choice of variables that the algorithm learns from this episode, for example through the more frequent selection of a variable measuring euro area sovereign bond spreads. The latest out-of-sample predictions made in mid-2023, suggest the probability of a downturn is at its greatest and most widespread since the GFC, with the largest contributions to such risks coming from house prices, interest rate developments (as measured by the slope of the yield curve and the rapidity of the change in short rates) and oil prices. On the other hand, warning signals from business cycle variables and equity prices, which are often good downturn predictors at short horizons, are conspicuously absent.
    Keywords: Downturn, forecast, GDP growth, recession, risk
    JEL: E01 E17 E65 E66 E58
    Date: 2023–12–12

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