nep-ifn New Economics Papers
on International Finance
Issue of 2024‒01‒15
fourteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Global Financial Cycle, Commodity Terms of Trade and Financial Spreads in Emerging Markets and Developing Economies By Carrera Jorge; Montes Rojas Gabriel; Solla Mariquena; Toledo Fernando
  2. Forecasting Volatility of Commodity, Currency, and Stock Markets: Evidence from Markov Switching Multifractal Models By Ruipeng Liu; Mawuli Segnon; Oguzhan Cepni; Rangan Gupta
  3. Uncovered interest rate, overshooting, and predictability reversal puzzles in an emerging economy By Rehim Kılıç
  4. Commodity Prices, Financial Frictions, and Macroprudential Policies By Shigeto Kitano; Kenya Takaku
  5. The effectiveness of macroprudential policies in managing extreme capital flow episodes By David de Villiers; Hylton Hollander; Dawie van Lill
  6. Macro-Financial Impacts of Foreign Digital Money By Anh Le; Alexander Copestake; Brandon Tan; Mr. Shanaka J Peiris; Umang Rawat
  7. The International Spillovers of Synchronous Monetary Tightening By Dario Caldara; Francesco Ferrante; Matteo Iacoviello; Andrea Prestipino; Albert Queraltó
  8. Cross-border Patenting, Globalization, and Development By Jesse LaBelle; Immaculada Martinez-Zarzoso; Ana Maria Santacreu; Yoto Yotov
  9. Avoiding Idiosyncratic Volatility: Flow Sensitivity to Individual Stock Returns By Marco Di Maggio; Francesco A. Franzoni; Shimon Kogan; Ran Xing
  10. Rethinking the Informal Economy and the Hugo Effect By Francesco Pappadà; Kenneth S. Rogoff
  11. Data Protection in the Era of Algorithmic Pricing: A Comparative Analysis of the USA, EU, and China By Cui, Hao
  12. Local Currency Loans in the Global Development Finance Architecture By Schclarek Curutchet Alfredo; Jiajun Xu
  13. Global Evidence on Profit Shifting Within Firms and Across Time By DELIS Fotis; DELIS Manthos; LAEVEN Luc; ONGENA Steven
  14. Is There a Better Way to Use Global Reserves? By Mark Plant

  1. By: Carrera Jorge; Montes Rojas Gabriel; Solla Mariquena; Toledo Fernando
    Abstract: We study the diffusion of shocks in the global financial cycle and global liquidity conditions to emerging and developing economies. We show that the classification according to their external trade patterns (as commodities’ net exporters or net importers) allows to evaluate the relative importance of international monetary spillovers and their impact on the domestic financial cycle volatility —i.e., the coefficient of variation of financial spreads and risks. Given the relative importance of commodity trade in the economic structure of these countries, our study reveals that the sign and size of the trade balance of commodity goods are key parameters to rationalize the impact of global financial and liquidity conditions. Hence, the sign and volume of commodity external trade will define the effect on countries’ financial spreads. We implement a two-equation dynamic panel data model for 33 countries during 1999:Q1-2020:Q4 that identifies the effect of global conditions on the countries’ commodities terms of trade and financial spreads, first in a direct way, and then by a feedback mechanism by which the terms of trade have an asymmetric additional influence on spreads.
    JEL: F41 Q02
    Date: 2022–11
  2. By: Ruipeng Liu (Department of Finance, Deakin Business School, Deakin University, Australia); Mawuli Segnon (Department of Economics, University of Munster, Germany); Oguzhan Cepni (Department of Economics, Copenhagen Business School, Denmark; Ostim Technical University, Ankara, Turkiye); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: This paper adopts a bivariate Markov switching multifractal (MSM) model to reexamine co-movement in stochastic volatility between commodity, foreign exchange (FX) and stock markets. After the 2007-2008 global financial crisis understanding volatility linkages and the correlation structure between these markets becomes very important for risk analysts, portfolio managers, traders, and governments. Using daily data on stock indices and FX rates from developed and emerging countries and a range of commodities such crude oil, natural gas, aluminum, copper, gold, silver, platinum, wheat, corn, soybean and soybean oil we find evidence of (re)correlation between commodity, FX and stock markets. The bivariate MSM model compares favorably to a bivariate DCC-GARCH and univariate MSM model, especially at short (1, 5 and 10 days) forecasting horizons. Furthermore, we discuss its implications for risk and portfolio management.
    Keywords: Multifractal processes, Volatility co-movement, Commodity returns, Foreign exchange returns, Stock returns
    JEL: C53 C58 G15
    Date: 2023–12
  3. By: Rehim Kılıç
    Abstract: By using realized and survey-based expected exchange rate data, the paper presents five key findings regarding the Uncovered Interest rate Parity (UIP) and related puzzles in an Emerging Market (EM). First, Fama regressions, when not accounting for shifts in the UIP relationship, yield slopes that are statistically identical to one, irrespective of whether survey-based expected exchange rates or realized exchange rates are used. Second, caution is necessary however, as our analysis identifies three distinct sub-periods within each exchange rate measure, each exhibiting varying levels of puzzling behavior. Third, under realized exchange rates, expectation errors can introduce both downward and upward biases or no bias at all, depending on the sub-period. On the other hand, currency risk premiums consistently lead to a downward bias. Under expected exchange rates, currency risk premiums continue to exert a downward bias at varying degrees across sub-periods. Fourth, responses to interest rate differential shocks by expectation errors are pivotal in inducing both downward and upward biases or removing biases altogether when utilizing realized exchange rate data. Fifth, evidence concerning overshooting and reversal puzzles, as well as their link to the UIP puzzle, varies depending on the specific sub-period and the choice of exchange rate measurement, making it more intricate than the previous literature has documented.
    Keywords: UIP Puzzle; FX Rate Overshooting Puzzle; Predictability Reversal Puzzle; Fama Regression; Expectations
    JEL: F31 F41 G11 G15
    Date: 2023–11–22
  4. By: Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN); Kenya Takaku (Faculty of International Studies, Hiroshima City University, JAPAN)
    Abstract: Fluctuations in commodity prices have significant effects on output and financial stability in emerging countries. We examine the effect of macroprudential policies on commodity-exporting countries, which consist of two sectors---the commodity-producing sector and final goods sector. When a commodity-exporting country suffers from volatile fluctuations in commodity prices, we find that macroprudential policy in each sector is welfare-enhancing and that it is optimal to impose macroprudential policies in both sectors. We also show that macroprudential policies are more effective in improving welfare for commodity-exporting economies suffering from a stronger link between commodity prices and interest rate spreads, higher sensitivity of interest spreads to debt, and larger commodity price shocks.
    Keywords: Macroprudential policies; Commodity-exporting countries; DSGE model; Financial frictions; Emerging economies; Mongolia
    JEL: E32 E44 F32 O20 Q48
    Date: 2023–12
  5. By: David de Villiers (Department of Economics, Stellenbosch University); Hylton Hollander (Department of Economics, Stellenbosch University); Dawie van Lill (Department of Economics, Stellenbosch University)
    Abstract: Against the backdrop of a proliferation of policy tools, ongoing policy uncertainty surrounds the suitability of capital flow management in mitigating systemic risk and financial disruptions. We study the effectiveness of macroprudential policies in managing extreme capital flow episodes (surges, stops, flight, and retrenchment), comparing them to capital controls and foreign exchange interventions. Using propensity score matching, based on a panel of 54 countries spanning 1990Q1 to 2020Q3, we find that macroprudential policy can reduce the likelihood of extreme capital flow episodes at least as effectively as capital controls or foreign exchange interventions. Their relative effectiveness, however, varies considerably across type of instrument, proliferation of tools, country income-development level, and type of extreme capital flow episode.
    Keywords: macroprudential policy, capital controls, foreign exchange interventions, extreme capital flows, financial stability
    JEL: E58 F3 F4 G01 G1
    Date: 2023
  6. By: Anh Le; Alexander Copestake; Brandon Tan; Mr. Shanaka J Peiris; Umang Rawat
    Abstract: We develop a two-country New Keynesian model with endogenous currency substitution and financial frictions to examine the impact on a small developing economy of a stablecoin issued in a large foreign economy. The stablecoin provides households in the domestic economy with liquidity services and an additional hedge against domestic inflation. Its introduction amplifies currency substitution, reducing bank intermediation and weakening monetary policy transmission, worsening the impacts of recessionary shocks and increasing banking sector stress. Capital controls raise stablecoin adoption as a means of circumvention, increasing exposure to spillovers from foreign shocks. Unlike a domestic CBDC, a ban on stablecoin payments can alleviate these effects.
    Keywords: Cryptocurrency; Open Economy; Financial Frictions; Optimal Policy
    Date: 2023–12–06
  7. By: Dario Caldara; Francesco Ferrante; Matteo Iacoviello; Andrea Prestipino; Albert Queraltó
    Abstract: We use historical data and a calibrated model of the world economy to study how a synchronous monetary tightening can amplify cross-border transmission of monetary policy. The empirical analysis shows that historical episodes of synchronous tightening are associated with tighter financial conditions and larger effects on economic activity than asynchronous ones. In the model, a sufficiently large synchronous tightening can disrupt intermediation of credit by global financial intermediaries causing large output losses and an increase in sacrifice ratios, that is, output lost for a given reduction in inflation. We use this framework to show that there are gains from coordination of international monetary policy.
    Keywords: Monetary Policy; Inflation; International Spillovers; Financial Frictions; Open Economy Macroeconomics; Panel Data Estimation
    JEL: C33 E32 E44 F42
    Date: 2023–11–29
  8. By: Jesse LaBelle; Immaculada Martinez-Zarzoso; Ana Maria Santacreu; Yoto Yotov
    Abstract: We build a stylized model that captures the relationships between cross-border patenting, globalization, and development. Our theory delivers a gravity equation for cross-border patents. To test the model’s predictions, we compile a new dataset that tracks patents within and between countries and industries, for 1980-2019. The econometric analysis reveals a strong, positive impact of policy and globalization on cross-border patent flows, especially from North to South. A counterfactual welfare analysis suggests that the increase in patent flows from North to South has benefited both regions, with South gaining more than North post-2000, thus lowering real income inequality in the world.
    Keywords: cross-border patents; gravity; policy; globalization; development
    JEL: F63 O14 O33 O34
    Date: 2023–12
  9. By: Marco Di Maggio (Harvard Business School; NBER); Francesco A. Franzoni (Universita della Svizzera italiana; Swiss Finance Institute; CEPR); Shimon Kogan (Reichman University; University of Pennsylvania); Ran Xing (Stockholm University; Aarhus University; Swedish House of Finance)
    Abstract: Despite positive and significant earnings announcement premia, we find that institutional investors reduce their exposure to stocks before earnings announcements. A novel result on the sensitivity of flows to individual stock returns provides a potential explanation. We show that extreme announcement returns for an individual holding lead to substantial outflows, controlling for overall performance, and they increase the probability of managers leaving the fund. Reducing the exposure to these stocks before the announcement mitigates the outflows. We build a model to describe and quantify this tradeoff. Overall, the paper identifies a new dimension of limits to arbitrage for institutions.
    Keywords: News trading, mutual fund performance, fund flows, limits of arbitrage, financial constraints, earnings announcements
    JEL: G12 G23
    Date: 2023–11
  10. By: Francesco Pappadà; Kenneth S. Rogoff
    Abstract: This paper offers a new approach to measuring the size of the informal economy based on VAT data for the European Union. Although data intensive, our EVADE measure is simpler and more transparent than existing measures. EVADE also shows more variation across countries of Europe than earlier measures, including higher informality in Greece, Italy and Spain, for example. Moreover, we find considerably higher variation within countries across time; in a cross-country time series regression, controlling for tax rates, we confirm that the informal economy grows significantly in recessions and decreases in booms, which we term the “Hugo effect”.
    JEL: E26 E32 H26 O17
    Date: 2023–12
  11. By: Cui, Hao
    Abstract: In the era of algorithmic pricing, there is increasing recognition of the importance of data security. Various countries have begun to establish their own data protection regimes. The most widely discussed are the radically different regimes in the EU and the US, while China has taken a unique direction in data protection development after absorbing the experiences of both Europe and the US and combining them with its own political characteristics. This paper explores the relationship between algorithmic pricing and data protection, and argues for the development of a data protection regime to address data security challenges in the era of algorithmic pricing. Through comparative legal research, this paper compares the data protection legal regimes of the European Union, the United States and China from three perspectives: legal principles, international impact and case applications. Through comparative analyses, this paper concludes that a comprehensive data protection regime is more effective than data regulations scattered in various documents. By studying the comparative analysis of three countries, especially the international impact of the EU data protection regime, this paper concludes that a global data protection standard can be recognised and summarised. Such a standard should have four basic elements: 1) the comprehensive empowerment of data subjects, 2) effective and independent intervention by supervisory authorities, 3) a strict ex ante preventive review mechanism, and 4) a satisfactory ex-post relief system. This paper suggests that each country’s data protection system can be designed with reference to this standard and in the light of the specific conditions of the country. In summary, the comparative analyses in this paper provide new perspectives for an in-depth understanding of the changes in data protection legal regimes in different countries in the era of algorithmic pricing. This will help promote more effective data protection laws and policymaking around the world.
    Date: 2023–08–31
  12. By: Schclarek Curutchet Alfredo; Jiajun Xu
    Abstract: We analyze how multilateral development banks (MDBs) can lend in local currency to investment projects that are “domestic-oriented” (DOIPs), i.e., which do not generate hard currency, without incurring in currency mismatches between their assets and liabilities, which would downgrade their credit ratings. Further, we compare two funding strategies for MDBs; one that involves buying local currency and one that involves issuing local currency bonds. The main policy conclusion is that there are tradeoffs between these two funding strategies and MDBs should consider the particular exchange rate risks and balance of payments crisis risks for the real investment projects that are financed and the host countries.
    JEL: G01 E51
    Date: 2023–11
  13. By: DELIS Fotis (European Commission - JRC); DELIS Manthos; LAEVEN Luc; ONGENA Steven
    Abstract: We provide estimates of profit shifting for over 2 million firm-year observations in 100 countries over the period 2009-2020. Employing nonparametric estimation techniques within a mainstay model of profit shifting, we examine how profits for both parent and subsidiary firms within a multinational group respond to marginal changes in the composite tax indicator. The key merit of this approach is that it yields firm-year estimates of profit shifting. We find that multinational firms engage in extensive profit shifting by maintaining affiliates in low-tax countries and zero-tax havens. Multinational groups with an ultimate owner in tax havens exhibit the largest responses of profits to the tax incentive. Our comprehensive estimates of global profit-shifting volumes exceed those obtained elsewhere in the literature using firm-level data and are in line with estimates obtained using macro-level data. Our new database opens important avenues to analyse the sources and effects of profit shifting.
    Date: 2023–12
  14. By: Mark Plant (Center for Global Development)
    Abstract: Global reserves can serve as a global public good, facilitating the short-term global recovery from the economic impacts of the pandemic and Russian invasion of Ukraine, as well as the longer-term global transition to a sustainable and equitable economic future. Strategic allocation of Special Drawing Rights (SDRs) could facilitate sharing of global reserves with low- and middle-income countries to the mutual benefit of advanced and developing countries. This will require the development of new SDR sharing mechanisms, in which multilateral development banks could be instrumental. Other SDR reforms should also be pursued.
    Date: 2022–10–04

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