nep-ifn New Economics Papers
on International Finance
Issue of 2024‒02‒05
thirteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Global Bank Lending and Exchange Rates By Jonas Becker; Maik Schmeling; Andreas Schrimpf
  2. Integration and Financial Stability: A Post-Global Crisis Assessment By Giraldo, Iader; Giraldo, Iader; Gomez-Gonzalez, Jose E; Uribe, Jorge M
  3. Global Risk Factors and Their Impacts on Interest Rates and Exchange Rates: Evidence from ASEAN+4 economies By OGAWA Eiji; LUO Pengfei
  4. Fear (no more) of Floating: Asset Purchases and Exchange Rate Dynamics By Yasin Mimir
  5. Funding the Fittest? Pricing of Climate Transition Risk in the Corporate Bond Market By Martijn A. Boermans; Maurice Bun; Yasmine van der Straten
  6. The long-term earnings' effects of a credit market disruption By Adamopoulou, Effrosyni; De Philippis, Marta; Sette, Enrico; Viviano, Eliana
  7. Central African Economic and Monetary Community: Common Policies of Member Countries, and Common Policies in Support of Member Countries Reform Programs-Press Release; Staff Report; and Statement by the Executive Director By International Monetary Fund
  8. Bankruptcy Exemption of Repo Markets: Too Much Today for Too Little Tomorrow? By Viral V. Acharya; V. Ravi Anshuman; S. Vish Viswanathan
  9. Foreign Exchange Interventions in the New-Keynesian Model: Transmission, Policy, and Welfare By Yossi Yakhin
  10. Insurance corporations’ balance sheets, financial stability and monetary policy By Kaufmann, Christoph; Leyva, Jaime; Storz, Manuela
  11. The Rise of Factor Investing: "Passive" Security Design and Market Implications By Lin William Cong; Shiyang Huang; Douglas Xu
  12. Tokenomics: How “Risky” are the Stablecoins? By Shah, Anand; Bahri, Anu
  13. International reserves, currency depreciation and public debt: new evidence of buffer effects in Africa. By Issiaka Coulibaly; Blaise Gnimassoun; Hamza Mighri; Jamel Saadaoui

  1. By: Jonas Becker; Maik Schmeling; Andreas Schrimpf
    Abstract: We estimate the impact of banks' cross-currency lending on exchange rates to shed light on the importance of flows as a major force affecting FX market outcomes. When non-US banks extend more loans in US dollars (USD) relative to US banks originating foreign currency-denominated loans, the USD appreciates significantly. When a foreign bank grants a cross-currency USD loan, it needs to obtain USD liquidity which puts pressure on funding markets and leads to an appreciation of USD. This effect – which we estimate via a granular instrumental variable approach – has greatly intensified since the global financial crisis and crucially depends on how banks fund the provision of cross-currency loans. In line with this mechanism, we show that cross-currency lending also affects the FX swap market (and deviations from covered interest parity), as well as other segments of the US short-term funding market.
    Keywords: cross-currency lending, exchange rates, granular instrumental variable, CIP deviation
    JEL: F31 E44 G21
    Date: 2024–01
  2. By: Giraldo, Iader (FLAR); Giraldo, Iader (FLAR); Gomez-Gonzalez, Jose E (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College, Bronx); Uribe, Jorge M (Faculty of Economics and Business, Universitat Oberta de Catalunya)
    Abstract: In this study, we revisit the debate regarding the effects of financial openness on financial stability. In contrast to previous studies, our approach involves measuring the direct influences of openness on stability through a varied set of proxies used to capture the diverse dimensions of both of these concepts within a unified estimation framework. Employing state-of-the-art machine learning techniques, our estimates enable us to isolate the focal effects while controlling for a comprehensive set of macroeconomic, political, and institutional variables. Covering the period spanning 2010 to 2020 across 45 countries, our results indicate that, in the majority of cases, increased financial openness is beneficial for financial stability. Greater levels of integration tends to reduce the ratio of nonperforming loans to total loans, concurrently improving capital adequacy ratios and the ratio of provisions to nonperforming loans. Additionally, heightened openness leads to an increase in the levels of bank liquidity. Importantly, these enhancements to financial stability occur without any adverse effects on bank profitability. This suggests that policies aimed at fostering greater integration with global financial markets and promoting increased bank competition can exert positive impacts on financial stability without compromising bank profitability.
    Keywords: Openness; integration; Financial stability; Double-Debiased Machine Learning
    JEL: F21 F32 G21 G28
    Date: 2024–01–17
  3. By: OGAWA Eiji; LUO Pengfei
    Abstract: The international finance trilemma represents the trade-off among exchange rate stability, monetary policy autonomy and free capital flows, resulting in varied reactions to global risk factors among Asian economies. This study explores how various monetary policy objectives shape the diverse responses of Asian interest rates and exchange rates to global risk factors. Using the Structural Vector Autoregressive Model with Exogenous Variables (SVARX), we analyze the impulse responses of short-term interest rates and exchange rates to global risk factors, including the US monetary policy changes, global economic policy and financial risks, and oil prices. The main findings are as follows: first, we found that most of the Asian monetary authorities except Japan mirror the US monetary policy changes, demonstrating that a key policy objective is to stabilize their cross-border capital flows and exchange rates. The magnitude of mirroring depends on countries’ exchange rate regimes. Furthermore, although global economic policy and financial risks trigger the depreciation of most of the Asian exchange rates, their influence on Asian short-term interest rates is relatively smaller, showing the limited influence of global risk appetite on monetary policy objectives. Last, we found the opposite responses of Asian interest rates and exchange rates to oil prices, showing the diverse economic effects of oil prices on oil export and import countries.
    Date: 2024–01
  4. By: Yasin Mimir
    Abstract: We provide a theory on currency dynamics, capital flows and conditions for emerging market economy central bank asset purchases to leave room for manoeuvre for conventional monetary policy. Local-currency asset purchases ease financial conditions and boost banks’ foreign borrowing capacity. Therefore, they curb the financial amplification of government bond sell-off shocks by mitigating private sector capital outflows and the accompanying exchange rate depreciation. The resulting limited rise in inflation reduces the pro-cyclicality of conventional monetary policy. Our framework sheds light on stable exchange rate dynamics observed after the unprecedented asset purchase announcements in emerging-market economies during the COVID-19 crisis.
    Keywords: Asset purchases, exchange rate, conventional monetary policy
    JEL: E62 E63 G21
    Date: 2023–05–26
  5. By: Martijn A. Boermans; Maurice Bun; Yasmine van der Straten
    Abstract: We study whether climate transition risk is priced in corporate bond markets. We assess whether corporate bond investors value companies’ efforts to mitigate climate change by innovating in the green space. By combining global firm-level data on greenhouse emissions and green patents with bond-level holdings data, we provide evidence of a positive transition risk premium, which is significantly lower for emission intensive companies that engage in green innovation. The joint effect of emission intensity and green innovation on bond yield spreads is driven by European investors, specifically institutional investors. Overall, our results indicate that investors care about whether companies are ‘fit’ for the green transition.
    Keywords: Climate Change; Climate Transition Risk; Carbon Premium; Greenium; Green Innovation; Green Patents; Institutional Investors; Institutional Ownership
    JEL: G12 G15 G23 Q51 Q54
    Date: 2024–01
  6. By: Adamopoulou, Effrosyni; De Philippis, Marta; Sette, Enrico; Viviano, Eliana
    Abstract: This paper studies the long-term consequences on firms and workers of the credit crunch triggered by the 2007-2008 global financial crisis. Relying on a unique matched bank-employer-employee administrative dataset, we construct a firm-specific credit supply shock and examine firms' and workers' outcomes for 11 years after the crisis. We find that highly-exposed firms shrink permanently and invest less; these effects are larger for high capital-intensive firms. The impact on workers' earnings is also long-lasting, especially for high skilled workers, who are more complementary to capital. Displaced workers reallocate mostly to low capital-intensive firms, experiencing persistent wage losses.
    Keywords: credit crunch, employment, wages, long term effects, linked bank-employer-employee panel data, capital-skill complementarity
    JEL: E24 E44 G21 J21 J31 J63
    Date: 2023
  7. By: International Monetary Fund
    Abstract: The CEMAC’s recovery gained momentum in 2022, supported by higher hydrocarbon prices. The external position strengthened, with a rapid foreign reserve build-up, though still below adequate levels. The recent weakening in external buffers will require more forceful action to tighten liquidity conditions, greater compliance of member countries with foreign exchange regulations and stronger fiscal discipline. Underlying non-oil fiscal positions, however, also deteriorated, stressing the need for accelerating structural reforms, addressing recent fiscal slippages, and bringing polices back in line with Fund-supported program objectives and staff advice. This will be critical to strengthen the region’s resilience to hydrocarbon prices volatility, financial instability, entrenched inflation, tighter financial conditions, food insecurity, domestic conflicts and insecurity, and climate-related events.
    Date: 2023–12–21
  8. By: Viral V. Acharya; V. Ravi Anshuman; S. Vish Viswanathan
    Abstract: We examine the desirability of granting “safe harbor” provisions to creditors of financial intermediaries in sale-and-repurchase (repo) contracts. Exemption from an automatic stay in bankruptcy enables financial intermediaries to raise greater liquidity and induces entry of intermediaries with higher leverage during normal times. This liquidity creation occurs, however, at the cost of ex-post inefficiency when there are adverse aggregate shocks to the fundamental quality of collateral underlying the contracts. When exempt from bankruptcy, creditors of highly leveraged financial intermediaries respond to such shocks by engaging in collateral liquidations. Financial arbitrage by less leveraged financial intermediaries equilibrates returns from acquiring collateral at fire-sale prices and returns from real-sector lending, inducing higher lending rates, a deterioration in endogenous asset quality, and in the extremis, a credit crunch for the real sector. Given this distributive externality, taming the leverage cycle by not granting safe harbors, i.e., requiring an automatic stay on repo contracts in bankruptcy, can be not only ex-post optimal, but also ex-ante optimal, especially for illiquid collateral with high exposure to aggregate risk.
    JEL: D62 G01 G21 G28 G33 K11 K12
    Date: 2024–01
  9. By: Yossi Yakhin (Bank of Israel)
    Abstract: The paper introduces foreign exchange interventions (FXIs) to an otherwise standard new-Keynesian small open economy model. The paper studies the transmission mechanism of FXIs, solves for the optimal policy, suggests an implementable policy rule, and evaluates the welfare implications of different policies. Relying on the portfolio balance channel, a purchase of foreign reserves crowds out private holdings of foreign assets, thereby raising the UIP premium and the effective real return domestic agents face. As a result, a purchase of foreign reserves contracts domestic demand. At the same time, it depreciates the value of the domestic currency, which raises the price of foreign goods relative to domestic goods, thereby expanding foreign demand for home exports and contracting domestic imports. The effect on production depends on the wealth effect on labor supply. Optimal FXIs completely insulate the economy from the effect of financial shocks, such as capital flows and risk premium shocks. A policy rule that aims at stabilizing the UIP premium brings the economy close to its optimal allocation, regardless of the source of the shocks. The paper discusses the conditions under which strict targeting of the UIP premium is optimal. Calibrating the model to the Israeli economy, lifetime welfare gains from following optimal FXI policy, relative to maintaining a fixed level of foreign reserves, amount to 2.4% of annual steady state consumption. The results are robust to a variety of microstructures of the financial sector suggested in recent literature.
    Keywords: Foreign Exchange Interventions, UIP Premium, Monetary Policy, Open Economy Macroeconomics
    JEL: E44 E52 E58 F30 F31 F40 F41 G10 G15
    Date: 2024–01
  10. By: Kaufmann, Christoph; Leyva, Jaime; Storz, Manuela
    Abstract: The euro area insurance sector and its relevance for real economy financing have grown significantly over the last two decades. This paper analyses the effects of monetary policy on the size and composition of insurers’ balance sheets, as well as the implications of these effects for financial stability. We find that changes in monetary policy have a significant impact on both sector size and risk-taking. Insurers’ balance sheets grow materially after a monetary loosening, implying an increase of the sector’s financial intermediation capacity and an active transmission of monetary policy through the insurance sector. We also find evidence of portfolio re-balancing consistent with the risk-taking channel of monetary policy. After a monetary loosening, insurers increase credit, liquidity and duration risk-taking in their asset portfolios. Our results suggest that extended periods of low interest rates lead to rising financial stability risks among non-bank financial intermediaries. JEL Classification: E52, G11, G22, G23
    Keywords: monetary policy transmission, non-bank financial intermediation, portfolio re-balancing, risk-taking
    Date: 2024–01
  11. By: Lin William Cong; Shiyang Huang; Douglas Xu
    Abstract: We model financial innovations such as Exchange-Traded Funds, smart beta products, and many index-based vehicles as composite securities (CSs) that facilitate trading the common factors in assets' liquidation values. Through accessing a larger basket of assets in endogenously chosen proportions, CSs reduce investors' duplication of effort in trading multiple securities and attract more factor investors. We characterize analytically how competitive CS designers in equilibrium optimally select liquid underlying assets representative of the factors and find corroborating evidence in ETF data. CS trading entails investors' strategic and active decisions, consequently impounding more systematic information into prices. Their rise creates leads to greater informational efficiency, price variability, and co-movements in the underlying asset markets, as well as potentially heterogeneous effects on liquidity and asset-specific information acquisition/incorporation, depending on the importance of factors for asset value. The predictions explain and reconcile the rich (and often mixed) empirical observations about various types of CSs in the extant literature.
    JEL: D40 D82 G11 G14 G23
    Date: 2024–01
  12. By: Shah, Anand; Bahri, Anu
    Abstract: This study proposes a new risk measure for stablecoins, that is based on the probability of the stablecoin’s price hitting a threshold exchange rate post which the stablecoin is subjected to the risk of “break the buck/ death spiral”. We also juxtapose the risk measure computed using different models - Vasicek, CIR, ARMA+GARCH and Vasicek+GARCH and suggest the policy implication of the estimated model parameters - rate of reversion (a) and long term mean exchange rate (b) for stablecoin issuers. The study compares the volatility behaviour of the stablecoins with that of the traditional cryptocurrency, Bitcoin, equity index, NASDAQ composite and fiat currency, EURO. Stablecoins tend to be “stable” barring the events such as Terra – Luna crisis, FTX Bankruptcy and Silicon Valley Bank crisis. Traditional asset backed stablecoins – Tether, USD Coin, Binance USD and True USD are less risky than the decentralized algorithmic stablecoin, FRAX and decentralized cryptoasset backed stablecoin, DAI. The proposed risk measure could be of utility to the stablecoin issuers of algorithmic and cryptoasset backed stablecoins and the regulators for setting the capital requirement to guard against the break the buck/ death spiral risk.
    Keywords: Cryptocurrency, Stablecoins, Terra – Luna crisis, FTX Bankruptcy, Silicon Valley Bank crisis, Risk Measure, VaR, Vasicek, CIR, GARCH, Bitcoin, Tether, USD Coin, Binance USD, True USD, DAI, FRAX
    JEL: F31 G01 G11 G15 G23 G28
    Date: 2023–12–30
  13. By: Issiaka Coulibaly; Blaise Gnimassoun; Hamza Mighri; Jamel Saadaoui
    Abstract: The paper adds to the literature on the issue of public debt in African economies, by investigating the role foreign exchange reserves play in improving the level of indebtedness and as buffer of the negative effect of exchange rate depreciation while considering the exchange rate policy. Our results show a direct link between the level of foreign currency reserves and that of external debt in Africa. Particularly, we demonstrate that higher foreign currency reserves tend to decrease the public debt stock to GDP. This effect is even more significant when countries go through high exchange rate depreciation episodes (10% or higher). This impact, however, is not homogenous among country groups, as only countries with a floating exchange regime tend to benefit from this buffer effect compared to anchored regimes. In a time where most African economies face severe exchange rate depreciation episodes following the U.S. monetary tightening policy, central bankers and policy makers need to consider a plethora of policy issues including interventions in the FX market to mitigate depreciations and maintain a sustainable public debt stock.
    Keywords: Exchange Rate, International Reserves, Buffer Effect, Public Debt.
    JEL: F3 F31 F32 F34 H6
    Date: 2023

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