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on International Finance |
| By: | Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Andreas Schrimpf (Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen); Yuan Zhang (Shanghai University of Finance and Economics) |
| Abstract: | We develop a continuous time general equilibrium model with intermediaries at the heart of international financial markets. Global intermediaries bargain with households and extract rents from providing access to foreign claims. By tilting state prices, intermediaries’ market power breaks monetary neutrality and makes international risksharing inefficient. Despite having zero net positions, markups charged by intermediaries significantly distort international asset prices and exchange rate dynamics and their response to shocks. Our model can reproduce patterns consistent with several well-known exchange rate puzzles, such as deviations from Uncovered and Covered Interest Parity. All equilibrium quantities are derived in closed form, allowing us to pin down the underlying economic mechanisms explicitly. |
| Keywords: | Financial Intermediation, Exchange Rates, Uncovered Interest Parity, Covered Interest Parity Deviations |
| JEL: | E44 E52 F31 F33 G13 G15 G23 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2401&r=ifn |
| By: | Krenz, Johanna |
| Abstract: | What are the effects of financial integration on global comovement? Using a standard two-country DSGE model, I show that in response to country-specific supply shocks higher exposure to foreign assets leads to lower cross-country output correlations, while the opposite is true for country-specific demand shocks. I argue that an important, yet overlooked, transmission channel originates in the interplay between financial integration and terms of trade movements in response to the shocks hitting the economy. The transmission channel is independent of whether the agents who hold the foreign assets are financially constrained or not. |
| Keywords: | Business cycle comovement, Financial cycle comovement, Financial integration, Demand versus supply shocks, Terms of trade, Transfer Problem, Balance sheet effect |
| JEL: | E30 E44 F41 F44 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:uhhwps:281784&r=ifn |
| By: | Menzie D. Chinn; Laurent Ferrara |
| Abstract: | In recent years, there has been renewed interest in the moments of the yield curve (or alternatively, the term spread) as a predictor of future economic activity, defined as either recessions, or industrial production growth. In this paper, we re-examine the evidence for this predictor for the United States, other high-income countries, as well as selected emerging market economies (Brazil, India, China, South Africa and South Korea), over the 1995-2023 period. We examine the sensitivity of the results to the addition of financial variables that measure other dimensions of financial conditions both domestically and internationally. Specifically, we account for financial conditions indexes (Arrigoni, et al., 2022), the debt service ratio (Borio, et al., 2020), and foreign term spreads (Ahmed and Chinn, 2023). We find that foreign term spreads and the debt service ratio in many cases yield substantially better predictive power, in terms of in-sample fit using proportion of variance explained. Overall, the predictive power of the yield curve, as well as other financial variables, varies across countries, with particularly little explanatory power in emerging market economies. |
| JEL: | C22 E37 E43 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32084&r=ifn |
| By: | Bada Han; Jangyoun Lee; Taehee Oh |
| Abstract: | In this paper, we examine how, contrary to the ‘original sin’ hypothesis, emerging market economies have gained the ability to borrow abroad in their local currency. We empirically analyze the relationship of various economic variables with local currency debt and identify three crucial conditions for the capacity to borrow in local currency: institutional quality, sufficient depth in the domestic bond market, and adequate performance in inflation targeting. While shares in JPMorgan Government Bond Index-Emerging Markets (GBI-EM) index also appear to be influential, the associations with local currency debt is less clear. We conduct a similar empirical analysis on portfolio equity, which represents a safer form of external liability than foreign currency debt, and verify that the depth of the equity market plays a key role in attracting foreign capital to domestic equity markets. Finally, we propose a simple portfolio model based on the inelastic market hypothesis to explain the positive correlation between capital market depth and the dissipation of original sin, which refers to the presence of more external liability in the form of equity or local currency debt. In essence, our analysis suggests that emerging market economies with reasonably strong fundamentals are not necessarily reliant on foreign currency debt. |
| Keywords: | Original Sin; Local Currency Debt; Emerging Markets |
| Date: | 2024–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/018&r=ifn |
| By: | Bats, Joost Victor; Bua, Giovanna; Kapp, Daniel |
| Abstract: | The European Union plays a prominent role in climate regulations initiatives, this commitment likely implies that climate risk premiums look different in Europe compared to the rest of the world. This paper examines the pricing implications of climate risks in euro area corporate bond markets, focusing on physical and transition risk. Using climate news as a gauge for systematic climate risk, we find a significant pricing effect of physical risk in long-term bonds, with investors demanding higher returns on bonds exposed to physical risk shocks. The estimated physical risk premium is 34 basis points, indicating increased awareness and hedging demand after the Paris Agreement. Transition risk premiums are smaller and less significant, reflecting the ongoing transition to a low-carbon economy. Our findings contribute to understanding climate risk pricing in the European bond markets, highlighting the importance of physical risk and the evolving nature of investor demand for climate-resilient assets. JEL Classification: G12, G14, G28, Q51, Q54 |
| Keywords: | climate physical risk, climate transition risk, corporate bonds, intertemporal hedging demand, news index |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242899&r=ifn |
| By: | Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (BI Norwegian Business School) |
| Abstract: | Difference-in-differences (DiD) analysis is commonly used to study fixed-income pricing. Using simulations, we show that the standard DiD approach applied to variables with a term structure systematically produces false and mismeasured treatment effects, even under random treatment assignment. Standard DiD is misspecified because of endemic heterogeneity over the maturity spectrum and non-matched treated and control-bond samples. Neither bond fixed effects nor standard term-structure controls resolve the problem. We provide solutions using term-structure modeling that allow for heterogeneous effects over the maturity spectrum. These issues are not unique to DiD analysis, but are generic to group-assignment settings. |
| Keywords: | Fixed-income pricing, yield curve, term structure, difference-in-differences analysis, false and mismeasured treatment effects |
| JEL: | C20 G12 E43 E47 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2403&r=ifn |
| By: | Bonga-Bonga, Lumengo; Montshioa, Keitumetse |
| Abstract: | This paper contributes to the literature on portfolio allocation by assessing how assets from emerging and developed stock markets can be allocated efficiently during crisis periods. Towards this end, the paper proposes an approach to portfolio allocation that combines traditional portfolio theory with extreme value theory (EVT) based on Generalised Pareto Distributions (GPDs) and Generalised Extreme Values (GEVs). The results of the empirical analysis show that for the mean-variance portfolio constructed from GPD, the emerging market portfolio outperforms both the international portfolio, the combination of emerging and developed market assets, and the developed market portfolio. However, the developed market portfolio outperforms the emerging market portfolio for the mean-variance portfolio constructed from GEV distribution. The paper attributes these different outcomes to the intended objectives of these extreme-value approaches in the context of portfolio selection. These results offer essential guidance for investors and asset managers during the construction of portfolios in times of crisis. They highlight that the effectiveness of a portfolio is significantly influenced by its predefined objectives. Ultimately, these objectives are crucial in deciding the most suitable approach for portfolio construction. |
| Keywords: | Extreme Value Theory; General Pareto Distribution; Emerging and developed markets; portfolio optimisation; mean-variance. |
| JEL: | C58 G11 G15 |
| Date: | 2024–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119910&r=ifn |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission. |
| Keywords: | central bank research; international financial markets; monetary policy transmission |
| JEL: | E44 E52 F36 F42 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-3&r=ifn |
| By: | Dimitrakopoulou, Lydia; Genakos, Christos; Kampouris, Themistoklis; Papadokonstantaki, Stella |
| Abstract: | We examine how competition affects VAT pass-through in isolated oligopolistic markets as defined by the Greek islands. Using daily gasoline prices and a difference-in-differences methodology, we investigate how changes in VAT rates are passed through to consumers in islands with different market structure. We show that pass-through increases with competition, going from 50% in monopoly to around 80% in more competitive markets, but remains incomplete. We also discover a rapid rate of adjustment for VAT changes, as well as a positive relationship between competition and the rate of price adjustment. Finally, we document higher pass-through for products with more inelastic demand. |
| Keywords: | pass-through; tax incidence; gasoline; value added tax (VAT); market structure; competition; Greek islands |
| JEL: | H22 L1 |
| Date: | 2023–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121321&r=ifn |
| By: | Esposito, Federico; Hassan, Fadi |
| Abstract: | We analyze the role of trade credit and financial frictions in the propagation of international trade shocks along the supply chain. First, we show empirically that exposure to import competition from China increased the use of trade credit in the U.S. Then, we use a multi-country input-output trade model with borrowing constraints, trade credit, and endogenous employment to quantify the general equilibrium effects of such increase, characterizing the different channels at work. Borrowing constraints amplify the negative consequences of the China shock on employment, but introducing trade credit reduces these losses by 8%-27%, depending on the tightness of the constraints. |
| Keywords: | trade credit; trade shocks; financial frictions; borrowing constraints; employment |
| JEL: | E10 E44 F14 F15 F16 G20 |
| Date: | 2023–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121378&r=ifn |
| By: | Krüger, Jens J. |
| Abstract: | This paper documents the results from a macroeconomic total factor productivity analysis with a special focus on disentangling efficiency change and technological change under variable returns to scale. A sample of 93 countries is investigated by nonparametric methods. For the measurement three variants of the Malmquist index (basic, biennial, and global) are used. Specific country groups and selected individual countries are examined. The results show that productivity development is mainly driven by the interplay of technological change and efficiency change with a reversal from a backward shifting frontier function until the mid‐1990s to an advancing frontier thereafter. |
| Date: | 2024–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:142626&r=ifn |