nep-ifn New Economics Papers
on International Finance
Issue of 2024‒03‒04
sixteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. The Causal Effects of Global Supply Chain Disruptions on Macroeconomic Outcomes: Evidence and Theory By Xiwen Bai; Jesús Fernández-Villaverde; Yiliang Li; Francesco Zanetti
  2. "Monitoring time-varying systemic risk in sovereign debt and currency markets with generative AI" By Helena Chuliá; Sabuhi Khalili; Jorge M. Uribe
  3. The Impact of US Trade Sanctions on the Global Trade of Target Countries: Do the Political Institutions of the Targets Matter? By Sajjad Faraji Dizaji; Mohammad Reza Farzanegan
  4. The anatomy of a peg: lessons from China’s parallel currencies By Saleem Bahaj; Ricardo Reis
  5. Monetary Policy Wedges and the Long-term Liabilities of Households and Firms By Jules H. van Binsbergen; Marco Grotteria
  6. Convenience Yields and Exchange Rate Puzzles By Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig; Jialu Sun
  7. Whatever-It-Takes Policymaking during the Pandemic By Kathryn M.E. Dominguez; Andrea Foschi
  8. Provisions and Economic Capital for Credit Losses By Dorinel Bastide; St\'ephane Cr\'epey
  9. Interest Rate Uncertainty and Firm Decisions By Anne Duquerroy; Klodiana Istrefi; Sarah Mouabbi
  10. Bank Market Power and Monetary Policy Transmission: Evidence from Loan-Level Data By Nadezhda Ivanova; Svetlana Popova; Konstantin Styrin
  11. International migration and sustainable development in the Caribbean: an analysis of data trends from 2000 to 2020 By León, Daniel; Abdulkadri, Abdullahi
  12. US Dollar swaps after LIBOR By Heidorn, Thomas; Meier, Rebecca
  13. A Vector Multiplicative Error Model with Spillover Effects and Co-movements By E. Otranto
  14. Measuring Treasury Market Depth By Michael J. Fleming; Isabel Krogh; Claire Nelson
  15. Uncertainty Shocks and Inflation: The Role of Credibility and Expectation Anchoring By Beckmann, Joscha; Czudaj, Robert L.
  16. Credit Risk Meets Large Language Models: Building a Risk Indicator from Loan Descriptions in P2P Lending By Mario Sanz-Guerrero; Javier Arroyo

  1. By: Xiwen Bai; Jesús Fernández-Villaverde; Yiliang Li; Francesco Zanetti
    Abstract: We study the causal effects and policy implications of global supply chain disruptions. We construct a new index of supply chain disruptions from the mandatory automatic identification system data of container ships, developing a novel spatial clustering algorithm that determines real-time congestion from the position, speed, and heading of container ships in major ports around the globe. We develop a model with search frictions between producers and retailers that links spare productive capacity with congestion in the goods market and the responses of output and prices to supply chain shocks. The co-movements of output, prices, and spare capacity yield unique identifying restrictions for supply chain disturbances that allow us to study the causal effects of such disruptions. We document how supply chain shocks drove inflation during 2021 but that, in 2022, traditional demand and supply shocks also played an important role in explaining inflation. Finally, we show how monetary policy is more effective in taming inflation after a global supply chain shock than in regular circumstances.
    JEL: E32 E58 J64
    Date: 2024–02
  2. By: Helena Chuliá (Riskcenter- IREA and Department of Econometrics and Statistics, University of Barcelona.); Sabuhi Khalili (Department of Econometrics and Statistics, University of Barcelona.); Jorge M. Uribe (Faculty of Economics and Business Studies, Open University of Catalonia.)
    Abstract: SWe propose generative artificial intelligence to measure systemic risk in the global markets of sovereign debt and foreign exchange. Through a comparative analysis, we explore three novel models to the economics literature and integrate them with traditional factor models. These models are: Time Variational Autoencoders, Time Generative Adversarial Networks, and Transformer-based Time-series Generative Adversarial Networks. Our empirical results provide evidence in support of the Variational Autoencoder. Results here indicate that both the Credit Default Swaps and foreign exchange markets are susceptible to systemic risk, with a historically high probability of distress observed by the end of 2022, as measured by both the Joint Probability of Distress and the Expected Proportion of Markets in Distress. Our results provide insights for governments in both developed and developing countries, since the realistic counterfactual scenarios generated by the AI, yet to occur in global markets, underscore the potential worst-case scenarios that may unfold if systemic risk materializes. Considering such scenarios is crucial when designing macroprudential policies aimed at preserving financial stability and when measuring the effectiveness of the implemented policies.
    Keywords: Twin Ds, Sovereign Debt, Credit Risk, TimeGANs, Transformers, TimeVAEs, Autoencoders, Variational Inference. JEL classification: C45, C53, F31, F37.
    Date: 2024–02
  3. By: Sajjad Faraji Dizaji; Mohammad Reza Farzanegan
    Abstract: We investigate the effects of US-imposed trade sanctions on the global trade patterns of sanctioned countries by employing a gravity model that incorporates data spanning from 1980 to 2020 across 79 nations. The results reveal that both partial and complete US sanctions lead to significant reductions in bilateral trade between the US and target countries as well as between target and third countries. A unit increase in the intensity of complete trade sanctions in place reduces US bilateral trade flows with its sanctioned trading partners by about 76 percent while a unit increase in the intensity of partial US sanctions decreases trade by 16 percent. When complete export and import sanctions are implemented, US bilateral trade flows with its sanctioned trading partners witness a staggering decline of about 90 percent and 39 percent, respectively. In contrast, the application of partial export and import sanctions leads to a decrease in trade by 13 percent and 17 percent, respectively, all other factors remaining constant (ceteris paribus). Moreover, we show that target countries with stronger political institutions, as measured by democracy indicators, manage to alleviate some of the adverse effects of US sanctions on bilateral trade with both the US and third countries.
    Keywords: sanctions, trade, import, export, democracy, political institutions, gravity model
    JEL: D74 F14 F51 O24 O43
    Date: 2024
  4. By: Saleem Bahaj (UCL); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: China’s current account transactions use an offshore international currency, the CNH, that co-exists as a parallel currency with the mainland domestic currency, the CNY. The CNH is freely used, but by restricting its exchange for CNY, the authorities can enforce capital controls. Sustaining these controls requires tight management of the money supply and liquidity to keep the exchange rate between the dual currencies pegged. After describing how the central bank implements this system, we find a rare instance of identified, exogenous, transitory increases in the supply of money and estimate by how much they depreciate the exchange rate. Theory and evidence show that elastically supplying money in response to demand shocks can maintain a currency peg. Liquidity policies complement these monetary interventions to deal with the pressure on the peg from financial innovation. Finally, deviations from the CNH/CNY peg act as a pressure valve to manage the exchange rate between the yuan and the US dollar.
    Keywords: Chinese monetary policy, Gresham’s law, Goodhart’s law, Money markets, RMB
    JEL: F31 F33 E51 G15
    Date: 2024–01
  5. By: Jules H. van Binsbergen; Marco Grotteria
    Abstract: We examine the transmission of monetary policy shocks to the long-duration liabilities of households and firms using high-frequency variation in 10-year swap rates around FOMC announcements. We find that four weeks after the announcement mortgage rates move one-for-one with 10-year swap rates, leaving little explanatory power for mortgage concentration, bank market power, or credit risk. Variation in credit risk does materially affect monetary policy transmission to corporate bonds. Expected future short rates and term premia play a significant role in driving both mortgage rates and corporate bond yields, which explains the Federal Reserve’s increased focus on these quantities.
    JEL: E40 E43 E44 E5 E50 E52 E58 G21 G51
    Date: 2024–02
  6. By: Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig; Jialu Sun
    Abstract: We introduce safe asset demand for dollar-denominated bonds into a tractable incomplete-market model of exchange rates. The convenience yield on dollar bonds enters as a stochastic wedge in the Euler equations for exchange rate determination. This wedge reduces the pass-through from marginal utility shocks to exchange rate movements, resolving the exchange rate volatility puzzle. The wedge also exposes the dollar's exchange rate to convenience yield shocks, giving rise to exchange rate disconnect from macro fundamentals and a quantitatively important driver of currency risk premium. This endogenous exposure identifies a novel safe-asset-demand channel by which the Fed's QE impacts the dollar and long-term U.S. Treasury bond yields.
    JEL: F30 G15
    Date: 2024–01
  7. By: Kathryn M.E. Dominguez; Andrea Foschi
    Abstract: Central banks across the globe introduced large-scale asset purchase programs to address the unprecedented circumstances experienced during the pandemic. Many of these programs were announced as open-ended to shock-and-awe market participants and restore confidence in financial markets. This paper examines whether these whatever-it-takes announcements had larger effects than announcements with explicit limits on scale. We use a narrative approach to categorize announcements made by twenty-two central banks, and event study, propensity-score-matching, and local projection methods to measure the short-term effects of policy announcements on exchange rates and sovereign bond yields. We find that on average a central bank's first whatever-it-takes announcement lowers 10-year bond yields by an additional 25 basis points relative to size-limited announcements, suggesting that communication of potential policy scale matters. Our results for yields hold for both advanced and emerging economies, while exchange rates go in opposing directions, muting their response when we group all countries together.
    JEL: E44 E58 F42 G14
    Date: 2024–02
  8. By: Dorinel Bastide (LaMME); St\'ephane Cr\'epey (LPSM)
    Abstract: Based on supermodularity ordering properties, we show that convex risk measures of credit losses are nondecreasing w.r.t. credit-credit and, in a wrong-way risk setup, credit-market, covariances of elliptically distributed latent factors. These results support the use of such setups for computing credit provisions and economic capital or for conducting stress test exercises and risk management analysis.
    Date: 2024–01
  9. By: Anne Duquerroy; Klodiana Istrefi; Sarah Mouabbi
    Abstract: We examine the effects of uncertainty regarding the path of interest rates on firms’ decisions in the euro area. In the presence of heightened short-term interest rate uncertainty, firms tend to decrease their future investments and hiring activities. They also adopt a more cautious approach by hoarding cash and cutting dividend payments. Firm heterogeneity is crucial, as the negative effect on future investment is magnified when firms are ex-ante exposed to interest rate risk, face financial constraints or lack hedging strategies. These effects operate mainly through a financing and cash flow channel, highlighting the presence of a Finance-Interest-Rate-Uncertainty multiplier, whereby the effects of this uncertainty are amplified by the presence of financial constraints. Conversely, we find no significant effects of long-term interest rate uncertainty on firm decisions.
    Keywords: Interest Rate Uncertainty, Firm Heterogeneity, Financial Constraints, Rollover Risk, Investment, Employment, Cash Holding, Euro Area
    JEL: E43 E52 E22 G32
    Date: 2024
  10. By: Nadezhda Ivanova (Bank of Russia, Russian Federation); Svetlana Popova (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation)
    Abstract: This paper asks the following questions. How does market structure reshape the transmission of monetary policy to bank lending? How are loan characteristics such as loan volume, maturity, lending rate, risk, and the extensive margin of lending affected? Is there a trade-off between financial stability and the strength of monetary transmission? We find that, on more concentrated markets, the effect of monetary policy on lending rate and risk taking is amplified whereas the effect on loan volume is muted. Our current findings may imply the existence of a trade-off between the strength of monetary policy transmission and financial stability, but are subject to further investigation.
    Keywords: Monetary policy transmission; Market concentration.
    JEL: E44 E52 G21 C14
    Date: 2024–01
  11. By: León, Daniel; Abdulkadri, Abdullahi
    Abstract: This study assesses international migration trends in 28 Caribbean countries from 2000 to 2020 and discusses the implications of these trends for different aspects of sustainable development in the subregion. It is well-documented that the Caribbean is a subregion that has exhibited net emigration, but this trend has intensified over the last two decades, with Global North regions representing the main destination of Caribbean emigrants. Although immigration to the Caribbean increased from 2000 to 2020, this increase was less substantial than that recorded for emigration from the subregion. By 2020, intra-Caribbean migration stocks accounted for just over half of all immigration stocks in the subregion, showing growing intra-Caribbean mobility of persons. International migration trends in the Caribbean, particularly emigration from the subregion, have implications for the subregion’s sustainable development, and these are reflected in indicators such as international financial flows, demographic dynamics, and labour productivity. In general, the high net emigrant stock of the Caribbean directly correlates with remittance inflows to the subregion. Furthermore, many countries of the subregion with ageing populations stand to gain from increased immigration as it rejuvenates their labour forces. However, with highly skilled labour constituting a large and growing proportion of the net emigrant stocks, the resulting brain drain in the Caribbean could have a more profound impact on the sustainable development of the subregion. Available data showed that most countries with net emigration during the period covered by this study experienced negative or stagnant labour productivity levels. Considering the importance of quality data in assessing international migration trends, it is pertinent to collect, analyse, and disseminate international migration data in the Caribbean following international standards and best practices to facilitate optimal use of the subregion’s international migration statistics. This study has revealed some advances and gaps among Caribbean countries in producing international migration data. Some Caribbean countries have included questions on international migration in their national censuses, household surveys, and labour force surveys. Nevertheless, gaps remain in collecting international migration indicators, especially those related to labour and international university student mobility. Leveraging administrative data, inter-agency coordination, and international cooperation can help countries improve the collection of international migration data, thereby enhancing national statistical capacity in the Caribbean.
    Date: 2024–01–22
  12. By: Heidorn, Thomas; Meier, Rebecca
    Abstract: The main focus of this paper is a comprehensive overview of the US$ reference rate reform, with a particular focus on its implications for USD interest rate swaps (IRS). This paper aims to shed light on the current situation and future developments in a changing financial landscape. This paper discusses the change from US$-LIBOR to the Secured Overnight Financing Rate (SOFR) and the Chicago Mercantile Exchange (CME) Term SOFR as new reference rates. Main changes for US$ IRS against SOFR is a fixing-in-arrears, a loss in the money market term structure, and a change of implicit credit spreads. As only clients are allowed to use CME Term SOFR, banks face basis risk in hedging in the interbank market. As the SOFR is linked to treasuries instead of bank risk, in a crisis the difficulties of banks will increase. Corporate treasuries face a less efficient IRS market, wider ask-bid-spreads, changes in credit spreads, and an increase in complexity as the US money market now differs considerably from the EURO world.
    Keywords: LIBOR Reform, LIBOR, Secured Overnight Financing Rate, SOFR, Term SOFR, CME Term SOFR, RFRs, US$ overnight rate, interest rate swaps, US$ interest rate swaps, Bank Treasury, Corporate Treasury
    Date: 2024
  13. By: E. Otranto
    Abstract: Modern approaches to financial time series aim to model in a multivariate framework the volatility of different indices or assets, which could influence each other, creating spillover effects. Furthermore, the integration of financial markets provides a similar dynamics (co-movement). We propose a new model for volatility vectors, belonging to the family of Multiplicative Error Models, which incorporates spillover and co-movement effects. By adopting an appropriate parameterization, it is possible to estimate this model even for high dimensional vectors of volatility. To reduce the number of unknown coefficients, we propose a 3-step model-based clustering procedure. The proposed model is applied to a set of seventeen world financial indices, providing a useful interpretation of spillover effects and co- movements. Furthermore, the proposed parameterization is compared with two alternatives, showing significantly better performance.
    Keywords: high-dimensional time series;vector of volatility;multiplicative factors;model-based clustering;high-low range
    Date: 2024
  14. By: Michael J. Fleming; Isabel Krogh; Claire Nelson
    Abstract: A commonly used measure of market liquidity is market depth, which refers to the quantity of securities market participants are willing to buy or sell at particular prices. The market depth of U.S. Treasury securities, in particular, is assessed in many analyses of market functioning, including this Liberty Street Economics post on liquidity in 2023, this article on market functioning in March 2020, and this paper on liquidity after the Global Financial Crisis. In this post, we review the many measurement decisions that go into depth calculations and show that inferences about the evolution of Treasury market depth, and hence liquidity, are largely invariant with respect to these decisions.
    Keywords: Treasury securities; liquidity; order book
    JEL: G1
    Date: 2024–02–12
  15. By: Beckmann, Joscha; Czudaj, Robert L.
    Abstract: This paper focuses on the uncertainty effect on consumer price inflation based on a panel of 82 advanced, emerging, and developing economies studied over a sample period running from 1995 to 2022. In contrast to the previous literature, we particularly control for the role of monetary policy credibility by considering the monetary control classification of Cobham (2021) and by measuring the degree of anchoring of inflation expectations. We argue that the interpretation of uncertainty as a negative demand shock is appealing from a theoretical perspective but is unlikely to reflect uncertainty dynamics for countries with high inflation and/or low monetary policy credibility. We find that higher uncertainty boosts inflation. However, this effect is significantly reduced (or even eliminated) by both a strong degree of monetary control and a strong anchoring of inflation expectations, illustrating that both factors are of key importance for the propagation of uncertainty shocks.
    Keywords: Anchoring; Inflation expectations; Monetary policy; Survey data; Uncertainty
    JEL: E31 E52 E58
    Date: 2024
  16. By: Mario Sanz-Guerrero; Javier Arroyo
    Abstract: Peer-to-peer (P2P) lending has emerged as a distinctive financing mechanism, linking borrowers with lenders through online platforms. However, P2P lending faces the challenge of information asymmetry, as lenders often lack sufficient data to assess the creditworthiness of borrowers. This paper proposes a novel approach to address this issue by leveraging the textual descriptions provided by borrowers during the loan application process. Our methodology involves processing these textual descriptions using a Large Language Model (LLM), a powerful tool capable of discerning patterns and semantics within the text. Transfer learning is applied to adapt the LLM to the specific task at hand. Our results derived from the analysis of the Lending Club dataset show that the risk score generated by BERT, a widely used LLM, significantly improves the performance of credit risk classifiers. However, the inherent opacity of LLM-based systems, coupled with uncertainties about potential biases, underscores critical considerations for regulatory frameworks and engenders trust-related concerns among end-users, opening new avenues for future research in the dynamic landscape of P2P lending and artificial intelligence.
    Date: 2024–01

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