nep-ifn New Economics Papers
on International Finance
Issue of 2024‒04‒01
ten papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Sovereign Risk and Local Currency Lending Rates: Evidence from Five OECD Countries By Selcuk Gul
  2. Macroprudential capital regulation and fiscal balances in the euro area By Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
  3. High Frequency Monitoring of Credit Creation: A New Tool for Central Banks in Emerging Market Economies By Giraldo, Carlos; Giraldo, Iader; Gomez-Gonzalez, Jose E.; Uribe, Jorge M.
  4. Deciphering Dollar Exchange Rates and Interest Parity By Yang Yang; Ren Zhang; Shuwei Zhang
  5. The interest rate sensitivity of house prices: international evidence on its state dependence By Dr. Matthias Burgert; Johannes Eugster; Victoria Otten
  6. Worst-Case Higher Moment Risk Measure: Addressing Distributional Shifts and Procyclicality By Castro-Iragorri, Carlos; Gómez, Fabio; Quiceno, Nancy
  7. Excess reserves and monetary policy tightening By Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
  8. Emerging Markets Bond Index Performance and Sovereign Default: The Case of Ecuador By Zanoni, Wladimir; Díaz, Emily; Paredes, Jorge; Andrian, Leandro Gaston; Maldonado, Juan Lorenzo
  9. Exploring the Effects of FTAs on Chilean Exports: Heterogeneous responses and Financial Constraints By Roberto Alvarez; Eugenia Andreasen
  10. Modelling Risk-Weighted Assets: Looking Beyond Stress Tests By Josef Sveda; Jiri Panos; Vojtech Siuda

  1. By: Selcuk Gul
    Abstract: [EN] This study aims to identify the role played by the sovereign risk in determining the local currency lending rates to the non-financial sector. In this context, lending rate equations for five emerging countries that are members of the Organisation for Economic Cooperation and Development (OECD) are estimated by the Autoregressive Distributed Lag (ARDL) model. The findings indicate that the impact of sovereign risk on lending rates varies among countries. While an increase in the sovereign risk premium leads to a significant rise in the local currency lending rates in Türkiye, its impacts on the lending rates are relatively low in Poland and Mexico and almost negligible in Hungary and Chile. Results imply that, in the case of Türkiye, as the decline in the risk premium, accompanying the monetary tightening policy initiated in June 2023, become permanent, it may have a reducing effect on the financing costs of the non-financial sector in the medium-to-long term. [TR] Bu calisma, finansal olmayan sektore verilen yerli para cinsiden kredi faizlerinin belirlenmesinde ulke riskinin oynadigi rolu ortaya koymayi amaclamaktadir. Bu cercevede, Ekonomik Kalkinma ve Isbirligi Teskilati (OECD) uyeleri arasindan secilmis bes gelismekte olan ulke icin kredi faizi denklemleri Otoregresif Gecikmesi Dagitilmis (ARDL) modeli ile tahmin edilmektedir. Bulgular, ulke riskinin kredi faizleri uzerindeki etkisinin ulkeler arasinda degiskenlik gosterdigine isaret etmektedir. Ulke risk primindeki artis finansal olmayan sektore verilen yerli para cinsinden kredi faizlerini Turkiye ekonomisinde onemli oranda artirirken, Polonya ve Meksika'da soz konusu artisin kredi faizleri uzerindeki etkisinin daha zayif, Macaristan ve Sili’de ise neredeyse ihmal edilebilir duzeyde oldugu gorulmektedir. Sonuclar, Turkiye ozelinde, 2023 yilinin haziran ayinda uygulanmaya baslanan parasal sikilastirma politikasina eslik eden risk primindeki dususun kalici hale gelmesiyle, orta ve uzun vadede finansal olmayan sektorun finansman maliyetlerini azaltici etkide bulunabilecegini ima etmektedir.
    Date: 2024
  2. By: Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
    Abstract: We examine the fiscal footprint of macroprudential policy in euro area countries arising through the bond market channel (Reis, 2021). Using local projections, we estimate impulse responses of the fiscal balance to an unexpected tightening in macroprudential capital regulation. Our findings suggest a dichotomy between country groups. In peripheral countries, the cyclically adjusted primary balance ratio deteriorates after a restrictive capital-based macroprudential policy shock. Since banks are important investors in domestic government debt, the shift in the public budget toward higher borrowing after the innovation might pose a threat to financial stability to the extent that sovereign risk increases. By contrast, in core countries, the cyclically adjusted primary balance ratio barely reacts to a sudden tightening in capital regulation.
    Keywords: Fiscal footprint, macroprudential capital regulation, sovereign-bank nexus, local projections
    JEL: C33 G28 H63 K33
    Date: 2024
  3. By: Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya)
    Abstract: This study utilizes weekly datasets on loan growth in Colombia to develop a daily indicator of credit expansion using a two-step machine learning approach. Initially, employing Random Forests (RF), missing data in the raw credit indicator is filled using high frequency indicators like spreads, interest rates, and stock market returns. Subsequently, Quantile Random Forest identifies periods of excessive credit creation, particularly focusing on growth quantiles above 95%, indicative of potential financial instability. Unlike previous studies, this research combines machine learning with mixed frequency analysis to create a versatile early warning instrument for identifying instances of excessive credit growth in emerging market economies. This methodology, with its ability to handle nonlinear relationships and accommodate diverse scenarios, offers significant value to central bankers and macroprudential authorities in safeguarding financial stability.
    Keywords: Credit growth; Machine learning methodology; Excessive credit creation; Financial stability
    JEL: C45 E44 G21
    Date: 2024–03–10
  4. By: Yang Yang (School of Finance, Zhongnan University of Economics and Law); Ren Zhang (Department of Finance & Economics, Texas State University); Shuwei Zhang (Department of Economics, Towson University)
    Abstract: This paper explores exchange rate dynamics and the uncovered interest parity (UIP) violation in the context of multiple shocks. Our key contribution lies in reveal- ing that exchange rate dynamics emanate from the collective influence of different shocks, in contrast to prevailing literature emphasizing the dominance of a single shock. While verifying the unconditional UIP reversals, we are the ï¬ rst to show that there is no signiï¬ cant evidence of conditional UIP reversal with an innovative test method developed in this paper. Additionally, through rigorous mathematical proof, we establish that conditional UIP reversal is not a prerequisite for unconditional UIP reversal in models featuring a moving averaging representation. This insight relaxes stringent prerequisites in earlier theoretical studies, offering broad applicability for understanding reversal patterns in UIP and other asset returns.
    Keywords: Bayesian SVAR, Exchange rate, New Fama puzzle, Uncovered interest parity.
    JEL: E32 E44 E52 F31 F41
    Date: 2024–03
  5. By: Dr. Matthias Burgert; Johannes Eugster; Victoria Otten
    Abstract: This paper investigates how house prices have historically responded to interest rates and how their reaction has depended on preexisting conditions. We identify exogenous variations in short-term interest rates for 29 OECD countries relying on international spillovers from US monetary policy. Our results suggest that the average house price reaction is larger and more protracted than most of the previous estimates suggest. Amplitude and speed, however, depend considerably on the specific context. The reaction of house prices is larger and faster when interest rates are low, when their increase occurs during a recession, and when credit conditions are already tight. A preceding boom in house prices slows the price reaction at first but amplifies the decline in the medium term. Based on these results, we estimate how the cyclical conditions prevalent in 2022 typically influenced the house price reaction in our historical sample.
    Keywords: House prices, Interest rates, Local projection, Smooth transition function
    JEL: R21 E51 E32
    Date: 2024
  6. By: Castro-Iragorri, Carlos (Facultad de Economía Universidad del Rosario); Gómez, Fabio (Facultad de Economía Universidad del Rosario); Quiceno, Nancy (Camara de Riesgo Central de Contraparte, CRCC)
    Abstract: This paper addresses the inherent procyclicality in widely adopted financial risk measures, such as Expected Shortfall (ES). We propose an innovative approach utilizing the Higher Moment (HM) risk measure, which offers a robust solution to distributional shifts by incorporating adaptive features. Empirical results using historical S&P500 returns indicate that worst-case HM risk measures significantly reduce the underestimation of risk and provide more stable risk assessments throughout the financial cycle compared to traditional ES predictions. These results suggest that HM risk measures represent a viable alternative to regulatory add-ons for stress testing and procyclicality mitigation in financial risk management.
    Keywords: procyclicality; higher moment risk; stress testing; expected shortfall
    JEL: C58 G17 G32
    Date: 2024–02–29
  7. By: Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
    Abstract: We show that the transmission of the European Central Bank's (ECB) recent monetary policy tightening differs across banks depending on their level of excess reserves. Specifically, the net worth of reserve-rich banks may display a boost when the interest rate paid on reserves increases strongly. Focusing on the ECB's 2022 rate hiking cycle, we show that reserve-rich banks' credit supply is less sensitive to the monetary policy tightening compared to other banks. The effect varies in the cross-section of both banks and firms. The results are binding at the firm level, indicating the presence of real effects.
    Keywords: interest rates, bank lending, excess liquidity, monetary policy
    JEL: E43 E44 E52 G21
    Date: 2024
  8. By: Zanoni, Wladimir; Díaz, Emily; Paredes, Jorge; Andrian, Leandro Gaston; Maldonado, Juan Lorenzo
    Abstract: This paper delves into the dynamic impact of Ecuador's 2008 sovereign debt default on the subsequent performance of the country's bonds, specifically as measured by the Emerging Markets Bond Index (EMBI). Through a blend of qualitative and quantitative analyses, the paper develops a framework for understanding the interplay between macroeconomic and political fundamentals, global liquidity dynamics, and investor behaviors. Employing a synthetic control method, the study assesses the default's impact on Ecuadors EMBI performance, revealing a dynamically heterogeneous influence that fluctuates with evolving macroeconomic and political landscapes. The findings highlight the importance of considering a broad spectrum of economic variables in sovereign risk assessment, especially for economies with significant exposure to volatile commodity markets. The study offers insights into the complex dynamics governing sovereign bond markets post default, emphasizing the roles of fiscal discipline, investor communication, and political stability in mitigating sovereign risk.
    Keywords: Sovereign Debt Default;EMBI;Fiscal Distress Analysis;Investor Behavior Dynamics;Ecuadorian Economic Policy
    JEL: F34 G15 H63 F65 E44
    Date: 2024–03
  9. By: Roberto Alvarez; Eugenia Andreasen
    Abstract: In this paper, we examine the influence of Free Trade Agreements (FTAs) on Chilean exports during the past thirty years. Over the last three decades, Chile has entered into 31 FTAs with 65 countries, encompassing nearly 90% of global GDP. Despite this, there's a notable absence of empirical evidence regarding the extent and nature of the impact of these agreements on export volumes and product diversification. With a rich dataset encompassing bilateral trade flows at the product-level and key financial indicators, we employ a differencein-differences approach to provide robust evidence of the positive impact of these FTAs on export levels and the variety of products exported. Our analysis also reveals variations in these effects based on the industries' initial export share and trading partners' income levels. Furthermore, we investigate how FTAs interacted with the financial development and capital control policies of trading partners, demonstrating their role in mitigating financial constraints on trade.
    Date: 2024–03
  10. By: Josef Sveda (Czech National Bank and Charles University, Prague); Jiri Panos (European Central Bank and University of Economics, Prague); Vojtech Siuda (Czech National Bank and University of Economics, Prague)
    Abstract: We propose an improved methodology for modelling potential scenario paths of banks' riskweighted assets, which drive the denominator of capital adequacy ratios. Our approach centres on modelling the internal risk structure of bank portfolios and thus aims to provide more accurate estimations than the common portfolio level approaches used in top-down stress testing frameworks. This should reduce the likelihood of significant misestimation of riskweighted assets, which can lead to unjustifiably high or low solvency measures and induce false perceptions about banks' financial health. The proposed methodology is easy to replicate and suitable for various applications, including stress testing and calibration of macroprudential tools. After the methodology is introduced, we show how our proposed approach compares favourably to the methods typically used. Subsequently, we use our approach to estimate the potential increase in risk weights due to a cyclical deterioration in credit parameters and the corresponding setup of the countercyclical capital buffer for the Czech banking sector. Finally, an illustrative, hands-on example is provided in the Appendix.
    Keywords: Risk weighted exposure; stress-testing; credit portfolio structure; countercyclical capital buffer
    JEL: E58 G21 G28 G29
    Date: 2024–03–15

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