nep-ifn New Economics Papers
on International Finance
Issue of 2024‒04‒15
thirteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination By Nadav Ben Zeev; Daniel Nathan
  2. Determinants of currency choice in cross-border bank loans By Emter, Lorenz; McQuade, Peter; Pradhan, Swapan-Kumar; Schmitz, Martin
  3. Drivers of Dollar Share in Foreign Exchange Reserves By Linda S. Goldberg; Oliver Zain Hannaoui
  4. The Persistent Widening of Cross-Currency Basis: When Increased FX Swap Demand Meets Limits of Arbitrage By Nadav Ben Zeev; Daniel Nathan
  5. Four Facts about International Central Bank Communication By Bertsch, Christoph; Hull, Isaiah; Lumsdaine, Robin L.; Zhang, Xin
  6. Estimating the Impact of Official and Parallel Exchange Rates on Inflation in Sierra Leone. By Barrie, Mohamed Samba; Jackson, Emerson Abraham; Pessima, Joseph
  7. The Asymmetric Effects of Commodity Price Shocks in Emerging Economies By Andrea Gazzani; Vicente Herrera; Alejandro Vicondoa
  8. Estimating the contribution of macroeconomic factors to sovereign bond spreads in the euro area By Pablo Burriel; Mar Delgado-Téllez; Camila Figueroa; Iván Kataryniuk; Javier J. Pérez
  9. Do foreign bank investors promote acquiring banks' value in Asia-Pacific Countries? By Yoko Shirasu; Yukihiro Yasuda
  10. Geoeconomic Fragmentation and International Diversification Benefits By Tatsushi Okuda; Tomohiro Tsuruga
  11. Understanding Inflation Dynamics: The Role of Global Shocks in CEMAC By Johanna Tiedemann; Olivier Bizimana; Lluis Dalmau; Martin Ambassa
  12. Global Linkages across Sectors and Frequency Bands: A Band Spectral Panel Regression Approach By Jingjing Lyu; Bernd Süssmuth
  13. Effect of Exchange Rate Movements on Inflation in Sub-Saharan Africa By Laurent Kemoe; Moustapha Mbohou; Hamza Mighri; Mr. Saad N Quayyum

  1. By: Nadav Ben Zeev (BGU); Daniel Nathan (University of Pennsylvania and Bank of Israel)
    Keywords: Exchange Rate Determination; Equity Hedging Channel; Foreign Currency Forward Flows; Order Flow; Limits of Arbitrage; FX Dealers; Forward Exchange Rate; Spot Exchange Rate;Global Stock Prices; Institutional Investors; Granular Instrumental Variable; Bayesian Local Projections
    JEL: E44 F3 F31 G15 G23
    Date: 2023
  2. By: Emter, Lorenz; McQuade, Peter; Pradhan, Swapan-Kumar; Schmitz, Martin
    Abstract: This paper provides insights into the determinants of currency choice in cross-border bank lending, such as bilateral distance, financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. Cross-border bank lending in US dollars, and particularly in euro, is highly concentrated in a small number of countries. The UK is central in the international network of loans denominated in euro, although there are tentative signs that this role has diminished for lending to non-banks since Brexit. Offshore financial centres are pivotal for US dollars loans, reflecting, in particular, lending to non-bank financial intermediaries in the Cayman Islands, possibly as a result of regulatory and tax optimisation strategies. The empirical analysis suggests that euro-denominated loans face the “tyranny of distance”, in line with predictions of gravity models of trade, in contrast to US dollar loans. Complementarities between trade invoicing and bank lending are found for both the euro and the US dollar. JEL Classification: F31, F33, F34, F36, G21
    Keywords: cross-border banking, currency denomination, dominant currency paradigm, gravity
    Date: 2024–03
  3. By: Linda S. Goldberg; Oliver Zain Hannaoui
    Abstract: The share of U.S. dollar assets in the official foreign exchange reserve portfolios of central banks is sometimes taken as an indicator of dollar status. We show that the observed decline in the aggregate share of U.S. dollar assets does not stem from a systematic shift in currency preferences away from holding dollar assets. Instead, a small group of countries with large foreign exchange reserve balances drive the dollar share decline observed in aggregate statistics. This arises either due to countries conducting monetary policy vis-à-vis the euro or due to preference shifts away from dollars. Regression analysis shows that interest rate differentials between traditional and nontraditional reserve currencies can tilt portfolio composition, particularly in relation to the scale of investment tranches within overall central bank portfolios. Geopolitical distance from the United States and financial sanctions are associated with lower U.S. dollar shares, especially if the primary foreign currency liquidity needs of the central bank are already satisfied.
    Keywords: foreign exchange reserves; dollar; liquidity; convenience yields; currency of international debt; Foreign Exchange Reserves
    JEL: F3 F31 F33
    Date: 2024–03–01
  4. By: Nadav Ben Zeev (BGU); Daniel Nathan (University of Pennsylvania and Bank of Israel)
    Keywords: LOA-Dependent FX Swap Demand Channel; Cross-Currency Basis; Limits of Arbi- trage; Granular Instrumental Variable; Bartik Instrument; Open FX Swap Position; Institutional Investors; Bayesian State-Dependent Local Projections.
    JEL: E44 F3 G15 G23
    Date: 2023
  5. By: Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (BI Norwegian Business School; CogniFrame); Lumsdaine, Robin L. (Kogod School of Business, American University; Erasmus University Rotterdam; National Bureau of Economic Research (NBER); Tinbergen Institute; Center for Financial Stability); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: This paper introduces a novel database of text features extracted from the speeches of 53 central banks from 1996 to 2023 using state-of-the-art NLP methods. We establish four facts: (1) central banks with floating and pegged exchange rates communicate differently, and these differences are particularly pronounced in discussions about exchange rates and the dollar, (2) communication spillovers from the Federal Reserve are prominent in exchange rate and dollar-related topics for dollar peggers and in hawkish sentiment for others, (3) central banks engage in FX intervention guidance, and (4) more transparent institutions are less responsive to political pressure in their communication.
    Keywords: Exchange Rates; Natural Language Processing (NLP); International Spillovers; Monetary Policy
    JEL: C55 E42 E50 F31 F42
    Date: 2024–03–01
  6. By: Barrie, Mohamed Samba; Jackson, Emerson Abraham; Pessima, Joseph
    Abstract: This study examines the duality of the exchange rate market in Sierra Leone, delving into the distinct impacts of the official and parallel exchange rates (between the Leone and the United States Dollar) on inflation. Employing the Autoregressive Distributed Lag (ARDL) approach and utilizing annual time series data from 1980 to 2020, the research reveals that the depreciation of the Leone significantly influences inflation. This effect is more pronounced in the case of the parallel exchange rate, where a 1% depreciation results in a 1.26 percentage point increase in inflation, gradually decreasing to 0.92 percentage point over two years. Conversely, the depreciation of the official rate leads to a 0.43 percentage point increase inflation and subsequently to 0.52 percentage point increase in inflation for every 1% depreciation of the official exchange rate in the second year. The findings confirm the significance of both official and parallel exchange rates in influencing inflation, highlighting a substantial difference in their effects on the economy. Nevertheless, the results indicate no statistically significant long-term relationship between inflation and both the official and parallel exchange rates in Sierra Leone. Exchange rate depreciation, particularly in the parallel market, is shown to have a pronounced impact on inflation, necessitating careful oversight and regulation of the parallel market to ensure price stability. The study also uncovers the presence of foreign exchange market fragmentation, posing challenges to effective monetary policy and exchange rate management. Policy implications drawn from the research underscore the importance of regulating the parallel market to enhance transparency and stability. Integrating fragmented foreign exchange markets is deemed crucial for minimizing exchange rate pass through to inflation. Acknowledging the data limitations, the research suggests enriching future investigations by incorporating recent data, global economic factors, and investor sentiments, all of which have the tendency to affect exchange rate movements.
    Keywords: Official Exchange Rate, Parallel Exchange Rate, Inflation, exchange-rate-market-duality, Sierra Leone
    Date: 2023
  7. By: Andrea Gazzani (Bank of Italy); Vicente Herrera (SQM/Pontificia Universidad Católica de Chile); Alejandro Vicondoa (Pontificia Universidad Católica de Chile)
    Abstract: Commodity price fluctuations are a significant driver of business cycles in Emerging Economies (EMEs). While previous works have emphasized the link between commodity prices and financial conditions, none of them has explored empirically the potentially sign-dependent effects induced by commodity price shocks on domestic macro-financial conditions. Using a non-linear panel local projections model, we show that negative commodity price shocks induce stronger and faster effects on output and investment relative to positive shocks in EMEs. The trade balance improves after a negative shock due to the tightening of domestic financial conditions whereas it is unresponsive after a positive one. The response of financial conditions, both in terms of an increase in country spreads as well as in terms of a fall in net capital flows, is thus crucial in explaining the asymmetric responses. The faster and stronger spillover from faltering - rather than surging - commodity prices to the macro-financial conditions of commodity-exporting EMEs has important implications for the designof optimal policies in EMEs.
    Keywords: commodity prices, capital flows, financial frictions, non-linear effects
    JEL: F41 F44
    Date: 2024–03
  8. By: Pablo Burriel (Banco de España); Mar Delgado-Téllez (EUROPEAN CENTRAL BANK); Camila Figueroa (AFI); Iván Kataryniuk (Banco de España); Javier J. Pérez (Banco de España)
    Abstract: This paper proposes a novel approach to estimating the contribution of macroeconomic factors to sovereign spreads in the euro area, defined as the spread level consistent with the country’s prevailing macroeconomic conditions. Despite the wealth of papers estimating sovereign spreads, model-dependency and lack of robustness remain key considerations. Accordingly, we propose a “thick modeling” empirical framework, based on the estimation of a wide range of models. We focus on 10-year sovereign bond yields for nine euro area countries, using a sample that covers the period January 2000 to December 2023. Our results show that observed spreads behave in line with macro-financial determinants in “normal” times. Macroeconomic determinants are also able to account for a significant fraction of the observed sovereign spread dynamics in most episodes of financial turbulence, such as the pandemic and the aftermath of the Russian invasion of Ukraine. However, we find evidence of some deviations of sovereign spreads from their estimated values during the 2010-2012 euro area sovereign debt crisis. In this period, macroeconomic indicators are able to explain at most 26% of the observed peaks in spreads among non-core countries.
    Keywords: sovereign bond spreads, euro area, macroeconomic fundamentals
    JEL: E44 O52 G15
    Date: 2024–03
  9. By: Yoko Shirasu; Yukihiro Yasuda
    Abstract: Using comprehensive data on banks' M&A arrangements in Asia-Pacific countries from 2000 to 2014, we investigate differing performance effects based on the types of foreign institutional investors from the perspective of the acquirer bank's M&A strategies. Measured by the simple Q ratio, our results indicate that acquirer bank's future prospects in Asia-Pacific countries increase three years following the completion of M&A deals when the foreign institutional investors' is a bank type and has high equity stakes in the acquirer. In addition, acquirer banks' loan ratios are found to significantly increase without an accompanying increase in nonperforming loans when held by a bank type foreign investor. Moreover, banks' incomes from other fee-based businesses increase. By contrast, when an investment advisor or fund type of foreign institutional investors have high equity stakes, acquirer banks failed to expand core businesses in the long run, although some success is made in cost reduction in the short run. These results indicate that bank type foreign investors contribute to acquirer banks' future performance through influential advisory functions in the opaque banking industry of Asia.
    Date: 2024–03
  10. By: Tatsushi Okuda; Tomohiro Tsuruga
    Abstract: This paper applies the two-country open-economy model with trade in stocks and bonds of Coeurdacier et al. (2010) to quantify the loss of international diversification benefits for major advanced economies, which have a significant presence in international financial markets, under geoeconomic fragmentation. We perform counterfactual simulations under different hypothetical fragmentation scenarios in which these economies are unable to trade with geopolitically distant countries, as measured by voting disagreement on foreign policy issues at the United Nations General Assembly meetings during 2012-2021. The simulation results imply a potentially significant loss of international diversification benefits of financial openness for the considered advanced economies by limiting trading to partner countries that are geopolitical allies with highly synchronized business cycles.
    Keywords: Geopolitical risk; financial integration; international risk sharing
    Date: 2024–03–08
  11. By: Johanna Tiedemann; Olivier Bizimana; Lluis Dalmau; Martin Ambassa
    Abstract: As in the rest of the world, inflation in CEMAC surged more quickly and persistently than expected during the 2021–23 period. This paper examines the drivers of inflation dynamics and the contribution of global shocks to inflation persistence in CEMAC. We use a Phillips curve framework combined with the local projections method. Our results confirm the prominent role of global factors in driving inflation dynamics. Global commodity food and oil price fluctuations, and shipping costs are the main factors explaining the large variability in headline inflation. Further, we find that global price shocks have sizable and persistent effects on domestic headline inflation, with differences in the magnitude and speed of pass-through. The pass-through from commodity food price fluctuations to headline inflation is higher and more persistent than that of other global price shocks, reflecting the large share of food in the consumption baskets, which makes inflation more vulnerable to direct effects of international food shocks, but also larger second-round effects.
    Keywords: Inflation; underlying inflation; Phillips curve; commodity prices; shipping costs; CEMAC; inflation dynamics; price shock; commodity food price fluctuation; baseline result; inflation expectation; inflation development; Oil prices; Commodity price shocks; Food prices; Global
    Date: 2024–03–08
  12. By: Jingjing Lyu; Bernd Süssmuth
    Abstract: We introduce the technique of band spectral panel regression (BSPR) to analyze global linkages across sectors and frequency bands. It relies on decomposing time series —allowably measured in mixed observation frequency— into “deviation cycle” dynamics by frequency band. We use it to compute measures of real co-movement, trade linkage, financial market integration, and policy coordination band by band. Considering intra-industry as well as inter-industry linkage indicators, it is applied to data of contemporary China and its 20 major trading partners in the pre-trade war and pre-pandemic era. Band-specific fixed effects and band-industry-specific interaction terms are included. For labor intensive industries co-movement through intra-industry trade linkages is found to be band-specific. Moreover, our results clarify the puzzle of financial globalization implying real regionalization or contagious synchronization of cyclical dynamics. We find the latter to hold in the 4–6 years band and the former in the 6–10 years range.
    Keywords: spectral regression, frequency domain, cyclical co-movement, sectors
    JEL: C32 C49 E32 F40
    Date: 2024
  13. By: Laurent Kemoe; Moustapha Mbohou; Hamza Mighri; Mr. Saad N Quayyum
    Abstract: This paper provides new evidence on the exchange rate passthrough to domestic inflation in Sub-Saharan Africa (SSA) using both bilateral US dollar exchange rate and the nominal effective exchange rate (NEER), and monthly data. We find that depreciations cause sizable increases in domestic inflation. The passthrough in SSA is higher than in other regions and its magnitude depends on the exchange rate regime, type of exchange rate (bilateral versus NEER), natural resource endowment and domestic market competitiveness. The passthrough is found to be disproportionately larger and more persistent for large depreciation shocks, and for exchange rate changes that are more persistent. We also find evidence of asymmetry, with passthrough eight times stronger during depreciations than appreciations. Additional findings suggest that improved monetary policy effectiveness is an important driver of our observed declining estimates of exchange rate passthrough over time, supporting the long-standing view that strengthening monetary policy frameworks and credibility helps mitigate the impact of depreciations on inflation.
    Keywords: Exchange rage passthrough; inflation; nonlinearities; Sub-Saharan Africa
    Date: 2024–03–15

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