nep-ifn New Economics Papers
on International Finance
Issue of 2024‒04‒29
thirteen papers chosen by
Jiachen Zhan, University of California,Irvine

  1. The Geography of Capital Allocation in the Euro Area By Roland Beck; Antonio Coppola; Angus J. Lewis; Matteo Maggiori; Martin Schmitz; Jesse Schreger
  2. Multi-Sector Bond Funds: New Evidence on Global and Domestic Drivers and Effectiveness of Capital Account Measures By Rogelio Mercado Jr.; Luca Sanfilippo
  3. The Global Credit Cycle By Nina Boyarchenko; Leonardo Elias
  4. The Causal Effects of Equity Flows: Evidence from Korea By Jun Hee Kwak; Bada Han; Jaeyoung Lee
  5. Carbon taxes around the world: cooperation, strategic interactions, and spillovers By Alessandro Moro; Valerio Nispi Landi
  6. Book Value Risk Management of Banks: Limited Hedging, HTM Accounting, and Rising Interest Rates By João Granja; Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
  7. The economics of liquidity lines between central banks By Bahaj, Saleem; Reis, Ricardo
  8. Central Bank Exit Strategies Domestic Transmission and International Spillovers By Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Mr. Haroon Mumtaz; Pawel Zabczyk
  9. Inflation Expectations, Liquidity Premia and Global Spillovers in Japanese Bond Markets By Jens H. E. Christensen; Mark M. Spiegel
  10. Market perceptions, monetary policy, and credibility By Vincenzo Cuciniello
  11. Oil Price Volatility and Latin American Growth By Giraldo, Carlos; Giraldo, Iader; Turner, Philip
  12. Core Inflation Requiem: Paving the Way for a Dual-Component CPI in FPAS Central Banks By Shalva Mkhatrishvili; Douglas Laxton; Tamta Sopromadze; Mariam Tchanturia; Ana Nizharadze; Sergo Gadelia; Giorgi Gigineishvili; Jared Laxton
  13. Asymmetry and non-linearity in exchange rate pass-through: Evidence from scanner data By In Kyung Kim; Jinhyuk Lee; Hyejoon Im

  1. By: Roland Beck; Antonio Coppola; Angus J. Lewis; Matteo Maggiori; Martin Schmitz; Jesse Schreger
    Abstract: We assess the pattern of Euro Area financial integration adjusting for the role of “onshore offshore financial centers” (OOFCs) within the Euro Area. The OOFCs of Luxembourg, Ireland, and the Netherlands serve dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We provide new estimates of Euro Area countries' bilateral portfolio investments which look through both roles, attributing the wealth held via investment funds to the underlying holders and linking securities issuance to the ultimate parent firms. Our new estimates show that the Euro Area is less financially integrated than it appears, both within the currency union and vis-a-vis the rest of the world. While official data suggests a sharp decline in portfolio home bias for Euro Area countries relative to other developed economies following the introduction of the euro, we demonstrate that this pattern only remains true for bond portfolios, while it is artificially generated by OOFC activities for equity portfolios. Further, using new administrative evidence on the identity of non-Euro Area investors in OOFC funds, we document that the bulk of the positions constituting missing wealth in international financial accounts are now accounted for by United Kingdom counterparts.
    JEL: E0 F0 G0
    Date: 2024–03
  2. By: Rogelio Mercado Jr. (The South East Asian Central Banks (SEACEN) Research and Training Centre); Luca Sanfilippo (International Finance Corporation)
    Abstract: Portfolio bond flows to emerging and developing market economies (EDMEs) from multi-sector bond funds (MSBFs) are volatile and highly concentrated, rendering them potentially risky. This paper uses a recent MSBF flows dataset to shed more light on capital flow push and pull factors and to provide new evidence on the effectiveness of capital account tightening measures in reducing volatile MSBF flows. The results show: (i) higher U.S. monetary policy rates and global risk aversion significantly reduce aggregate MSBF flows and those denominated in hard currencies, while stronger global commodity price growth and global liquidity significantly increase them; (ii) global and domestic GDP growth (surprisingly) have a countercyclical impact on MSBF flows during our sample period, and, importantly, (iii) capital account tightening measures that target fixed income investment funds are effective in reducing MSBF flows to EDMEs, especially during periods of increased stress. Together, these results provide new insights into multi-sector bond funds and the importance of designing and implementing targeted capital control measures.
    Keywords: multi-sector bond funds, portfolio bond flows, and capital controls
    JEL: G23 F21 F38 F41
    Date: 2024–04
  3. By: Nina Boyarchenko; Leonardo Elias
    Abstract: Do global credit conditions affect local credit and business cycles? Using a large cross-section of equity and corporate bond market returns around the world, we construct a novel global credit factor and a global risk factor that jointly price the international equity and bond cross-section. We uncover a global credit cycle in risky asset returns, which is distinct from the global risk cycle. We document that the global credit cycle in asset returns translates into a global credit cycle in credit quantities, with a tightening in global credit conditions predicting extreme capital flow episodes and declines in the stock of country-level private debt. Furthermore, global credit conditions predict the mean and left tail of real GDP growth outcomes at the country level. Thus, the global pricing of corporate credit is a fundamental factor in driving local credit conditions and real outcomes.
    Keywords: global financial cycle; corporate bond returns; return predictability; international capital flows; credit and real activity outcomes
    JEL: F30 F44 G15 G12
    Date: 2024–03–01
  4. By: Jun Hee Kwak (Department of Economics, Sogang University, Seoul, Korea); Bada Han (InternationalMonetary Fund, Strategy, Policy, and Review Department); Jaeyoung Lee (Bank of Korea, Foreign ExchangeMarket Team)
    Abstract: In this paper, we estimate the causal effects of gross equity inflows into an open economy using the Granular Instrument Variable (GIV) constructed from regulatory data on foreign investments in the Korean stock market. We find that a one-standard-deviation increase in monthly foreign inflows into the Korean stock market results in approximately a 2.2% rise in the Korean benchmark stock price index and a 1.0% appreciation of the Korean won against the US dollar. These foreign inflows also lead to drops in short-term treasury bond rates and improvements in dollar funding conditions. Our empirical results are consistent with the InelasticMarket Hypothesis.
    Keywords: Foreign Investor, Capital Flow, Gross Equity Flow, Stock Price, Granular Instrument, InelasticMarket Hypothesis
    JEL: G12 G15 F31 F32
    Date: 2023
  5. By: Alessandro Moro (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: We examine the global implications of carbon taxation using a two-country environmental DSGE model, with a specific focus on the strategic interactions between countries, the case for cooperation, and the impact on the balance of payments. From a normative perspective, we show that, assuming a convex disutility of pollution, carbon taxes are strategic substitutes across countries: when one country increases carbon taxation, the other country finds it optimal to reduce it. From a positive perspective, a country imposing unilateral carbon taxation experiences a reduction in its production, a decrease in its interest rates, a depreciation of its currency on impact and an appreciation thereafter, higher debt, and equity outflows to the rest of the world.
    Keywords: carbon tax, climate change, capital flows, international policy transmission, DSGE
    JEL: F31 F32 F41 F42 Q58
    Date: 2024–03
  6. By: João Granja; Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: In the face of rising interest rates in 2022, banks mitigated interest rate exposure of the accounting value of their assets but left the vast majority of their long-duration assets exposed to interest rate risk. Data from call reports and SEC filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of derivatives left most assets unhedged. The banks most vulnerable to asset declines and solvency runs decreased existing hedges, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset declines, banks used accounting reclassification to diminish the impact of interest rate increases on book capital. Banks reclassified $1 trillion in securities as held-to-maturity (HTM) which insulated these assets book values from interest rate fluctuations. More vulnerable banks were more likely to reclassify. Extending Jiang et al.’s (2023) solvency bank run model, we show that capital regulation could address run risk by encouraging capital raising, but its effectiveness depends on the regulatory capital definitions and can by eroded by the use of HTM accounting. Including deposit franchise value in regulatory capital calculations without considering run risk could weaken capital regulation’s ability to prevent runs. Our findings have implications for regulatory capital accounting and risk management practices in the banking sector.
    JEL: G2 G21 G28
    Date: 2024–03
  7. By: Bahaj, Saleem; Reis, Ricardo
    Abstract: Liquidity lines between central banks are a key part of the international financial safety net. In this review article, we lay out some of the economic questions that they pose. Research has provided answers to some of these questions, but many more require further research.
    Keywords: EUREP; Eurosystem Repo Facility for Central Banks; FIMA; financial stability international currency; Foreign and International Monetary Authorities; lender of last resort; swap lines
    JEL: E44 G15 F33
    Date: 2022–11–01
  8. By: Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Mr. Haroon Mumtaz; Pawel Zabczyk
    Abstract: We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the only effective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates.
    Keywords: Monetary Policy; Quantitative Easing; International Spillovers
    Date: 2024–03–29
  9. By: Jens H. E. Christensen; Mark M. Spiegel
    Abstract: We provide market-based estimates of Japanese inflation expectations using an arbitrage-free dynamic term structure model of nominal and real yields that accounts for liquidity premia and the deflation protection afforded by Japanese inflation-indexed bonds, known as JGBi’s. We find that JGBi liquidity premia exhibit significant variation, and even switch sign. Properly accounting for them significantly lowers the estimated value of the indexed bonds’ deflation protection and affects inflation risk premium estimates. After liquidity adjustment, long-term Japanese inflation expectations have remained relatively stable at levels modestly exceeding one percent during the pandemic period. We then utilize our estimated liquidity measure to confirm the existence of statistically significant and economically meaningful spillovers to the JGBi market from global bond market illiquidity, as proxied by periods of low U.S. Treasury market depth.
    Keywords: affine arbitrage-free term structure model; deflation risk; deflation protection; Liquidity Spillovers
    JEL: C32 E43 E52 G12 G17
    Date: 2024–04–08
  10. By: Vincenzo Cuciniello (Bank of Italy)
    Abstract: This paper presents novel time-varying estimates of the monetary policy rule as perceived by financial markets, focusing on days of heightened inflation-linked swap rate volatility corresponding to preliminary inflation release dates in the euro area. My findings reveal significant fluctuations in the perceived responsiveness of monetary policy to inflation, reflecting shifts in the ECB's concerns regarding price stability risks. Moreover, the sensitivity of this perceived responsiveness to monetary shocks varies based on prevailing inflation expectations, with tighter policy having a greater impact in high-inflation environments. Lastly, a stronger perceived monetary policy response to inflation enhances policy credibility by dampening the sensitivity of long-term inflation expectations to short-term fluctuations.
    Keywords: European Central Bank, monetary policy rule, credibility, financial market expectations, macroeconomic data releases
    JEL: E50 G10 C10
    Date: 2024–03
  11. By: Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Turner, Philip (University of Basel)
    Abstract: Understanding the intricate relationship between oil price volatility and economic growth is essential for policymakers and investors seeking to develop effective policies to promote sustainable development and reduce vulnerabilities in the Latin American region. Our aim of this research paper was to analyze this relationship by accounting for the unique characteristics of the region, including both oil-producing countries and net oil importers, and comparing it with other regions worldwide. Our results revealed that the surge in oil prices following the pandemic has directly impacted the economic growth of Latin America. However, the economic growth of advanced economies has a more significant influence on Latin America's growth compared to that of other regions. Furthermore, we examined the potential implications of oil price volatility for inflation levels within countries, and we analyze the relationship between oil prices and the profitability of oil-producing firms based on microeconomic data, which elucidates the overall impact of oil price volatility on the region's economic growth.
    Keywords: Economic Growth; Commodities Market; Oil Prices; Latin America;
    JEL: F43 N16 Q02 Q11
    Date: 2024–04–11
  12. By: Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Douglas Laxton (NOVA School of Business and Economics, Saddle Point Research, The Better Policy Project); Tamta Sopromadze (Head of Monetary Policy Division, National Bank of Georgia); Mariam Tchanturia (Macroeconomic Research Division, National Bank of Georgia); Ana Nizharadze (Macroeconomic Research Division, National Bank of Georgia); Sergo Gadelia (Macroeconomic Research Division, National Bank of Georgia); Giorgi Gigineishvili (Macroeconomic Research Division, National Bank of Georgia); Jared Laxton (Economist at Advanced Macro Policy Modelling (AMPM))
    Abstract: We advocate for a novel approach to decomposing the Consumer Price Index, critiquing the traditional core inflation distinction (which omits volatile items like food and energy) for lacking a solid economic basis. Our proposed method, inspired by practices in economies like the United States, New Zealand and Armenia, categorizes prices into "flexible, " which adjust quickly and are influenced by external factors, and "sticky" non-tradables, which adjust more slowly, offering a clearer view of medium-term inflation expectations. This approach underscores the importance of economic analysis over simplistic statistical methods that exclude volatile CPI components. It emphasizes the need for economists to understand the dynamics driving both sticky and flexible price inflation, with the latter often signifying initial signs of excess demand pressures. Recognizing the impact of dollarization, where exchange rate depreciations quickly affect nontraded sticky prices, becomes crucial. This understanding is vital for formulating monetary policies that prevent long-term inflation expectations from escalating, highlighting the significance of studying the interplay between exchange rate movements and domestic price dynamics in dollarized economies.
    Keywords: Non-tradable sticky prices; Monetary policy credibility; Core inflation
    JEL: E10 E31 E52 E58
    Date: 2024–04
  13. By: In Kyung Kim (Department of Economics, Sogang University, Seoul, Korea); Jinhyuk Lee (Department of Economics, Korea University); Hyejoon Im (School of Economics & Finance, Yeungnam University)
    Abstract: Using retail scanner data from Kazakhstan, an emerging economy with significant and un-expected exchange rate fluctuations, we observe an incomplete yet substantial exchange rate pass-through (ERPT) into prices. Specifically, we note a 50% change occurring a year after the initial shock. The ERPT demonstrates asymmetry in response to exchange rate movements. Notably, the direction of this asymmetry is opposite for imported versus domestic products. Furthermore, our findings indicate that ERPT is non-linear; the price response is more pro-nounced when the exchange shock is small, aligning with the existence of menu costs. Our results also reveal that larger retailers exhibit a greater ERPT compared to smaller or medium-sized retailers, regardless of the exchange rate shock direction. Understanding these asymmetric and non-linear price responses to exchange rate shocks may be crucial for formulating effective inflation targeting policies, especially in emerging economies prone to high inflation.
    Keywords: exchange rate pass-through, consumer prices, scanner data, inflation dynamics
    JEL: F31 L16 F41
    Date: 2023

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