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on International Finance |
| By: | Reinhold Heinlein; Gabriella D. Legrenzi; Scott M. R. Mahadeo; Gabriella Deborah Legrenzi |
| Abstract: | We empirically assess the interlinkages between sovereign risk, measured in terms of CDS spreads, and exchange rates for a sample of emerging markets. Our period of analysis includes periods of severe stress, such as the Global Financial Crisis, the COVID-19 pandemic and the Ukrainian War. Using the most recent developments in local Gaussian partial correlation analysis and the associated nonlinear Granger causality tests, we are able to uncover linkages between assets across different segments of their joint distributions. Disentangling the effect of global factors, we show that the information on sovereign risk of other emerging economies is more relevant for the sovereign risk-exchange rate relationship than the state of developed markets risk for all countries in our sample and for all segments of the assets distribution. The same considerations apply for the movements of the US dollar relative to other currencies, where knowledge on movements of emerging currencies is of particular interest. Nonlinear Granger causality tests show bi-directional causality for most countries, confirming the importance of multiple transmission channels. Taken together, our results are of interest for international investors and policymakers, showing all interlinkages between sovereign risk and exchange rates across their entire distribution. |
| Keywords: | CDS, correlation, emerging markets, exchange rate, nonlinear causality, sovereign risk |
| JEL: | F31 G15 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11019&r=ifn |
| By: | Joshua Aizenman; Donghyun Park; Irfan A. Qureshi; Gazi Salah Uddin; Jamel Saadaoui |
| Abstract: | We investigate the determinants of emerging markets performance during five U.S. Federal Reserve monetary tightening and easing cycles during 2004–2023. We study how macroeconomic and institutional conditions of an Emerging Market (EM) at the beginning of a cycle explain EM resilience during each cycle. More specifically, our baseline cross-sectional regressions examine how those conditions affect three measures of resilience, namely bilateral exchange rate against the USD, exchange rate market pressure, and country-specific Morgan Stanley Capital International index (MSCI). We then stack the five cross-sections to build a panel database to investigate potential asymmetry between tightening versus easing cycles. Our evidence indicates that macroeconomic and institutional variables are associated with EM performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Our specific findings are largely consistent with economic intuition. For instance, we find that current account balance, international reserves, and inflation are all important determinants of EM resilience. |
| JEL: | E58 F32 F36 F44 G12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32303&r=ifn |
| By: | Madalen Castells Jauregui; Dmitry Kuvshinov; Björn Richter; Victoria Vanasco |
| Abstract: | What is the sectoral composition of the market for safety, and does it matter for economic stability? To address these questions, we construct a novel dataset of sectoral safe asset positions in 24 advanced economies since 1980. We document that the ratio of safe to total financial assets has remained stable in most countries, despite considerable growth in gross and net safe-asset positions relative to GDP. We find that fluctuations in safe-asset positions are mainly driven by the financial and the foreign sectors, with the real economy playing a muted role, indicating that financials in advanced economies have been increasingly intermediating safety within and across borders. We conclude by showing that increases in safe asset demand by foreigners -- or its counterpart, the supply by financials, -- are associated with expansions in domestic risky credit and lower subsequent output growth. |
| Keywords: | safe assets, Capital flows, financial accounts, Business cycles, financial stability |
| JEL: | E42 E44 E51 F33 F34 G15 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1438&r=ifn |
| By: | Ruth A. Judson |
| Abstract: | In principle, physical currency should be disappearing: payments are increasingly electronic, with new technologies emerging rapidly, and governments increasingly restrict large-denomination notes as a way to reduce crime and tax evasion. Nonetheless, demand for U.S. banknotes continues to grow, and consistently increases at times of crisis both within and outside the United States because dollar banknotes remain a desirable store of value and medium of exchange when local currency or bank deposits are inferior. Most recently, the COVID crisis resulted in historic increases in currency demand. After allowing for the effect of crises, U.S. banknote demand appears to be driven by the usual factors determining money demand, with no discernible downward trend. In this work, I review developments in demand for U.S. currency over the past few decades with a focus on developments since early 2020. In addition, I revisit the question of international demand: I present the raw data available for measuring international banknote flows and updates on indirect methods of estimating the stock of currency held abroad. These methods continue to indicate that a large share of U.S. currency is held abroad, especially in the $100 denomination. As shown earlier (Judson 2012, 2017), once a country or region begins using dollars, subsequent crises result in additional inflows: the dominant sources of international demand over recent decades are the countries and regions that were already heavy dollar users in the early to mid-1990s. While international demand for U.S. currency eased during the early 2000s as financial conditions improved, the abrupt return to strong international demand that began with the collapse of Lehman Brothers in 2008 has not slowed and reached new heights over 2020 and 2021. In contrast, however, the growth rate of demand for smaller denominations is slowing, perhaps indicating the first signs of declining domestic cash demand. |
| Keywords: | Currency; Banknotes; Dollarization; Crisis |
| JEL: | C82 E40 E49 |
| Date: | 2024–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1387&r=ifn |
| By: | Luca Fornaro; Christoph Grosse-Steffen |
| Abstract: | We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives inflows. The central bank then faces a difficult trade-off between containing unemploymnet in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, unconventional monetary interventions mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate. |
| Keywords: | Monetary unions, euro area, fragmentation, optimal monetary policy in openeconomies, Capital flows, fiscal crises, unconventional monetary policies, inflation, endogenous breaking of symmetry, Optimum |
| JEL: | E31 E52 F32 F41 F42 F45 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1437&r=ifn |
| By: | Rana, Hafiz Muhammad Usman; O'Connor, Fergal; Yerushalmi, Erez; Kim, H. Jae |
| Abstract: | This study examines the weak-form market efficiency of international precious metals markets (Gold, Silver, Platinum, and Palladium) using data from 9 domestic markets in their local currencies - rather than a US Dollar price as in most previous studies. We do this by using the Automatic Portmanteau test, Automatic Variance Ratio test, Autoboot Variance ratio test and Generalized Spectral Shape test to look at their evolving efficiency over time.The findings of this study suggest that market efficiency for four precious metals varies over time across both developed and emerging markets. The variation in market efficiency could be attributable to cyclical developments due to technology and the economic cycle. That they do not tend to efficiency together indicates that these markets are fragmented and not as interconnected as might have been assumed due to a variety of factors such as local regulations, market complexity, and differences in the market structure in each country. |
| Keywords: | Adaptive markets hypothesis; Martingale difference hypothesis; Market Efficiency; Precious Metals; Gold |
| Date: | 2024–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:akf:cafewp:28&r=ifn |
| By: | PATELLI Aurelio; MAZZILLI Dario; SBARDELLA Angelica; TACCHELLA Andrea; PIETRONERO Luciano |
| Abstract: | Developing a comprehensive international trade database is crucial for economic analysis, as trade activities are important drivers for the competitiveness and dynamism of an economy’s productive structure. At present, import-export data are available from the COMTRADE database, maintained by the United Nations on the basis of global customs reports. However, often differences between the information reported between importer and exporter declarations arise, due to factors such as transport costs or unharmonised reporting systems. The main goal of this project is to reconcile trade values, quantities, and unit values with state-of-the-art techniques, and provide a uniform international trade dataset at the product level for each country. Furthermore, newly reconciled features are made available, namely the product Quantities, typically expressed in Kilograms or in the number of items, and the Unit Values, corresponding to the value per unit of quantity of the products. The new features are analyzed in detail, with Unit Value statistics showing unexpected behaviour and power-law price distributions frequently observed. The presence of fat tails in the distribution of export unit values may thus question the possibility of defining the statistical moments of prices, such as the mean or the variance, for international trade. In this report, we integrate Economic Complexity analysis with the literature on Unit Values and propose a possible connection with complexity measures. In fact, prices can be used to redesign the empirical bipartite trade networks connecting countries to the products they export competitively which are an essential tool in Economic Complexity studies. Constructing unit value matrices and using them as input for economic complexity metrics allow us to obtain more accurate GDP forecasting and thus to inform policy on the growth potential of single economies. Differently from traditional international trade theory that overlooks possible differences in the quality of the goods produced by different countries, more recently a large literature has explored the role of prices in the global patterns of bilateral trade, especially as proxies of production and export quality, building on the work of Linder (Linder, 1961) who studied the propensity of higher income countries for high-quality products, both in terms of demand and supply, and argued that exchanges are more likely to happen between countries with similar income per capita levels. Relying on different general equilibrium and gravity models that include quality as a key determinant of the direction of international trade, this literature highlights large country differences in the quality of exported products (Schott, 2004, Hummels and Klenow, 2005). Further, using pricing analysis, we classify products into quality categories based on price-distance dynamics. For instance, a price increasing with the distance between the importer and the exporter is thus related to a market with high-quality products and competition on quality, while if the price decreases, it suggests that the product is in a price-competition market. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc136943&r=ifn |
| By: | Junliang Luo; Stefan Kitzler; Pietro Saggese |
| Abstract: | We explore the adoption of graph representation learning (GRL) algorithms to investigate similarities across services offered by Decentralized Finance (DeFi) protocols. Following existing literature, we use Ethereum transaction data to identify the DeFi building blocks. These are sets of protocol-specific smart contracts that are utilized in combination within single transactions and encapsulate the logic to conduct specific financial services such as swapping or lending cryptoassets. We propose a method to categorize these blocks into clusters based on their smart contract attributes and the graph structure of their smart contract calls. We employ GRL to create embedding vectors from building blocks and agglomerative models for clustering them. To evaluate whether they are effectively grouped in clusters of similar functionalities, we associate them with eight financial functionality categories and use this information as the target label. We find that in the best-case scenario purity reaches .888. We use additional information to associate the building blocks with protocol-specific target labels, obtaining comparable purity (.864) but higher V-Measure (.571); we discuss plausible explanations for this difference. In summary, this method helps categorize existing financial products offered by DeFi protocols, and can effectively automatize the detection of similar DeFi services, especially within protocols. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.00034&r=ifn |
| By: | Patrick Arni; Peter H. Egger; Katharina Erhardt; Matthias Gubler; Philip Sauré |
| Abstract: | This paper identifies the causal effects of trade shocks on worker outcomes. We exploit a unique setting based on three pillars: (i) a large, unanticipated appreciation of the Swiss franc in 2015, (ii) detailed data with firm-level exposure to trade via output markets (both domestic and foreign) and imported inputs (distinguished by their foreign labor content), which we match to (iii) worker-level panel data with rich information on labor-market outcomes. We find that increased competition in output markets induces negative effects on earnings for workers of affected firms. Conversely, a price drop of foreign inputs generates positive effects for workers of importing firms, but less so the higher the labor content of these imported inputs. All these patterns are consistent with a parsimonious model of task-based production. Moreover, positive and negative earnings effects are especially strong for workers in the lower tail of the within-firm wage distribution and, in particular, for workers who change their employer, pointing at involuntary (voluntary) job separations from firms that are negatively (positively) affected by the exchange rate appreciation. |
| Keywords: | trade and labor, exchange rate shock, matched employer-employee data |
| JEL: | F14 F16 J46 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11041&r=ifn |
| By: | McCarthy, Barra (Central Bank of Ireland) |
| Abstract: | The impact of institutional investment on residential rental markets is a topic that draws much attention, but for which limited evidence exists. This paper aims to remedy this by analysing the direct and indirect impact of institutional investment in existing housing stock on residential rents at the property level, using Ireland as a case study. Ireland is particularly suited, as large portfolios of rental properties became available for purchase due to the Global Financial Crisis (GFC), enticing institutional investors into Ireland's rental market for the first time. By focusing on investment in existing stock, the analysis isolates the impact of institutional investment from the effect it can have on local rental markets when it is channelled to new rental housing – a supply effect which should reduce rents. The study finds that institutional investors increased the level of rents by 4.1 percentage points more than other landlords with comparable properties following purchase. Available evidence supports many different causal mechanisms, including bargaining power, institutional landlords providing a higher cost-higher quality service, and institutional landlords placing greater emphasis on profitability. |
| Keywords: | Institutional Investment, Residential Rental Markets, Spatial Data. |
| JEL: | R30 G23 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:1/rt/24&r=ifn |
| By: | Tersoo David Iorngurum (Charles University, Prague, Czech Republic) |
| Abstract: | The interest rate pass-through represents a vital transmission mechanism between the financial sector and the real economy. Nonetheless, the empirical literature offers no consensus regarding the direction and extent of asymmetry in this pass-through. In this paper, I systematically review the empirical literature using various contemporary meta-analytic techniques to test for publication bias and establish consensus for the conflicting study outcomes. I find evidence of publication bias. Beyond publication bias, the magnitude of the reported pass-through declines relative to the simple literature average, but substantial asymmetry remains. Precisely, bank lending rates appear to be a lot more responsive to increases than decreases in monetary policy interest rates. Furthermore, I identify the factors responsible for diverse study outcomes. These include study characteristics, asymmetry, and macrofinancial variables. Concerning study characteristics, results differ due to differences in data frequency, data source, the researched period, study quality, author affiliation, and estimation context. Concerning macrofinancial factors, results differ due to differences in openness to foreign direct investment inflows, openness to trade, the inflationary environment, and economic development status. The pass-through is particularly strong in countries more open to foreign direct investment inflows and developed economies but relatively weak for countries more open to import trade and countries with a high inflationary environment. Finally, I model the interest rate pass-through based on the best practices in the literature. On average, the short-run pass-through to bank lending rates is about 49.7% for a policy rate hike and about 29.7% for a policy rate cut. On the other hand, the long-run pass-throughs are about 69.6% and 46.6%, respectively. |
| Keywords: | Interest rate pass-through, asymmetry, meta-analysis |
| JEL: | E43 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_17&r=ifn |