nep-ifn New Economics Papers
on International Finance
Issue of 2024‒05‒13
eleven papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Unveiling the Dance of Commodity Prices and the Global Financial Cycle By Luciana Juvenal; Ivan Petrella
  2. The RMB's global role as an anchor currency: No evidence By Heimonen, Kari; Rönkkö, Risto
  3. Across the borders, above the bounds: a non-linear framework for international yield curves By Coroneo, Laura; Kaminska, Iryna; Pastorello, Sergio
  4. Exchange Rate in Emerging Markets: Shock Absorber or Source of Shock? By Pym Manopimoke; Nuwat Nookhwun; Jettawat Pattararangrong
  5. A Primer on Bitcoin Cross-Border Flows: Measurement and Drivers By Mr. Eugenio M Cerutti; Mr. Jiaqian Chen; Martina Hengge
  6. The role of hedge funds in the Swiss franc foreign exchange market By Jessica Gentner
  7. An unconventional FX tail risk story By Cañon, Carlos; Gerba, Eddie; Pambira, Alberto; Stoja, Evarist
  8. Uncertainty and Risk in Cryptocurrency Markets: Evidence of Time-frequency Connectedness By rao, amar; Dagar, Vishal; dagher, leila; Shobande, Olatunji
  9. The U.S. dollar’s “exorbitant privilege” remains By Otaviano Canuto
  10. Estimating Contagion Mechanism in Global Equity Market with Time-Zone Effect By Boyao Wu; Difang Huang; Muzi Chen
  11. Global value chains and the dynamics of UK inflation By Aquilante, Tommaso; Dogan, Aydan; Firat, Melih; Soenarjo, Aditya

  1. By: Luciana Juvenal; Ivan Petrella
    Abstract: We examine the impact of commodity price changes on the business cycles and capital flows in emerging markets and developing economies (EMDEs), distinguishing between their role as a source of shock and as a channel of transmission of global shocks. Our findings reveal that surges in export prices, triggered by commodity price shocks, boost domestic GDP, an effect further amplified by the endogenous decline of country spreads. However, the effects on capital flows appear muted. Shifts in U.S. monetary policy and global risk appetite drive the global financial cycle in EMDEs. Eased global credit conditions, attributed to looser U.S. monetary policy or lower global risk appetite, lead to a rise in export prices, higher output, a decrease in government borrowing costs, and stimulate greater capital flows. The endogenous response of export prices amplifies the output effects of a more accommodative U.S. monetary policy while country spreads magnify the impact of shifts in global risk appetite.
    Date: 2024–04–05
  2. By: Heimonen, Kari; Rönkkö, Risto
    Abstract: This study examines the role of the Chinese renminbi (RMB) as an international anchor currency. After China abandoned its tight US dollar (USD) peg in 2005, the RMB found greater popularity as a reserve currency. This change in the RMB's role reflected China's growing presence in the global economy, even challenging the USD in some of the 155 countries that signed on to the Belt and Road initiative (BRI). Modifying the approach of Ahmed (2021) to estimate basket weights in exchange rate policy for the currencies of 63 advanced and emerging economy currencies, we account for potential drivers of the exchange rate omitted in previous studies to obtain unbiased anchor weight estimates. Unlike earlier studies, we find that the RMB's anchor weight in exchange rate policies remains low irrespective of China's global role. Overall, the weight of the RMB averaged 6 %, compared to an average share of 58 % for the USD and 35 % for the euro. We also find that the USD, euro and yen anchor choices are strongly interlinked. A change in the anchor weight of any of these three currencies results in a strong opposite change in the weights of other two. Changes in RMB anchoring, however, do not materially impact USD, euro and yen weights. An increase in financial markets volatility leads developing countries to increase anchor weights of the developed countries currencies USD, euro and yen. Heightened geopolitical uncertainty only increases the weights of the USD and euro.
    Keywords: exchange rate, currency peg, RMB
    JEL: F31 F33
    Date: 2024
  3. By: Coroneo, Laura (University of York); Kaminska, Iryna (Bank of England); Pastorello, Sergio (University of Bologna)
    Abstract: This paper presents a non-linear framework to evaluate spillovers across domestic and international yield curves when policy rates are constrained by the zero lower bound. Based on the sample of US and UK data, we estimate a joint shadow rate model of international yield curves, accounting for the zero lower bound, no-arbitrage conditions within and between government bond markets, and the global nature of some of the bond risk factors. Results indicate that the post-2009 US monetary policy transmission mechanism and its spillover effects on the UK yield curve are non-linear and asymmetric.
    Keywords: Joint term structure models; local projections; monetary policy; non-linear responses; shadow rate term structure models; yield curve; zero lower bound
    JEL: E43 E47 E52 G15
    Date: 2024–02–09
  4. By: Pym Manopimoke; Nuwat Nookhwun; Jettawat Pattararangrong
    Abstract: This paper examines the stabilization role of flexible exchange rates for emerging economies within the Latin America and Asia regions. Based on a structural VAR model, we utilize zero and sign restrictions as well as introduce novel exchange rate pass-through restrictions to identify structural macroeconomic shocks. Overall, we find that exogenous exchange rate shocks drive more than half of total exchange rate fluctuations in emerging economies. Despite this predominant role, we find that exchange rates do not act as a source of shocks to the real economy, but instead absorb and reduce output growth and inflation volatilities. We further find that this shock-insulation property is highly shockdependent, where the benefits of flexible exchange rates are most evident for demand and global shocks, while exchange rate movements tend to amplify output growth volatilities in the face of global supply shocks. Also, based on counterfactual analyses, we find that the net benefits of flexible exchange rates as a shock absorber are in general larger for emerging economies in Latin America than in Asia, particularly during crises periods. Finally, while we find that the stabilization role of exchange rates hinges upon the nature of underlying structural shocks, there is also a positive association with structural determinants such as a country’s degree of exchange rate flexibility and trade openness.
    Keywords: Flexible exchange rate; Shock absorber; Exchange rate pass-through; Shock dependency; Structural VAR
    JEL: C32 E44 F31 F41
    Date: 2024–04
  5. By: Mr. Eugenio M Cerutti; Mr. Jiaqian Chen; Martina Hengge
    Abstract: The rapid growth of crypto assets raises important questions about their cross-border usage. To gain a better understanding of cross-border Bitcoin flows, we use raw data covering both on-chain (on the Bitcoin blockchain) and off-chain (outside the Bitcoin blockchain) transactions globally. We provide a detailed description of available methodologies and datasets, and discuss the crucial assumptions behind the quantification of cross-border flows. We then present novel stylized facts about Bitcoin cross-border flows and study their global and domestic drivers. Bitcoin cross-border flows respond differently than capital flows to traditional drivers of capital flows, and differences appear between on-chain and off-chain Bitcoin cross-border flows. Off-chain cross-border flows seem correlated with incentives to avoid capital flow restrictions.
    Keywords: Crypto assets; Bitcoin; Cross-border flows; Capital flows
    Date: 2024–04–05
  6. By: Jessica Gentner
    Abstract: This paper investigates the role of hedge funds within the Swiss franc (CHF) foreign exchange (FX) market, using a novel and comprehensive flow dataset that covers a large proportion of the CHF FX market. Employing a two-stage-least-squares (2SLS) approach, I isolate the causal effect of hedge funds’ net flow on CHF returns, taking into account reverse causality. The analysis reveals that hedge funds’ net flow significantly impacts CHF returns, with a net buying of one billion leading to an approximate 0.4% increase in returns. In contrast, the net flow from other market participants has a negligible impact, even when potential reverse causality is dismissed. This influence of hedge funds’ net flow becomes particularly noticeable on days when the Swiss National Bank (SNB) delivers contractionary monetary policy surprises. On such days, even a small surprise amplifies the impact of hedge funds’ net flow significantly. The analysis of market participants’ trading prices substantiates the hypothesis that hedge funds, due to their expertise in FX forecasting and best execution as well as superior transaction timing abilities, in aggregate tend to trade at more advantageous prices than other market participants.
    Keywords: Swiss franc, Market microstructure, Asymmetric information, Monetary policy shocks
    JEL: G12 G14 F31
    Date: 2024
  7. By: Cañon, Carlos (Bank of England); Gerba, Eddie (Bank of England); Pambira, Alberto (Bank of England); Stoja, Evarist (University of Bristol)
    Abstract: We examine how the tail risk of currency returns of nine countries, from 2000 to 2020, were impacted by central bank monetary and liquidity measures across the globe with an original and unique dataset that we make publicly available. Using a standard factor model, we derive theoretical measures of tail risks of currency returns which we then relate to the various policy instruments employed by central banks. We find empirical evidence for the existence of a cross-border transmission channel of central bank policy through the FX market. The tail impact is particularly sizeable for asset purchases and swap lines. The effects last for up to one month, and are proportionally higher in a hypothetical joint QE action scenario. This cross-border source of tail risk is largely undiversifiable, even after controlling for the US dollar dominance and the effects of its own monetary policy stance.
    Keywords: Unconventional and conventional monetary policy; liquidity measures; currency tail risk; systematic and idiosyncratic components of tail risk
    JEL: E44 E52 G12 G15
    Date: 2024–04–05
  8. By: rao, amar; Dagar, Vishal; dagher, leila; Shobande, Olatunji
    Abstract: This study aims to investigate the spillover effects from geopolitical risks (proxied by the geopolitical risk index) and cryptocurrencies-related uncertainty (proxied by the Cryptocurrency Uncertainty Index) to cryptocurrencies. We utilize the Baruník and Křehlík (2018) framework to detect time-frequency connectedness. Our investigation for the period 2017 to 2022 discovers significant spillover effects from both indices to cryptocurrencies. Utilizing the information transmission theory and network graphs, our findings reveal that some cryptocurrencies function as net receivers of spillovers from geopolitical risks and uncertainty in the short-term, while over longer time horizons they transform into net transmitters of spillovers to uncertainty. The study contributes to better understanding how uncertainty due to various factors (geopolitical, policy changes, regulatory changes, etc.) could affect the cryptocurrencies’ markets.
    Keywords: cryptocurrencies; geopolitical risk; market uncertainty; time–frequency connectedness
    JEL: C58 G15
    Date: 2024
  9. By: Otaviano Canuto
    Abstract: Recent initiatives and policy moves by China and other countries to extend the reach of use of the renminbi in the international monetary system, while the U.S. dollar share in global reserves has slightly shrunk in relative terms, have sparked frequent discussions about a hypothetical “de-dollarization” of the global economy. We approach here what that would mean in terms of global currency functions as means of payment and store of value. While we point out a relative decline of the U.S. dollar weight in those functions more recently, we also highlight gravitational factors that tend to uphold its position. Therefore, the “exorbitant privilege” that the U.S. dollar has provided to its issuer is likely to remain.
    Date: 2023–04
  10. By: Boyao Wu; Difang Huang; Muzi Chen
    Abstract: This paper proposes a time-zone vector autoregression (VAR) model to investigate comovements in the global financial market. Analyzing daily data from 36 national equity markets, we explore the subprime and European debt crises using static analysis and the COVID-19 crisis through a rolling window method. Our study of comovements using VAR coefficients reveals a resonance effect in the global system. Findings on densities and assortativities suggest the existence of the transmission mechanism in all periods and abnormal structural changes during the crises. Strength analysis uncovers the information transmission mechanism across continents over normal and turmoil periods and emphasizes specific stock markets' unique roles. We examine dynamic continent strengths to demonstrate the contagion mechanism in the global equity market over an extended period. Incorporating the time-zone effect significantly enhances the VAR model's interpretability. Signed networks provide more information on global equity markets and better identifies critical contagion patterns than unsigned networks.
    Date: 2024–04
  11. By: Aquilante, Tommaso (Bank of England); Dogan, Aydan (Bank of England); Firat, Melih (International Monetary Fund); Soenarjo, Aditya (London School of Economics)
    Abstract: This paper explores the link between the UK’s participation in global value chains (GVCs) and inflation dynamics. Using sectoral data, we find evidence indicating that UK industries with higher proportions of imported inputs from emerging market economies (EMEs) exhibit a flatter Phillips curve. We then build a two-country model with input-output linkages and demonstrate analytically that an increased reliance on imported intermediate goods, serving as a proxy for GVCs, results in a flatter Phillips curve. Additionally, GVC integration affects inflation dynamics through the influence of cyclical forces that shape firms’ marginal costs via terms of trade fluctuations. Specifically, we highlight how the limited business cycle correlation between the UK economy and EMEs reduces the pass-through of domestic shocks to prices.
    Keywords: Global value chains; inflation dynamics; Phillips curve
    JEL: E30 E31 E32 F10 F14
    Date: 2024–02–09

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