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on International Finance |
| By: | Mikhail Chernov; Valentin Haddad; Oleg Itskhoki |
| Abstract: | Financial markets play two roles with implications for the exchange rate: they accommodate risk sharing and act as a source of shocks. In prevailing theories, these roles are seen as mutually exclusive and individually face challenges in explaining exchange rate dynamics. However, we demonstrate that this is not necessarily the case. We develop an analytical framework that characterizes the link between exchange rates and finance across all conceivable market structures. Our findings indicate that full market segmentation is not necessary for financial shocks to explain exchange rates. Moreover, financial markets can accommodate a significant extent of international risk sharing without leading to the classic exchange rate puzzles. We identify plausible market structures where both roles coexist, addressing challenges faced when examined separately. |
| JEL: | E44 F31 G15 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32436&r= |
| By: | Patrick Douglass; Linda S. Goldberg; Oliver Zain Hannaoui |
| Abstract: | Global central banks and finance ministries held nearly $12 trillion of foreign exchange reserves as of the end of 2023, with nearly $7 trillion composed of U.S. dollar assets. Nevertheless, a narrative has emerged that an observed decline in the share of dollar assets in official reserve portfolios represents the leading edge of the dollar’s loss of status in the international monetary system. Some market participants have similarly linked the apparent increase in official demand for gold in recent years to a desire to diversify away from the U.S. dollar. Drawing on recent research and analytics, this post questions these narratives, arguing that these observed aggregate trends largely reflect the behavior of a small number of countries and do not represent a widespread effort by central banks to diversify away from dollars. |
| Keywords: | dollar; reserves; gold |
| JEL: | F3 F5 F6 |
| Date: | 2024–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98313&r= |
| By: | Financial System and Bank Examination Department (Bank of Japan); Strategy Development and Management Bureau (Financial Services Agency) |
| Abstract: | Securing stable foreign currency liquidity is one of the most important issues for Japanese major banks, as it is the basis of the expansion of their overseas businesses. The March 2023 banking turmoil in the United States and Switzerland shed new light on the importance of managing liquidity risk. Against this background, major banks have been enhancing their risk management through foreign currency liquidity stress testing based on more conservative and appropriate stress scenarios, early warning frameworks, and prompt and accurate liquidity data management. The Financial Services Agency and the Bank of Japan have supported these efforts through initiatives including joint surveys. As a result, major banks' resilience to foreign currency liquidity risk has steadily improved. However, there remains room for further enhancement. Going forward, banks are expected to continue their efforts to further enhance their risk management in line with changes in the risk profiles of their overseas businesses and the external environment. |
| Date: | 2024–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojrev:rev24e03&r= |
| By: | Justin R. Pierce; Peter K. Schott; Cristina Tello-Trillo |
| Abstract: | We examine US workers' employment and earnings before and after trade liberalization with China. Among workers initially employed in manufacturing, we find substantial and persistent declines in both outcomes, with indirect exposure via input-output linkages exacerbating the negative effects of direct exposure. For workers initially employed outside manufacturing, however, we find that the positive impact of greater upstream exposure via inputs more than offsets the adverse impacts of own- and downstream exposure, inducing relative earnings gains. We also find that spatial exposure is more influential than industry exposure. |
| JEL: | F0 F13 J30 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32438&r= |
| By: | Efrem Castelnuovo; Lorenzo Mori; Gert Peersman |
| Abstract: | We employ a structural VAR model with global and US variables to study the relevance and transmission of oil, food commodities, and industrial input price shocks. We show that commodi-ties are not all alike. Industrial input price changes are almost entirely endogenous responses to other shocks. Exogenous oil and food price shocks are relevant drivers of global real and financial cycles, with food price shocks exerting the greatest influence. We then conduct counterfactual estimations to assess the role of systematic monetary policy in shaping these effects. The results reveal that pro-cyclical policy reactions exacerbate the real and financial effects of food price shocks, whereas counter-cyclical responses mitigate those of oil shocks. Finally, we identify dis-tinct mechanisms through which oil and food shocks affect macroeconomic variables, which could also justify opposing policy responses. Specifically, along with a sharper decrease in nondurable consumption, food price shocks raise nominal wages and core CPI, intensifying inflationary pres-sures. Conversely, oil price shocks act more like adverse aggregate demand shocks absent mone-tary policy reactions, primarily through a decrease in durable consumption and spending on goods and services complementary to energy consumption, which are amplified by financial frictions. |
| Keywords: | commodity price shocks, transmission mechanisms, monetary policy |
| JEL: | E32 E52 F44 G15 Q02 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-36&r= |
| By: | Kaan Celebi; Werner Roeger; Paul J. J. Welfens |
| Abstract: | This paper re-evaluates the US external deficit which has considerably widened over the 1990s. US safe asset provision to the rest of the world is the dominant explanation for the persistent nature of the US external deficit. We suggest that apart from the safe asset hypothesis, there is an important role for technology shocks originating in US multinational companies that have a strong foreign direct investment presence. It is shown that technology shocks that increase the market value of FDI assets are loosening the sustainability constraint on the trade balance and therefore generate persistent trade balance deficits. Our analysis suggests that this channel can explain why the US tech-boom in the 1990s has contributed significantly to the increase of the US current account deficit and its duration. Technology shocks have been neglected as a reason for longer lasting current account deficits since for these shocks, standard open economy DSGE models can only generate temporary external deficits. We show that our enhanced DSGE-model – covering both trade and FDI – not only matches well the dynamics of the US external balance but can also account for the observed evolution of FDI related components of the external balance. In particular, US technology shocks can match the increase in net FDI income and a rising FDI capital balance. Our analysis suggests that FDI flows and their determinants should play a more important role in monitoring external imbalances by international organizations. |
| Keywords: | Foreign direct investment, current account imbalance, USA, DSGE, technology shocks |
| JEL: | D5 F21 F23 F32 O3 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2074&r= |
| By: | Babur Kocaoglu; Martín Almuzara; Argia M. Sbordone |
| Abstract: | In the aftermath of the COVID-19 pandemic, inflation rose almost simultaneously in most economies around the world. After peaking in mid-2022, inflation then went into decline—a fall that was just as universal as the initial rise. In this post, we explore the interrelation of inflation dynamics across OECD countries by constructing a measure of the persistence of global inflation. We then study the extent to which the persistence of global inflation reflects broad-based swings, as opposed to idiosyncratic country-level movements. Our main finding is that the spike and subsequent moderation in global inflation in the post-pandemic period were driven by persistent movements. When we look at measures of inflation that include food and energy prices, most of the persistence appears to be broad-based, suggesting that international oil and commodity prices played an important role in global inflation dynamics. Excluding food and energy prices in the analysis still shows a broad-based persistence, although with a substantial increase in the role of country-specific factors. |
| Keywords: | global inflation; persistence; OECD |
| JEL: | E31 |
| Date: | 2024–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:98275&r= |
| By: | Ari Kutai (Bank of Israel); Daniel Nathan (Bank of Israel); Milena Wittwer (Boston College) |
| Abstract: | We leverage the unique institutional feature that the Israeli government bond market operates on an exchange rather than over-the-counter to analyze whether and why having an exchange affects market liquidity during a crisis. We document how the liquidity crisis in March 2020 affected the Israeli government bond market, and conduct difference-in-differences analyses, comparing bid-ask spreads in exchange markets (such as the Israeli government bond and U.S. future market) with markets lacking an exchange (like the U.S. government bond market). Our findings support the idea that having an exchange enhances market liquidity. A counterfactual analysis using trade data from the Israeli exchange suggests that this is due to the ability of investors to readily provide liquidity to one another and the efficient netting of trade flows on an exchange. |
| Keywords: | Exchange, OTC market, government bonds, liquidity, crisis |
| JEL: | D4 G1 G12 G14 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2024.03&r= |
| By: | Haishi Li; Zhi Li; Ziho Park; Yulin Wang; Jing Wu |
| Abstract: | How do firms in neutral developing countries adjust their supply chains in response to geopolitical and economic fragmentation? Do they comply with or circumvent Western sanctions on Russia? Using comprehensive transaction-level bill of lading data from major developing countries, we study these questions in the context of the Russo-Ukrainian War. We find that firms in non-sanctioning countries significantly reduced exports of sanctioned products to Russia (and Belarus) if their headquarters are located in sanctioning countries (i.e., sanctioning MNEs), highlighting MNEs’ role in propagating sanctions globally. Domestic firms in developing countries observed a relative increase in such exports, weakening the effect of Western sanctions. Sanctioning MNEs expanded exports of sanctioned products to both sanctioning and Russia-friendly countries, indicating a blend of compliance and non-compliance. Sanctioning MNEs significantly reduced imports from Russia (and Belarus) in financially risky sectors, consistent with the effect of financial sanctions. To strengthen the effectiveness of sanctions, sanctioning countries should use their MNE networks, induce domestic firms in neutral countries to comply, and prevent sanction avoidance of MNEs through indirect exports. |
| Keywords: | global supply chains, geopolitical risk, international conflict |
| JEL: | F14 F63 O19 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11110&r= |
| By: | Stilianos Fountas (Department of Economics, University of Macedonia); Dimitra Kontana (Department of Economics, University of Macedonia); Paraskevi Tzika (Department of Economics, Swansea University) |
| Abstract: | This paper focuses on financial asset return spillovers and economic policy uncertainty spillovers in 3 continents (Europe, America, and Asia) in the last few decades. We examine three financial asset markets (stock, bond, and foreign exchange). Spillovers are measured using the Diebold-Yilmaz spillover index. In the first part, we measure the size of spillovers and find a significant increase in spillovers during the global financial crisis, the European sovereign crisis, and the recent pandemic. In the second part, we test for the effect of uncertainty spillovers on financial asset return spillovers. Using rolling impulse response functions, we obtain the following results: First, the responses of financial markets spillovers to uncertainty spillovers are time-varying and are mostly positive. Second, the highest responses in financial market return spillovers to uncertainty spillovers occur in America and the smallest responses in financial market return spillovers occur in Europe. Third, among the three financial markets, the highest responses apply to the foreign exchange market. Finally, the largest responses during the pandemic apply in Europe. |
| Keywords: | economic policy uncertainty, rolling impulse responses, uncertainty spillovers, financial asset market return spillovers. |
| JEL: | C32 D80 E20 E66 F42 G18 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:mcd:mcddps:2024_03&r= |
| By: | Lasha Arevadze (Macroeconomic Research Division, National Bank of Georgia); Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Saba Metreveli (Macroeconomic Research Division, National Bank of Georgia); Giorgi Tsutskiridze (Macroeconomic Research Division, National Bank of Georgia); Tamar Mdivnishvili (Macroeconomic Research Division, National Bank of Georgia); Nika Khinashvili (PhD candidate, Geneva Graduate Institute.) |
| Abstract: | Last couple of decades of research has significantly advanced New Keynesian DSGE modeling. While each of such models faces its own important limitations, it can still contribute to robust policy analysis as long as we consolidate relevant macroeconomic features in it and remain conscious of the limitations. With this paper we are introducing a DSGE model for Georgia with features relevant for Emerging Market Economies (EMEs), characterized with large number of real and nominal imperfections. While some model features are already standard to existing DSGE frameworks, we also emphasize aspects particularly relevant to EMEs. These include dominant currency invoicing, forward premium puzzle, breakdown of Ricardian equivalence, impaired expenditure switching mechanism, decoupled domestic and imported price levels impacting real exchange rate trend, and other non-stationarities. Additionally, we distinguish between global financial centers and other trade partner economies. This LEGO model with these building blocks is planned to be expanded further with other properties in the future to make the model suitable for analyzing FX interventions and macroprudential policies, in addition to monetary and fiscal policies. The model is intended to become the workhorse model for macro-financial analysis in Georgia, representing a key addition to the NBG’s existing FPAS, though its adaptability can extend to other country contexts as well. |
| Keywords: | Non-tradable sticky prices; Monetary policy credibility; Core inflation |
| JEL: | E10 E31 E52 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:aez:wpaper:2024-02&r= |
| By: | Cécile Couharde; Carl Grekou; Valérie Mignon; Florian Morvillier |
| Abstract: | This paper provides an in-depth analysis of the link between exchange rate misalignments and economic growth for a large sample of 170 countries over the 1973-2019 period. We rely on new cross-country data on multilateral currency misalignments and cross-quantile regressions to demonstrate that the seemingly divergent views of the Washington Consensus and the export-led growth theory on the role of currency undervaluations in promoting economic growth can be reconciled. Although any significant departures from the equilibrium exchange rate levels are found undesirable, we show that undervaluations are more likely to stimulate economic growth in developing countries. However, this positive impact is observed only up to certain thresholds of development level and currency undervaluation. Consequently, strategies in the poorest countries that systematically undervalue currencies in real terms to foster growth should be carefully tailored, as they raise the risk for these economies of switching from a positive to a less favorable growth regime, depending on both their specific wealth level and the extent of their currency undervaluation. |
| Keywords: | Cross-quantile Regressions;Economic Growth;Multilateral Currency Misalignments;Undervaluations |
| JEL: | F31 O47 C32 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cii:cepidt:2024-06&r= |