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on International Finance |
| By: | Xie, Oliver |
| Abstract: | I develop a theory on the optimal currency choice for invoicing international goods trade in the presence of imperfect financial hedging of currency risk. I demonstrate that the classic irrelevance result—that the cost of external financial hedging does not impact the choice of currency for invoicing—rests on the assumption that sellers set prices ex-ante and commit to fulfill any order size ex-post. I refer to this set-up as sticky prices and flexible quantities. I show that when quantities are also sticky, in the sense that the order quantity is pre-specified, then financial hedging affects the optimal currency of invoicing choice. My theory of jointly sticky prices and quantities incorporates financial frictions into existing theories of real hedging. I show that this financial hedging channel is quantitatively relevant and that it generates a feedback between macroprudential policies that affect the cost of hedging, such as capital controls on domestic versus foreign borrowing, and the optimal currency of invoicing. As a result, macroprudential policies can affect the expenditure switching properties of the exchange rate by inducing a different choice of optimal currency of invoicing. |
| Date: | 2024–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:v8zdk&r= |
| By: | Viral V. Acharya; Zhengyang Jiang; Robert J. Richmond; Ernst-Ludwig Von Thadden |
| Abstract: | We analyze international trade and health policy coordination during a pandemic by developing a two-economy, two-sector trade model integrated into a micro-founded SIR model of infection dynamics. Disease transmission intensity can differ by goods (manufactured versus services and domestic versus foreign). Governments can adopt containment policies to suppress infection spread domestically, and levy import tariffs to prevent infection from abroad. The globally coordinated policy dynamically adjusts both policy instruments heterogeneously across sectors. The more-infected country aggressively contains the pandemic, raising tariffs and tilting the terms of trade in its favor, while the less-infected country lowers tariffs to share its economic pain. In contrast, in the Nash equilibrium of uncoordinated policies the more infected country does not internalize the global spread of the pandemic, lowering tariffs and its terms of trade, especially in the contact-intensive services sector, while the less infected country counters the spread by raising tariffs. Coordination therefore matters: the health-cum-trade war leads to less consumption and production, as well as smaller health gains due to inadequate global diversification of infection curves. |
| JEL: | F1 F3 I1 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32566&r= |
| By: | Schmitz, Martin; Dietrich, Andreas; Brisson, Rémy |
| Abstract: | The nominal effective exchange rate (EER) of a currency is an index of the trade-weighted average of its bilateral exchange rates vis-à-vis the currencies of selected trading partners, while the real EER is derived by adjusting the nominal index for relative prices or costs. The nominal EER provides a summary measure of a currency’s external value, while the real EER is the most commonly used indicator of the international price and cost competitiveness of an economy. Additionally, for all individual euro area countries, harmonised competitiveness indicators (HCIs) are published by the European Central Bank (ECB) based on the same methodology as the euro EERs. This paper describes how the calculation of the ECB’s EERs and HCIs has been enhanced to take into account in the underlying trade weights the evolution of international trade linkages and, in particular, the growing importance of trade in services. The paper includes an in-depth description of the methodology used to calculate these enhanced EERs and HCIs. In particular, it presents how to overcome the challenges arising from the inclusion of services trade, foremost in terms of data availability, with imputation and estimation techniques. Importantly, the ECB’s well-established methodology – which in particular accounts for competition faced by euro area exporters in third markets – did not have to be changed with the inclusion of services trade. Finally, the paper provides some evidence on the usefulness of the enhanced indicators for policymakers, economic analysts and the public at large. JEL Classification: C82, F10, F17, F30, F31, F40 |
| Keywords: | competitiveness, effective exchange rate (EER), gravity model, harmonised competitiveness indicator (HCI), nominal effective exchange rate (NEER), real effective exchange rate (REER), services trade, trade weights |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbsps:202449&r= |
| By: | Ryan Chahrour; Vito Cormun; Pierre De Leo; Pablo A. Guerrón-Quintana; Rosen Valchev |
| Abstract: | We find that variation in expected U.S. productivity explains over half of U.S. dollar/G7 exchange rate fluctuations. Both correctly-anticipated changes in productivity and expectational noise, which influences the expectation of productivity but not its eventual realization, have large effects. This “noisy news” is primarily related to medium-to-long-run TFP growth, and transmits to the exchange rate by causing significant deviations from uncovered interest parity. Together, these disturbances generate many well-known exchange puzzles, including predictable excess returns, low Backus-Smith correlations, and excess volatility. Our findings suggest these puzzles have a common origin, linked to productivity expectations. |
| JEL: | D8 F3 G1 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32596&r= |
| By: | Sulehri, Fiaz Ahmad; Ali, Amjad |
| Abstract: | Financial inclusion, ensuring access to affordable financial products and services, is vital for economic development and poverty reduction. This study investigates the relationship between bank concentration, policy mix, and financial inclusion dynamics in developed and developing nations across 2014, 2017, and 2021. Utilizing financial inclusion as the dependent variable, factors such as bank concentration, fiscal freedom, monetary freedom, globalization, education, and urbanization are examined as independent determinants. Separate analyses for each country group enable cross-country comparisons and policy insights. The findings reveal a consistent hindrance to financial inclusion due to high bank concentration across all years and in both developing and developed countries, highlighting the critical need to diversify financial institutions for enhanced access. The impact of fiscal freedom shows shaded patterns, with a modestly negative effect in 2017 for developing nations, underscoring the necessity for tailored fiscal policies to actively promote inclusion. Monetary freedom positively influences financial inclusion in 2014 and 2017, diminishing by 2021. Globalization consistently fosters financial inclusion, though its significance fades in developed countries in 2021. Education emerges as a key driver, displaying a robust positive relationship across all years and countries. Urbanization's impact varies, with significant positive effects in 2017 but diminishing significance by 2021. Policymakers are urged to diversify financial institutions, tailor fiscal policies, and ensure monetary stability. Fostering globalization and strategic investments in education are identified as effective strategies for enhancing financial inclusion, with a call for adaptable, context-specific approaches to ensure inclusive economic growth. |
| Keywords: | Financial Inclusion, Bank Concentration, Monetary and Fiscal Freedom, Globalization |
| JEL: | E44 G21 O15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121284&r= |
| By: | Cunha, Daniel; Craveiro, Giovana; Rossi, Marina |
| Abstract: | This paper explores a granular database from the Inter-American Development Bank (IDB) Green Bond Transparency Platform covering the issuance of 430 corporate and sovereign Environmental, Social, and Governance (ESG) bonds in Latin America and the Caribbean (LAC) that are outstanding in international markets. The goal was to investigate how the creation of a sovereign ESG reference yield curve can boost the private ESG bond market. Using a difference-in-differences (DID) approach, we empirically estimate that the creation of a sovereign ESG reference curve roughly leads to a 60 percent increase in the volume of corporate bond issuances and a 25 percent increase in the number of ESG corporate bond issuances in the external markets after three years. On the mechanisms, we argue that the sovereign ESG reference yield curve works as a benchmark for private sector ESG bond issuers by providing a standard against which the performance of ESG bonds can be measured. |
| Keywords: | ESG;thematic bond;green;Social;Sustainability;sustainability-linked bond;debt capital markets;sovereign debt;LAC;corporate sector;international markets |
| JEL: | H63 E43 R50 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13452&r= |
| By: | Marco Grotteria; Max Miller; S.Lakshmi Naaraayanan |
| Abstract: | This paper documents that foreign lobbying influences US government spending. We introduce a comprehensive dataset of over 230, 000 date-stamped, in-person meetings between agents representing foreign governments and individual US legislators, state governors, and employees of US executive agencies from 2000 to 2018. The data suggest that foreign agents meet disproportionately with individuals important for foreign aid and corporate subsidies, like legislators sitting on powerful congressional committees. Foreign agents also maintain connections with legislators even after they depart powerful committees, providing evidence that meetings do not just reflect short-term quid-pro-quo arrangements. Around meetings, foreign countries receive greater amounts of financial aid. Foreign firms whose governments lobby more often also receive larger corporate subsidies from areas the legislators and governors that they meet with represent. Finally, legislators who meet more often with foreign agents receive both monetary and electoral benefits, while we do not find changes in the political contributions they receive or in their probability of re-election, suggesting that legislators are not punished by their constituents for meeting with representatives of foreign countries. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:not:notnic:2024-12&r= |
| By: | Dutta, Sourish (Vivekananda Institute of Professional Studies-Technical Campus) |
| Abstract: | This article reiterates the importance of understanding and addressing the strategic inquiries and potential responses in the context of global value chain (GVC) participation. Policymakers must address these crucial matters to engage in GVCs effectively. Governments aspiring to participate in GVCs must focus on determining which tasks to prioritise and exploring various forms of GVC governance. The challenges and opportunities of establishing top-notch GVC connections and fostering a favourable environment for foreign assets are significant for countries looking to integrate into GVCs. While navigating power dynamics and supply chain risks, these efforts can attract suitable foreign investors, enhance market connectivity, and develop high-quality infrastructure and services, all of which can lead to significant economic growth and development. The potential benefits of GVC participation are vast, and by understanding and addressing the strategic inquiries and possible responses, policymakers can take control of the situation and pave the way for a prosperous future. |
| Date: | 2024–06–16 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:zxmru&r= |
| By: | Khamitkhanova, Aiganym; Paul, Anju Mary (New York University Abu Dhabi) |
| Abstract: | Kazakhstan scored 5.13 out of 10 in the GCPI, placing it in the “Maturing” band of the Index. Its score of 5.40 in Sub-Index A indicates that despite existing financial and employment protections during pregnancy and maternity leave, there are areas that require improvement, such as paternity and dependent care leave policies, and mother-friendly workplace policies. With a score of 4.87 in Sub-Index B, Kazakhstan shows some level of support for domestic workers. However, there are substantial gaps in ensuring fair employment, decent working and living conditions, labor rights, and protections for forced domestic workers. |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:cmqke&r= |
| By: | Willem THORBECKE; CHEN Chen; Nimesh SALIKE |
| Abstract: | Traditional models indicate that appreciations of the exporting country’s currency relative to the importing country’s currency decrease exports. The dominant currency paradigm (DCP) holds that, since so much trade is invoiced in U.S. dollars (USD), a change in the importing country’s currency relative to the USD rather than relative to the exporting country’s currency influences trade. We seek to choose between these hypotheses for China, the world’s largest exporter. The results indicate that both the traditional model and the DCP framework help to explain China’s exports over the 1995-2018 period. When we focus on the period before renminbi internationalization policies increased renminbi invoicing, we find that the DCP framework no longer has explanatory power, but the bilateral RMB exchange rate does. We find that one reason for this puzzling finding is that exchange rates in countries that provide parts and components to China are correlated with the bilateral RMB rate and influence China’s exports. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:24062&r= |