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on International Finance |
| By: | Han, Wontae (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Hyo-Sang (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Song, Saerang (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Junhyong (Korea Development Institute (KDI)) |
| Abstract: | This study analyzed the effects of uncertainty and interest rate hike shocks on capital flows, as well as the effectiveness of economic stabilization policies. When comparing the impacts of global economic policy uncertainty shocks and individual country economic policy uncertainty shocks, empirical analysis showed that global economic policy uncertainty shocks had a significant effect on capital flows. This suggests that global factors are more closely associated with capital flows than country-specific factors, relating to discussions on the global financial cycle. Although classified as an advanced economy, Korea has a shallow foreign exchange market and its financial markets are sensitive to external shocks, so the spillover effects of uncertainty shocks need to be analyzed through various channels like trade, capital transactions, industrial structure, and monetary policy. As financial globalization progresses with Fintech and digital finance, the spillover effects of external shocks through capital transactions are expected to increase, especially requiring close monitoring of shocks from countries with similar industrial structures to Korea. An integrated policy framework analysis found that for emerging economies without anchored inflation expectations and shallow foreign exchange markets, a combination of monetary policy and foreign exchange intervention was effective for economic stabilization. Recently, major international organizations like the IMF, BIS, and OECD have shifted towards allowing some foreign exchange intervention and capital flow management measures to reduce exchange rate and capital flow volatility and achieve financial stability. Since there is a general consensus that Korea does not have a deep foreign exchange market, an appropriate combination of monetary policy, foreign exchange intervention, and capital flow management measures can help reduce exchange rate volatility. As Korea's foreign exchange market advances and if Korea succeeds to join major global bond indices, its sensitivity to external factors may increase, so measures to assess the depth and maturity of Korea's foreign exchange and financial markets are needed to determine the optimal policy mix. |
| Keywords: | external shocks; capital flow response; policy effectiveness |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwe:2024_017&r= |
| By: | Clemens M. Graf von Luckner; Mr. Robin Koepke; Ms. Silvia Sgherri |
| Abstract: | This paper shows how cryptocurrency markets can fuel cross-border capital flight by serving as marketplaces that match counterparts with and without (illicit) access to FX. In countries where international transactions are restricted, crypto exchanges effectively allow domestic agents to pay a premium to buy foreign currency. The counterparts to these transactions are agents with access to FX, who sell crypto holdings purchased abroad. A stylized model illustrates that restricted foreign currency amid economic imbalances incentivizes these transactions via persistent crypto premia in local relative to global markets. We analyze relative crypto pricing data in several country case studies, providing empirical support that crypto markets serve as marketplaces for capital flight that already took place, rather than a novel channel for capital flight. We make available a novel dataset on crypto market premia, which we propose as indicators of excess demand for foreign currency and capital control intensity. The dataset will be posted along with this paper and updated periodically. |
| Keywords: | Capital flows; digital money; capital controls |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/133&r= |
| By: | Annie Soyean Lee; Charles Engel |
| Abstract: | Empirical work finds that flows of investments from the U.S. and other high income countries to emerging markets increase during times of quantitative easing by the U.S. Federal Reserve, and the reverse movement occurs under quantitative tightening. We offer new evidence to confirm these findings, and then propose a theory based on the liquidity of U.S. government liabilities held by the public. We hypothesize that QE, by increasing liquidity, offers greater flexibility for investors that might be concerned their funds will be tied up when shocks to income or investment opportunities arise. With the assurance that some of their portfolio can be readily sold in liquid markets, rich country investors are more willing to increase investments in illiquid loans to emerging markets. The effect of increasing the liquidity of U.S. government liabilities on investments in EMs may even be stronger during times of greater uncertainty. |
| JEL: | E5 F30 F40 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32572&r= |
| By: | Malcolm Fisher; Alan Walsh |
| Abstract: | We share insights from Canadian data from 2002 to 2022 that the Bank of Canada collected. The Bank submits these data each year to the Financial Stability Board for inclusion in its Global Monitoring Report on Non-Bank Financial Intermediation. |
| Keywords: | Financial institutions; Sectoral balance sheet |
| JEL: | G2 G21 G22 G23 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-15&r= |
| By: | Ling Cen; Lauren Cohen; Jing Wu; Fan Zhang |
| Abstract: | Using both the onset of the US-China trade war in 2018 and the most recent Russia-Ukraine war and associated trade tensions, we show a counterintuitive pattern in global trade. Namely, while the average firm trading with these nations significantly decreases their trade with these jurisdictions following sanctions, government-linked firms show a marked contrast. In particular, government-linked firms actually significantly increase their trading activity following the onset of formal sanctions. The increase is large - roughly 33% (t=4.01). We find no increase broadly to other countries (even countries in the same regions) at the same time, nor of these same firms in these same regions at other times. In terms of mechanism, government-linked supplier firms are nearly twice as likely to receive tariff exemptions. More broadly, these effects are increasing in the level of government connection. For instance, firms geographically closer to the government agencies they supply increase their imports more acutely. Using micro-level data, government-supplying firms recruiting more employees with past government work experience also increase trading activity more – particularly when the past employee worked in a government-contracting role. Lastly, this results in sizable accrued benefits in terms of firm-level profitability, market share gains, and outsized stock returns. |
| JEL: | F42 F51 G15 G38 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32621&r= |
| By: | Matthew DeHaven; Hannah Firestone; Chris Webster |
| Abstract: | We find striking correlations between the presidential election outcome probability and major financial indicators, including USD currency pairs, bond prices, stock index futures, and a market volatility measure. The correlations are consistent with 'risk-on' behavior in markets, a term which describes investors moving toward riskier asset classes, as the election results became clearer. Further, we decompose the market reaction into a 'reduction in uncertainty' component and a 'probability of a Democratic party presidency' component. This decomposition reveals how markets reacted to the increasing certainty of the outcome as election results came in. Finally, we analyze the differing market reactions to the presidential election and the Senate election, including data from the unique Georgia runoffs, and demonstrate that bond prices were particularly sensitive to the probability of a combined Democratic Senate and Presidency. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03527&r= |
| By: | Malcolm Fisher; Alan Walsh |
| Abstract: | Nous présentons des observations tirées de données canadiennes s’échelonnant de 2002 à 2022 et recueillies par la Banque du Canada. Chaque année, la Banque soumet ce type de données au Conseil de stabilité financière pour qu’il les intègre à son rapport Global Monitoring Report on Non-Bank Financial Intermediation. |
| Keywords: | Bilan sectoriel; Institutions financières |
| JEL: | G2 G21 G22 G23 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-15fr&r= |
| By: | James G. MacKinnon (Queen's University); Morten Ørregaard Nielsen (Aarhus University); Matthew D. Webb (Carleton University) |
| Abstract: | For linear regression models with cross-section or panel data, it is natural to assume that the disturbances are clustered in two dimensions. However, the finite-sample properties of two-way cluster-robust tests and confidence intervals are often poor. We discuss several ways to improve inference with two-way clustering. Two of these are existing methods for avoiding, or at least ameliorating, the problem of undefined standard errors when a cluster-robust variance matrix estimator (CRVE) is not positive definite. One is a new method that always avoids the problem. More importantly, we propose a family of new two-wayCRVEs based on the cluster jackknife. Simulations for models with two-way fixed effects suggest that, in many cases, the cluster-jackknife CRVE combined with our new method yields surprisingly accurate inferences. We provide a simple software package, twowayjack for Stata, that implements our recommended variance estimator. |
| Keywords: | cluster jackknife, cluster sizes, clustered data, cluster-robust variance estimator, CRVE, grouped data, two-way fixed effects |
| JEL: | C10 C12 C21 C23 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:qed:wpaper:1516&r= |
| By: | Mr. Kevin Fletcher; Veronika Grimm; Thilo Kroeger; Thilo Kroeger; Ms. Aiko Mineshima; Christian Ochsner; Mr. Andrea F Presbitero; Paul Schmidt-Engelbertz; Jing Zhou |
| Abstract: | Global geopolitical tensions have risen in recent years, and European energy prices have been volatile following Russia’s invasion of Ukraine. Some analysts have suggested that these shifting conditions may significantly affect FDI both to and from Germany. To shed light on this issue and other factors affecting German FDI, we leverage two detailed and complementary FDI datasets to explore recent trends in German FDI and how it is affected by geopolitical tensions and energy prices. In doing so, we also develop a new measure of geopolitical alignment. Our main findings include the following: (i) the post-pandemic recovery in Germany’s inward and outward FDI has been weaker than in the US or the rest of the European Union (EU27) as a whole; (ii) Germany’s outward FDI linkages with geopolitically distant countries have been weakening since the Global Financial Crisis; (iii) the relationship between Germany’s outward FDI and geopolitical distance has become more pronounced over the last six years; (iv) Germany’s outward FDI to China-Russia bloc countries is more sensitive to recent geopolitical developments compared with that to US-bloc countries; and (v) Germany’s outward FDI in energy-intensive sectors decreases as destination countries’ energy costs increase, but energy costs do not appear to have a statistically significant effect on outward FDI in non-energy intensive sectors. |
| Keywords: | Germany; foreign direct investment; geopolitical fragmentation |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/130&r= |
| By: | Hong, Sungwoo (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)) |
| Abstract: | Due to the accelerating digital transformation in the post-COVID-19 world, the share of service trade in the economies of major countries worldwide is expected to increase further. Services and participation in the global value chain (GVC) are closely related because services serve as a significant input factor in the manufacturing sector. The recent movement to open the service market in Latin American countries has an inherent policy goal of enhancing participation in the GVC centered on the manufacturing industry by facilitating the introduction of services within and outside the region in product trade. Korea’s exports are still concentrated on the trade of manufacturing-centered products, and improving competitiveness in the service sector is a challenge. In a situation where Korea's exports to the world are sluggish due to the spread of protectionism and delayed global economic recovery, the Korean government and companies need to move away from the traditional Korea-Latin America cooperation model that was focused on manufacturing-oriented product trade. In addition, they need to expand service trade and create new solutions in the service sector. Therefore, against this background, it is essential to understand the level of service market openness in major Latin American countries, provide information to governments and companies, and provide the logic for economic cooperation between Korea and Latin America in the service sector. This report briefly shows the status of service market opening in major countries in Lain America and empirical findings of relationships between service market opening and manufacturing GVCs of Latin America. As a result of reviewing the domestic laws of MERCOSUR and the Pacific Alliance in Latin America, the level of regulation on investment in the service sector has been lowered due to the past active policy of attracting foreign direct investment except for some cases. However, the level of service concessions in these countries was significantly lower than the level of investment liberalization based on domestic law. As a result of the empirical analysis, I found that when Latin American countries signed a bilateral service trade agreement with a Global North country, the agreement significantly strengthened the backward linkages of Latin American exporting countries. Among Latin American countries, when a country in the Global North concluded a service trade agreement with a Global North country, forward linkages of Latin American exporting countries also increased. |
| Keywords: | Latin America; Service Market Opening; Manufacturing GVCs |
| Date: | 2024–05–17 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwe:2024_014&r= |