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on International Finance |
| By: | Tsvetelina Nenova |
| Abstract: | This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors' demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world's two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy. |
| Keywords: | international finance, portfolio choice, safe assets |
| JEL: | F30 G11 G15 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1254 |
| By: | Yan Bai; Patrick J. Kehoe; Pierlauro Lopez; Fabrizio Perri |
| Abstract: | Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads' fluctuations. Over the whole 1994-2024 period, however, Northern shocks account for less than 20% of these fluctuations. |
| Keywords: | international business cycles; sovereign debt; default; long run risk; Epstein-Zin preferences; global banks; global cycles |
| JEL: | E32 F44 G15 H63 |
| Date: | 2025–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99613 |
| By: | Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi |
| Abstract: | The period after the Global Financial Crisis (GFC) was characterized by a considerable risk migration within global liquidity flows, away from cross-border bank lending towards international bond issuance. We show that the post-GFC shifts in the risk sensitivities of global liquidity flows are related to the tightness of the balance sheet (capital and leverage) constraints faced by international (bank and nonbank) lenders and to the migration of borrowers across funding sources. We document that the risk sensitivity of global liquidity flows is higher when funding is provided by financial intermediaries that are facing greater balance sheet constraints. We also provide evidence that the post-GFC migration of borrowers from cross-border loans to international debt securities was associated with a decline in the risk sensitivity of global liquidity flows to EME borrowers. |
| Keywords: | global liquidity; international bank lending; international bond flows; emerging markets; advanced economies |
| JEL: | G10 F34 G21 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99824 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | In the literature on monetary policy spillovers considered in the two previous posts, countries that would otherwise operate independently are connected to one another through bilateral trade relationships, and it is assumed that there are no frictions in currency, financial, and asset markets. But what if we introduce a number of real-world complexities, such as a dominant global currency and tight linkages across international capital markets? Given these additional factors, is it still possible to draw generalized conclusions about international policy spillovers—and can we still think of them as a fundamentally bilateral phenomenon? In our third and final post, we explore these questions by focusing on two key elements in the determination of international policy spillovers: the U.S. dollar and the Global Financial Cycle. |
| Keywords: | Global spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99795 |
| By: | Sangyup Choi (Yonsei University); Jongho Park (Soongsil University); Kwangyong Park (Sogang University) |
| Abstract: | What accounts for cross-country heterogeneity in exchange rate responses to U.S. monetary policy shocks? Using high-frequency data around Federal Open Market Committe (FOMC) announcements, we document that countries with deeper financial markets—proxied by the size of foreign portfolio liabilities—experience larger currency depreciations following U.S. monetary tightening. This effect is particularly strong for forward guidance shocks relative to conventional interest rate surprises. To rationalize these findings, we extend the gradual portfolio adjustment model by introducing a forward-looking news shock and allowing portfolio adjustment costs to decline with financial market depth. The model replicates our empirical findings, offering a unified explanation for heterogeneous short-run exchange rate dynamics. |
| Keywords: | Exchange rates; Monetary policy spillovers; Portfolio adjustment frictions; Forward guidance; Daily data |
| JEL: | E52 F31 F41 G11 G17 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-240 |
| By: | Oscar Botero-Ramírez; Andrés Murcia; Mauricio Villamizar-Villegas |
| Abstract: | We examine the impact of foreign investor heterogeneity on local lending, focusing on Colombia from 2014 to 2023. Distinguishing between benchmark-driven and unconstrained investors, we highlight their differing responses to global and idiosyncratic shocks. Using bond-level data and the corporate credit registry, we link banks’ exposure to foreign flows with firm-level lending decisions. By decomposing Colombia’s weight in the J.P. Morgan GBI-EM index into valuation and exogenous components, we identify how investor behavior shapes bank balance sheets. Our main findings show that banks with greater exposure to unconstrained investors significantly expand lending during capital inflows, whereas those linked to benchmark-driven investors exhibit a more muted response. These results emphasize the role of investor composition in financial stability and provide key insights for policymakers in emerging markets. **** RESUMEN: Examinamos el impacto de los diferentes tipos de inversionistas extranjeros en el crédito local, centándonos en Colombia entre 2014 y 2023. Diferenciamos entre inversionistas guiados por índices de referencia e inversionistas no restringidos, destacando sus respuestas divergentes ante choques globales e idiosincrásicos. Utilizando datos a nivel de bonos y el registro de crédito comercial, relacionamos la exposición de los bancos a flujos extranjeros con las decisiones de préstamo a nivel de empresa. Al descomponer el peso de Colombia en el índice J.P. Morgan GBI-EM en componentes de valoración y exógenos, identificamos cómo el comportamiento de los inversionistas influye en los balances bancarios. Nuestros principales hallazgos muestran que los bancos con mayor exposición a inversionistas no restringidos expanden significativamente el crédito durante las entradas de capital, mientras que aquellos vinculados a inversionistas guiados por índices presentan una respuesta más moderada. |
| Keywords: | Capital flows, foreign investment, investor classification, J.P. Morgan GBI-EM index, emerging markets, Flujos de capital, inversión extranjera, clasificación de inversionistas, índice J.P. Morgan GBI-EM, mercados emergentes |
| JEL: | F3 F4 G01 G11 G12 G15 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1309 |
| By: | Marco Garofalo; Giovanni Rosso; Roger Vicquéry |
| Abstract: | This paper studies the effect of financial sanctions on the dominance of the US dollar in global credit markets. In the aftermath of the invasion of Crimea in 2014, sanctions imposed by both the US and the EU restricted the provision of financial services to Russian firms. We document how, between 2014 and 2021, the share of global cross-border credit to Russia denominated in US dollars declined from 65% to 25%, while the share denominated in euros rose from 20% to 45%. Relying on confidential bank-level data covering the universe of global banks located in the UK, we show that this shift was driven by banks previously lending to Russia in US dollars, and that banks shifted to euro lending to Russia regardless of whether their ultimate owner was based in a sanctioning jurisdiction or not. We argue that this euroisation relates to an increase in the relative “settlement risk” of US dollar claims, in the context of US extra-territorial sanctions targeting the dollar payment system. We rationalise our findings in a three-country model with financial intermediaries, where sanctions are introduced as both jurisdiction and currency-circuit specific frictions. |
| Date: | 2025–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1079 |
| By: | Florencia Airaudo; Francois de Soyres; Keith Richards; Ana Maria Santacreu |
| Abstract: | Recent geopolitical tensions have revived interest in understanding the economic consequences of geopolitical fragmentation. Using bilateral trade flows, portfolio investment data, and detailed records of economic policy interventions, we revisit widely-used geopolitical distance metrics, specifically the Ideal Point Distance (IPD) derived from United Nations General Assembly voting. We document substantial variability in measured fragmentation, driven significantly by methodological choices related to sample periods and vote categories, especially in the wake of Russia’s 2022 invasion of Ukraine. Our results show robust evidence of increasing fragmentation in both trade flows and economic policy interventions among geopolitically distant country pairs, with particularly strong effects observed in strategically important sectors and policy motives. In contrast, financial portfolio allocations exhibit weaker, more heterogeneous, and context-sensitive responses. These findings highlight the critical importance of methodological transparency and careful specification when assessing geopolitical realignments and their implications for international economic relations. |
| Keywords: | fragmentation; geoeconomics; trade; financial flows |
| JEL: | F14 F36 F50 F60 |
| Date: | 2025–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:99766 |
| By: | Bambe, Bao-We-Wal |
| Abstract: | This paper examines the effect of macroprudential policies on private domestic investment using a panel of 87 developing countries from 2000 to 2017. Our instrumental variables strategy exploits the geographic diffusion of macroprudential policies across countries, with the idea that reforms in neighbouring countries can affect the adoption or strengthening of domestic reforms through peer pressure or imitation effects. The findings indicate that the tightening of macro-prudential policies significantly reduces private domestic investment. This effect holds for both instruments targeting borrowers and those targeting financial institutions, and is subject to heterogeneity depending on several economic and institutional factors. The transmission channel analysis highlights that the negative impact of macroprudential policies on investment is primarily driven by a reduction in credit supply and financial inclusion. |
| Keywords: | Macroprudential policies, private domestic investment, developing countries, instrumental variables |
| JEL: | E22 E44 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:diedps:313611 |