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on International Finance |
| By: | Bruno Pellegrino; Enrico Spolaore; Romain Wacziarg |
| Abstract: | Observed international investment positions and cross-country heterogeneity in rates of return to capital are hard to reconcile with frictionless capital markets. In this paper, we develop a theory of international capital allocation: a multi-country dynamic spatial general equilibrium model in which the entire network of cross-border investment is endogenously determined. Our model features cross-country heterogeneity in fundamental risk, a demand system for international assets, and frictions that cause segmentation in international capital markets. We measure frictions affecting international investment and apply our model to data from nearly 100 countries, using a new dataset of international capital taxes and cultural, geographic and linguistic distances between countries (geopoliticaldistance.org). Our model performs well in reproducing the composition of international portfolios, the cross-section of home bias and rates of return to capital, and other key features of international capital markets. Finally, we carry out counterfactual exercises: we show that barriers to international investment reduce world output by almost 7% and account for nearly half of the observed cross-country differences in capital stock per employee. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:fda:fdaddt:2025-05 |
| By: | Ryuichiro Izumi; Weng Fei Leong; Balázs Zélity (Department of Economics, Wesleyan University) |
| Abstract: | Capital controls are often discussed as a potential tool to stabilize macroeconomic fluctuations. However, empirical studies typically find that their use does not systematically respond to the business cycle. This paper revisits the cyclicality of capital inflow controls by considering two possibilities: governments may respond only when output deviations become sufficiently large, and their responses may vary with the underlying macroeconomic policy stance. Using quarterly panel data for 45 advanced and emerging economies from 2000 to 2015, we find that inflow controls are employed countercyclically, but only in response to large output fluctuations. Moreover, the propensity to tighten inflow controls during booms is significantly amplified in countries that pursue more countercyclical fiscal and monetary policies. These findings help reconcile the gap between theoretical expectations and existing empirical findings, suggesting the importance of accounting for threshold effects and macro-policy stance in evaluating capital flow management and incorporating adjustment frictions into theoretical models. |
| Keywords: | capital controls, macroprudential policy, international capital flows |
| JEL: | F32 F33 F41 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2025-006 |
| By: | Lang, Jan Hannes; Rusnák, Marek; Herbst, Tobias |
| Abstract: | We examine the differential impact of monetary policy and macroprudential policy on bank lending rates in the euro area, using granular corporate loan-level data for the period 2019-2023. We find three results: First, consistent with the predictions of a stylized theoretical model of bank lending rates, monetary policy exerts an order of magnitude larger impact on lending rates than macroprudential policy. Second, the effectiveness of monetary policy transmission weakens when interest rates are close to or below zero. Third, the impact of macroprudential policy on lending rates increases when banks have limited capital headroom above capital buffer requirements, indicating cautious lending behavior when banks get close to regulatory constraints. Our findings have important policy implications for the joint conduct of monetary and macroprudential policy. JEL Classification: G21, G28, E43, E52 |
| Keywords: | bank capitalization, credit supply, interest rate pass-through, loan-level data |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253057 |
| By: | Rashad Ahmed; Iñaki Aldasoro |
| Abstract: | This paper examines the impact of dollar-backed stablecoin flows on short-term US Treasury yields using daily data from 2021 to 2025. Estimates from instrumented local projection regressions suggest that a 2-standard deviation inflow into stablecoins lowers 3-month Treasury yields by 2-2.5 basis points within 10 days, with limited to no spillover effects on longer tenors. We also find evidence of asymmetric effects: stablecoin outflows raise yields by two to three times as much as inflows lower them. Decomposing the yield impact by issuer shows that USDT (Tether) has the largest contribution followed by USDC (Circle), consistent with their relative size. Our results highlight stablecoins' growing footprint in safe asset markets, with implications for monetary policy transmission, stablecoin reserve transparency, and financial stability. |
| Keywords: | stablecoins, treasury securities, money market funds, safe assets |
| JEL: | E42 E43 G12 G23 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1270 |
| By: | Acosta Henao, Miguel (Central Bank of Chile); Amado, María Alejandra (Bank of Spain); Pérez Reyna, David (Universidad de los Andes); Martí, Montserrat (Central Bank of Chile) |
| Abstract: | This paper investigates the granular transmission of U.S. monetary policy shocks to deviations from the uncovered interest rate parity (UIPDs) in emerging economies. Using a comprehensive dataset from Chile that accounts for firm-bank relationships and the time-variant characteristics of both firms and banks, we uncover several key findings: (1) Shocks to the federal funds rate (FFR) increase banks’ costs of foreign borrowing; (2) these higher credit costs disproportionately affect small firms, raising their UIPDs more than for large firms; (3) this size-differentiated impact stems from the relatively higher interest rates on domestic currency loans faced by small firms; (4) in contrast, interest rates on dollar-denominated loans respond homogeneously across all firms; (5) we find no differential effect on loan quantities, suggesting an active role of credit supply and demand. We rationalize these findings with a small open economy model of corporate default that incorporates heterogeneous firms borrowing from domestic banks in both foreign and domestic currencies. In our model, a higher FFR reduces the marginal cost of defaulting on domestic-currency debt for small firms more than for large firms |
| Keywords: | Uncovered interest rate parity; U.S. monetary policy; bank lending; firm financing; firm heterogeneity |
| JEL: | E43 E44 F30 F41 |
| Date: | 2025–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:col:000089:021387 |
| By: | Shimano, Norihito |
| Abstract: | This study aims to examine financialization in non-financial corporations (NFCs) by a new analytical method. Using both parent-only and consolidated financial statements, we reveal the complete picture of financialization in Japanese manufacturing corporations from the perspectives of both parent companies and corporate groups. We show that financialization trends differ significantly between parent companies and corporate groups. In particular, the content of financial assets held by corporations and the trend of financial revenues are quite different between them. After demonstrating the financialization trends, this study further investigates the determinants of financial revenues in Japanese manufacturing corporations, focusing on the difference in the level of financial revenues between parent companies and corporate groups. By panel data analysis, we clarify that financial revenues in parent companies have been much larger than those in corporate groups because only parent companies need to increase their financial revenues to cover dividend payments. Our analysis shows that as globalization progresses, Japanese manufacturing parent companies absorb a large amount of financial revenues from overseas subsidiaries and affiliates to pay dividends to shareholders. This behavior of the parent companies is a typical example of how financialization interacts with globalization. |
| Keywords: | Financialization, non-financial corporations, firm data, Japan |
| JEL: | C23 D21 G34 P16 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124683 |
| By: | Phillip An; Karlye Dilts Stedman; Amaze Lusompa |
| Abstract: | This paper investigates the utility of daily data in measuring high-frequency monetary policy surprises, comparing various announcement-day asset price changes with their intradaily (30-minute) counterparts. We find that both frequencies are similarly distributed and often highly correlated, particularly for longer-horizon measures. Testing daily surprises for systematic contamination from non-monetary policy news, we find no evidence to suggest that contemporaneous news releases bias their measurement. Empirical applications, including high-frequency passthrough to Treasury yields and proxy SVAR models, suggest that daily surprises produce results comparable to those obtained with intradaily data. Our findings suggest that while intradaily data remains invaluable for certain applications, daily data offers a practical and robust alternative for assessing monetary policy surprises, particularly when the event, or the reaction to it, extends beyond a narrow window, or when intradaily data is unavailable. |
| JEL: | E43 E44 E52 E58 G14 |
| Date: | 2025–05–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:100052 |
| By: | Mark A. Aguiar; Manuel Amador; Doireann Fitzgerald |
| Abstract: | This note addresses whether and when a trade war that imposes balanced trade (or even zero trade) can be consistent with initial non-zero net foreign asset positions. Using a bilateral trade model, we exploit insights from the classic literature on the Transfer Problem to characterize when gross asset or liability positions and tariff policies generate an endogenous terms-of-trade effect that ensures the value of assets and liabilities balance. As long as gross positions denominated in different goods differ in sign, there exists a continuum of bilateral tariff policies that ensure balanced trade and that satisfy the contractual financial obligations. If the new terms-of-trade do not reverse the initial direction of trade, balanced trade is consistent with non-zero exports and imports. In general, high enough bilateral tariffs lead to an autarkic outcome where no trade occurs and the net foreign asset positions rebalance to zero. |
| JEL: | F1 F13 F30 F32 F40 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33743 |
| By: | Michael Smolyansky; Gustavo A. Suarez |
| Abstract: | When the Federal Reserve tightens monetary policy, do the prices of riskier assets fall relative to safer assets? Or, do investors interpret policy tightening as a signal that economic fundamentals are stronger than they previously believed, thus leading riskier assets to outperform? We present evidence that the latter of these two forces empirically dominates within the U.S. corporate bond market. Following an unanticipated monetary policy tightening, riskier corporate bonds outperform safer corporate bonds, demonstrating the importance of an informational, or non-monetary, component within monetary policy announcements. |
| Keywords: | Monetary policy; Corporate bonds; Non-monetary news; Federal Reserve information effect; Reaching for yield |
| JEL: | E40 E52 G12 G14 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:100026 |