|
on International Finance |
| By: | Tian, Xin (University of Groningen) |
| Abstract: | This paper examines whether a flexible exchange rate regime, capital controls, and foreign reserves are effective tools to reduce BRICS countries’ exposure toglobal financial cycle (GFCy) shocks. Based on local projections in which we allow the response of national financial cycles (NFCys) to the GFCy to vary, we observe that flexible exchange rate regime absorbs GFCy shocks in BRICS countries, as do tighter capital controls and larger international reserves. We also find thatthe responses of NFCys to GFCy shocks are heterogeneous across countries, withstronger effects observed in countries with higher inflation and GDP growth. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gro:rugfeb:2024007-gem |
| By: | Felipe Benguria; Felipe Saffie |
| Abstract: | We measure the response of financial outcomes to the US announcement on April 2, 2025, of tariffs on nearly all its trading partners. To address the challenge posed by potential anticipation by economic agents, we decompose these tariffs into a component associated with bilateral deficits and an arguably unanticipated component resulting from the rounding up of the continuous deficit measure to the next whole number or to the baseline 10% rate. We measure the short-term response of stock prices and exchange rates, focusing on all countries with which the US has a bilateral deficit. For both outcomes, the round-up component’s effect is an order of magnitude larger than that of the deficit component. We find that a one percentage point higher tariff is associated with a statistically significant 0.23% decline in stock prices. Further, we find no evidence of a dollar appreciation; if anything, higher tariffs are associated with a dollar depreciation, driven by countries with a floating regime. We show this is consistent with a model that allows for trade reallocation and in which exports to the US are invoiced in dollars while exports to the rest of the world are partly invoiced in producer currency. |
| JEL: | F1 F3 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34036 |
| By: | Mai Dao; Pierre-Olivier Gourinchas; Oleg Itskhoki |
| Abstract: | We offer a unifying empirical model of covered and uncovered currency premia, interest rates and spot and forward exchange rates, both in the cross section and time series of currencies. We find that the rich empirical patterns are in line with a partial equilibrium model of the currency market, where hedged and unhedged currency is supplied by intermediary banks subject to value-at-risk balance-sheet constraints, emphasizing the frictional nature of equilibrium currency premia and exchange rate dynamics. In the cross section, the excess supply of local-currency savings is the key determinant of low relative interest rates, negative covered and uncovered currency premia, cheap forward dollars; and vice versa. In the time series, covered currency premia change infrequently and in concert across currencies, driven by aggregate financial market conditions. In contrast, uncovered currency premia move frequently in response to currency-specific demand shocks, which we capture with the dynamics of net currency futures positions of dealer banks. Sharp exchange rate depreciations in response to negative shifts in currency demand are followed by small persistent predictable appreciations that generate future positive expected currency returns necessary to ensure intermediation of currency demand shocks, irrespective of their financial or macroeconomic origin. Changes in net futures positions of dealer banks account for most of the variation in the spot exchange rate for every currency. |
| Keywords: | exchange rates; uncovered interest parity; covered interest parity; currency markets; futures market; intermediation frictions |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/153 |
| By: | Michael Plante; Alexander W. Richter; Sarah Zubairy |
| Abstract: | This paper revisits the relationship between federal debt and interest rates, which is a key input for assessments of fiscal sustainability. Estimating this relationship is challenging due to confounding effects from business cycle dynamics and changes in monetary policy. A common approach is to regress long-term forward interest rates on long-term projections of federal debt. We show that issues regarding nonstationarity have become far more pronounced over the last 20 years, significantly biasing the recent estimates based on this methodology. Estimating the model in first differences addresses these concerns. We find that a 1 percentage point increase in the debt-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by about 3 basis points, which is statistically and economically significant and highly robust. Roughly three-quarters of the increase in interest rates reflects term premia rather than expected short-term real rates. |
| JEL: | E43 E63 H63 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34018 |
| By: | Erdinc Akyildirim (University of Nottingham); Gamze Ozturk Danisman (Istanbul Bilgi University); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | Using a panel of 929 U.S. publicly listed firms, this paper investigates the impact of artificial intelligence (AI) employment on the disclosure of political risk in corporate earnings calls. We utilize the firm-level AI employment measure developed by Babina et al. (2024), based on resume and job posting records. Furthermore, we supplement it with our newly generated AI disclosure indices at the firm level, created through textual analysis of earnings call transcripts. Our findings indicate that firms with greater AI employment are significantly less likely to disclose information about political risk during earnings calls. We propose a dual mechanism that underpins this association. First, AI enables narrative management: firms use AI tools to strategically alter the tone and wording of disclosures, avoiding phrases that may elicit unfavorable sentiment, leading to a reduction in reputational risk. Second, AI improves firms’ internal performance and risk management, hence reducing the need for voluntary political risk disclosures. Our findings add to the literature on voluntary disclosure and the economic implications of AI by indicating that AI, as a general-purpose technology, has unintended consequences for corporate transparency. |
| Keywords: | Artificial Intelligence (AI), political risk, voluntary disclosures, earnings calls, textual analysis, AI disclosure index |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2556 |
| By: | Gschossmann, Isabella; Kok, Christoffer; De Cicco, Valentina |
| Abstract: | Do climate stress tests affect bank credit supply to brown firms? Using a difference-in-differences approach and detailed data on individual bank loans in the euro area, this paper provides novel evidence on the effects of the ECB’s 2022 climate risk stress test. Despite no capital implications or public disclosures, participating banks significantly reduced credit to greenhouse gas-intensive industries relative to nonparticipants. Among affected firms, smaller borrowers were more negatively impacted. Notably, only the best-performing banks in the climate stress test significantly reduce their brown credit after participation. This is evidence that banks which are more advanced in climate risk management more proactively consider transition risks in their lending. In contrast, banks less advanced in managing climate risk do not to the same extent discriminate against polluting firms. JEL Classification: E51, G21, G28 |
| Keywords: | banking supervision, climate risk, climate stress test |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253088 |
| By: | Athanasopoulos, Angelos; Fraccaroli, Nicolo; Kern, Andreas; Romelli, Davide |
| Abstract: | This paper studies the impact of central bank independence on sovereign borrowing, using an index that captures institutional constraints on central bank lending to the government across 155 countries from 1972 to 2023. The findings show that tighter lending to the executive significantly reduces sovereign interest rates and raises the debt-to-gross domestic product ratio in developing countries. These effects reflect the executive’s improved ability to borrow at lower costs under greater central bank independence. The results are robust to multiple tests, but there are no significant effects in advanced economies. From a policy perspective, the results highlight the key role of independent central banks as catalysts for reducing governments’ borrowing costs and enhancing the government’s borrowing capacity. |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11179 |
| By: | Efraim Benmelech; Nitish Kumar; Raghuram Rajan |
| Abstract: | We examine the importance of corporate assets in supporting debt. Prior studies typically see only secured debt as asset backed, while the rest is deemed cash flow based. This implies only a small fraction of US debt is asset backed. Yet because corporations often resist offering security explicitly to debt, much unsecured debt is implicitly asset backed. Moreover, we find that the degree to which unsecured debt is asset backed can change with a firm’s condition and the economic situation. Consequently, asset values can affect the quantum and price of borrowing, with effects accentuated in adverse economic conditions, as suggested by financial accelerator theories. Given that a corporation’s debt is typically supported by both expected cash flows and assets, with the relative support varying with time and situation, the industry practice of classifying debt as “asset based” or “cash flow based” is overly categorical, especially for long term corporate bonds. |
| JEL: | E50 G3 G33 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34008 |