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on International Finance |
| By: | Anantha Divakaruni; Peter Zimmerman |
| Abstract: | Several studies have shown that aggregate demand for US dollars fell following the announcement of tariffs by the US government on April 2, 2025. Using data on stablecoins as a proxy for dollar trading, we find that the decline in dollar demand is smaller for investors in countries that saw larger increases in tariffs. Our interpretation is that, as foreign investors anticipate that tariffs will make it more expensive to acquire US dollars in the future, they buy dollars today. This channel is stronger for more liquid stablecoins and for countries with tighter capital controls, consistent with the idea that, when actual dollars are hard to acquire, stablecoins may be regarded as a substitute. Our findings cast light on the effects of the tariffs on global foreign exchange markets, as well as on the degree to which stablecoins are considered a close substitute for dollars. |
| Keywords: | dollars; stablecoins; tariffs; trade barriers |
| JEL: | F31 G15 G23 |
| Date: | 2025–08–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:101529 |
| By: | Philippe Bacchetta; J. Scott Davis; Eric Van Wincoop |
| Abstract: | Global non-U.S. banks have significant dollar exposure both on and off their balance sheet. We develop a model to analyze their adjustment to dollar funding shocks, whether from reduced direct lending or external dollar shortages. The model provides insight into banks’ responses through borrowing, lending and FX swap positions, as well as the impact on their net worth, their probability of default and CIP deviations. Implications of the model are confronted with data on the response of non-U.S. global banks to major dollar funding shocks. We examine the benefits from buffering these shocks through central bank dollar swap lines or local currency lending by the central bank. |
| Keywords: | GSIB Banks; U.S. Dollar Liquidity; CIP Deviations; Liquidity Swap Lines |
| JEL: | F30 F40 |
| Date: | 2025–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:101523 |
| By: | Friederike Niepmann; Leslie Sheng Shen |
| Abstract: | How do banks respond to geopolitical risk, and is this response distinct from other macroeconomic risks? Using U.S. supervisory data and new geopolitical risk indices, we show that banks reduce cross-border lending to countries with elevated geopolitical risk but continue lending to those markets through foreign affiliates—unlike their response to other macro risks. Furthermore, banks reduce domestic lending when geopolitical risk rises abroad, especially when they operate foreign affiliates. A simple banking model in which geopolitical shocks feature expropriation risk can explain these findings: Foreign funding through affiliates limits downside losses, making affiliate divestment less attractive and amplifying domestic spillovers. |
| Keywords: | geopolitical risk; bank lending; credit risk; international spillovers |
| JEL: | F34 F36 G21 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:101470 |
| By: | Menzie D. Chinn; Jeffrey A. Frankel; Hiro Ito |
| Abstract: | We analyze the determinants of individual central bank holdings of international reserves, as shares of gold, dollar, euro, pound, yen and yuan, over the 1999-2022 period. We augment standard economic determinants of size, exchange rate volatility, currency pegs and bilateral trade with bilateral political/economic variables such as disagreement in UN voting, military alliances, and financial and trade sanctions. These variables augment uncertainty measures such as global Economic Policy Uncertainty, US monetary and trade policy uncertainty, and the VIX. In addition, we investigate whether the US imposition of tariffs in 2018 had any measurable impact on dollar and other holdings. We conclude that financial sanctions and trade policy uncertainty have a statistically and economically significant effect on holdings of the US dollar. US tariffs had an economically – but not statistically – significant impact on shares of foreign exchange reserves: dollar shares fell by 2.1% and other shares rose by 0.8%. These findings can inform the debate regarding some of the benefits and costs of using such geo-economic policies. |
| JEL: | F33 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34177 |
| By: | Damien Capelle; Bruno Pellegrino |
| Abstract: | We use a dynamic spatial general equilibrium model of international investment and production to investigate the real implications of the last five decades of financial globalization. We introduce a wedge accounting framework to estimate country- and time-varying measures of outward and inward Revealed Capital Account Openness (RKO). We show how to identify these wedges for a large panel of countries using limited publicly available data on national accounts and external asset and liability positions since the 1970s. Our analysis reveals striking cross-country differences in the pace and direction of financial account opening: wealthier countries have become relatively more open to foreign capital inflows, while poorer countries have become relatively more open to capital outflows, a phenomenon we call “Unbalanced Financial Globalization.” Counterfactual simulations show that this unbalanced financial globalization has worsened capital allocation, resulting in a 5.9% decrease in world GDP, a 3.4% rise in cross-country income inequality, lower wages in poorer countries, and a decline in rates of return on capital in richer countries. In contrast, if financial account opening had been uniform, the improved allocation of capital would have reduced income inequality, and increased global GDP. These findings underscore the crucial role of spatial heterogeneity in shaping the real impact of international capital markets integration. |
| JEL: | F2 F3 F4 F6 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34121 |
| By: | Miguel Acosta-Henao; Maria Alejandra Amado; Montserrat Martí; David Perez-Reyna |
| 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. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1043 |
| By: | Christoph Trebesch; Josefin Meyer; Alberto Martin; Fernando Broner |
| Abstract: | How do shifts in the global balance of power shape the world economy? We propose a theory of alignment-based "hegemonic globalization, " built on two central premises: countries differ in their preferences over policies (such as the rule of law or regulatory frameworks) and trade between any two countries increases with the degree of alignment in these policies. Hegemons promote policy alignment and thereby facilitate deeper trade integration. A unipolar world, dominated by a single hegemon, tends to support globalization. However, the transition to a multipolar world can trigger fragmentation, which is particularly costly for the declining hegemon and its closest allies. To test the theory, we use international treaties as a proxy for alignment and compile a novel "Global Treaties Database, " covering 77, 000 agreements signed between 1800 and 2020. Consistent with the theory, we find that hegemons account for a disproportionate share of global treaty activity and that treaty-signing is a leading indicator of increasing bilateral trade. |
| Keywords: | cooperation, globalization, hegemon, international coercion, international treaties, multipolar world, trade integration |
| JEL: | F02 F15 F50 F51 F55 F60 P45 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1504 |