|
on International Finance |
| 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 affiliatesâ 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: | 2025–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1418 |
| By: | Ms. Emine Boz; Anja Brüggen; Camila Casas; Georgios Georgiadis; Ms. Gita Gopinath; Arnaud Mehl |
| Abstract: | This paper presents the most comprehensive and up-to-date panel dataset on global trade invoicing currency and examines recent pattern shifts with a focus on geopolitical alignment. Using data for 132 countries from 1990 to 2023—including new coverage of the Chinese renminbi—we document five key findings. First, the US dollar remains dominant, with global invoicing shares broadly stable. Second, renminbi use has grown steadily and expanded beyond Asia, though it remains modest. Third, countries not geopolitically aligned with the US continue to rely on the dollar, though this reliance has declined in a few key economies. Fourth, since 2021, the correlation between the use of a given invoicing currency and the geopolitical distance to its issuer has become more negative, reflecting growing polarization. Fifth, there is no robust evidence consistent with effective policy initiatives to reduce dollar reliance in oil exports. These findings highlight the resilience of dominant currencies and suggest emerging fragmentation in invoicing patterns along geopolitical lines. |
| Keywords: | Trade invoicing currency; dominant-currency paradigm; geopolitical alignment |
| Date: | 2025–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/178 |
| By: | Sebastian Fossati (University of Alberta); Xiao Li (University of Alberta) |
| Abstract: | We model the conditional distribution of future exchange rate returns for nine currencies as a function of real-time financial conditions. We show that the lower and upper quantiles of the exchange rate return distribution exhibit significant in-sample co-movement with financial conditions. Similarly, the conditional moments of the out-of-sample forecast display time-varying patterns, with the variance and kurtosis showing the most pronounced changes during and after the 2008-09 financial crisis. Deteriorating financial conditions are associated with an increase in volatility, particularly for commodity currencies. Overall, we conclude that financial conditions capture tail dependencies in exchange rate returns and contain valuable information for out-of-sample prediction. |
| Keywords: | exchange rates; financial conditions; NFCI; density forecasts |
| JEL: | C22 F31 G17 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ris:albaec:021546 |
| By: | Neil Mehrotra; Michael E. Waugh |
| Abstract: | What are the effects of tariff changes and trade conflicts on the natural rate of interest? This article investigates this question, using a multicountry, heterogeneous-agent trade model in which the natural rate of interest is determined by firms’ demand for capital and households’ supply of assets through their savings behavior. We analyze how the equilibrium interest rate evolves during the transition to higher unilateral tariffs and a global trade war. In the short run, tariffs reduce capital demand, and so the natural rate of interest must fall for households’ asset supply to line up with capital demand. In the long run, both asset supply and capital demand fall by similar amounts, which leads to little change in the long-run natural rate of interest. |
| JEL: | E0 E40 F0 F10 F40 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34206 |
| By: | Albertazzi, Ugo; Hooft, James ’t; Ter Steege, Lucas |
| Abstract: | In contrast to the conventional Fisherian view that inflation reduces real debt positions, we show that significant increases in inflation are strongly associated with financial crises. In the spirit of Jordà et al. (2020), countries with free and fixed ex-change rates can be compared to difference out the confounding reaction of monetary policy. Across a dataset of 18 advanced economies over 151 years, we show that the impact of inflation extends beyond its indirect effect via monetary policy. To further corroborate causality, we instrument inflation with oil supply shocks, finding that a 1pp rise in inflation doubles the probability of financial crisis from its sample average. We give evidence for the redistribution channel, where inflationary shocks directly cut real incomes, as a possible mechanism. In conjunction with recent literature on the dangers of rapidly tightening monetary policy, our results point to a difficult trade-off for central banks once inflation has risen. JEL Classification: E31, E44, E58, G01 |
| Keywords: | currency pegs, financial crises, inflation, monetary policy, oil supply |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253108 |
| By: | Emi Nakamura; Venance Riblier; Jón Steinsson |
| Abstract: | The Federal Reserve partially "looked through" the post-Covid rise in inflation and ultimately managed to bring about an "immaculate disinflation." The Fed's policy deviated strongly from the Taylor rule during this period. More generally, central banks with strong inflation-fighting credentials looked through post-Covid inflationary shocks yet experienced less inflation than more hawkish but less credible central banks. In light of this episode, we assess the degree to which the Taylor rule is descriptive, and the degree to which it should be viewed as prescriptive. While the Taylor rule (generally) fits well during the Greenspan period, it (generally) fits poorly in the early 1980s and after the early 2000s. Academic work has emphasized the role of the Taylor rule in preventing self-fulfilling fluctuations (guaranteeing determinacy). These concerns can be addressed with a shock-contingent commitment and are fragile to deviations from fully rational expectations. We discuss three reasons why optimal policy may not always imply a one-for-one response of interest rates to inflation (forward guidance, correlated shocks, and "long and variable lags"). The main challenge arising from such policies is not indeterminacy but erosion of inflation-fighting credibility and potential deanchoring of long-run inflation expectations. Only central banks with strongly anchored inflation expectations and large amounts of inflation-fighting credibility are likely to be able to look through inflationary shocks. |
| JEL: | E5 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34200 |
| By: | Subash Bhandari; Hyeongwoo Kim |
| Abstract: | This paper investigates the transmission of structural global oil market shocks to U.S. inflation using an instrumental variable structural vector autoregression (IV-SVAR) applied to highly disaggregated Consumer Price Index (CPI) components. We consider two types of shocks: oil supply shocks, arising from OPEC production disruptions, and oil supply news shocks, reflecting expectations of future production changes. The inflationary effects are concentrated in energy-related goods, significantly driving headline CPI, while non-necessity components exhibit muted or even negative responses. Moreover, news shocks generate short-lived, front-loaded effects, whereas supply shocks produce more persistent impacts. |
| Keywords: | Oil Supply Shock; OPEC News Shock; Disaggregated CPI Components; Instrumental Variable Structural Vector Autoregression |
| JEL: | E3 F4 Q4 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2025-06 |