|
on International Finance |
| By: | Husnu C. Dalgic; Galip Kemal Ozhan |
| Abstract: | This paper argues that currency risk premia are an endogenous outcome of a country’s fundamental trade and financial structures. Empirically, we isolate global risk factors from currency returns and show that a country’s exposure to these factors is jointly determined by its share of dollar invoicing and its net foreign debt position. We then develop a small open-economy model with dominant-currency pricing (DCP) and dollar-denominated liabilites to explain the underlying mechanism. The model demonstrates that empirically plausible risk premia require the interaction of both frictions. High dollar invoicing mutes the expenditure switching channel, while high dollar debt creates a potent, contractionary financial channel. Together, these frictions make currency depreciations recessionary (countercyclical), rendering the currency a poor hedge and "risky" for investors. We show this has a first-order policy consequence: the resulting risk premium raises the economy’s neutral interest rate, leading to structurally high inflation under a standard Taylor rule. Our results show how trade and financial frictions jointly create currency risk and pose a fundamental challenge for monetary policy |
| Keywords: | Currency returns, dominant currency pricing, uncovered interest parity, inflation, dollar debt. |
| JEL: | E44 F32 F41 G15 G21 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_717 |
| By: | Marijn A. Bolhuis; Mr. Francesco Grigoli; Marcin Kolasa; Mr. Roland Meeks; Mr. Andrea F Presbitero; Zhao Zhang |
| Abstract: | Emerging markets have shown remarkable resilience during risk-off episodes in recent years. While favorable external conditions—good luck—contributed to this resilience, improvements in policy frameworks—good policies—played a critical role in bolstering the capacity of emerging markets to withstand the adverse consequences of these events. Improvements in monetary policy implementation and credibility have reduced reliance on foreign exchange (FX) interventions and capital flow management measures, and stricter macroprudential regulation also contributed to less FX interventions. Also, central banks have become less sensitive to fiscal interference and hold sway over domestic borrowing conditions. Looking ahead, countries with robust frameworks face easier policy trade-offs and are better positioned to navigate risk-off episodes. In contrast, economies with weaker frameworks risk de-anchoring inflation expectations and larger output losses if monetary tightening is delayed, especially when persistent price pressures emerge. In these settings, FX interventions offer only temporary relief and are less necessary when policy frameworks are sound. |
| Keywords: | Emerging markets; Risk-off shocks; Monetary policy; FX interventions |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/256 |
| By: | Yang Zhou (Graduate School of Economics, Nagoya City University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, JAPAN) |
| Abstract: | Do geopolitical risks affect the occurrence of "extreme capital flow episodes"? Using a panel of 57 economies from 1986Q1 to 2023Q4, we examine the effects of both global and country-specific geopolitical risks on the occurrence of the four types of extreme capital episodes ("surge", "stop", "flight", and "retrenchment"). We find no association between global geopolitical risks and the occurrence of extreme capital flow episodes for advanced economies and only a weak association for emerging economies. In contrast, country-specific geopolitical risks show no significant association for advanced economies but a significant association for emerging economies. Our results suggest that when country-specific geopolitical risk is high, an emerging economy is more likely to experience stop, flight, and retrenchment episodes and less likely to experience surge episodes, reflecting heightened risk perceptions among both domestic and foreign investors. For each episode, we further identify its key underlying flow type: banking flows for flight, direct investment flows for stop, and banking, debt, and equity flows for retrenchment. We also find that country specific geopolitical risks became a more important driver of these episodes after the global financial crisis. These findings are robust to incorporating additional economic uncertainty indices, to excluding or adding certain control variables, to removing periods of dramatic global geopolitical risk fluctuations, and to employing alternative econometric methodologies. |
| Keywords: | Global geopolitical risk; Country-specific geopolitical Risk; Extreme capital flow episodes; Emerging economies; Flight-to-safety; Flighthome effects |
| JEL: | E44 F32 F51 G28 G32 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-32 |
| By: | John Beirne (Asian Development Bank); Nuobu Renzhi (Capital University of Economics and Business in Beijing) |
| Abstract: | This paper examines the effects of country-specific geopolitical risk on capital flow volatility and asset markets across 29 emerging and advanced economies over the period 2000–2023. Using panel regressions and a panel structural vector autoregression framework, the results show that geopolitical risk raises bond yields and leads to exchange rate depreciation, with stronger and more persistent effects in emerging economies. Asset markets for advanced economies are affected mainly through lower equity prices. The impact on capital flow volatility is slightly higher on average for advanced economies but remains more persistent for emerging economies. Greater financial development, higher central bank independence, and lower public debt mitigate the adverse effects of geopolitical risk on both capital flows and asset markets. These findings highlight the importance of strong macroeconomic fundamentals and institutional frameworks in building resilience against geopolitical shocks. |
| Keywords: | geopolitical risk;capital flow volatility;financial markets |
| JEL: | G15 G41 |
| Date: | 2025–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:021786 |
| By: | Glen Kwende; Erin Nephew |
| Abstract: | This technical note presents a methodological change to the International Monetary Fund’s Currency Composition of Foreign Exchange Reserves (COFER) dataset. Using a combination of stratified mean imputation and carry-forward imputation, IMF staff construct a new COFER timeseries which allocates 100 percent of global foreign exchange reserves across currencies, eliminating the "unallocated" portion of the dataset. This change improves the analytical usefulness of the COFER dataset by providing a more complete and consistent time series, while also strengthening the confidentiality of individual country data. Overall trends in currency composition remain broadly unchanged, but the allocation of previously unallocated reserves leads to modest adjustments in currency shares. |
| Keywords: | Currency composition; Dollar; COFER dataset; IMF Library; analytical usefulness; usefulness of the IMF's COFER Data; IMF staff; views ofthe IMF; Currencies; International reserves; International liquidity; Reserve currencies; Global |
| Date: | 2025–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imftnm:2025/014 |
| By: | Felipe Beltrán; Mr. David O Coble Fernandez; Manuel Escobar; Felipe D Rojas |
| Abstract: | In this paper we study how aggregate demand surprises affect and propagate to the global economy, with particular attention to their impact on Emerging Market Economies (EMEs). To do so, we introduce a new high-frequency external instrument to identify global demand shocks: the sensitivity of oil futures prices around labor market announcements from the US and the Euro Area, two events that consistently trigger strong revisions in global growth expectations across financial markets. Using a proxy-SVAR framework, our results suggest that a global demand shock has positive effects on world industrial production, reduces oil inventories and global uncertainty, and improves financial conditions. In EMEs, upward revision in macroeconomic outlook leads to higher industrial production and inflation, real exchange rate appreciation, and lower EMBI spreads. When the sample is split between oil-importers and exporters, we observe results consistent with the role of external trade exposure in shaping transmission, heterogeneity in the magnitude and persistence of output, inflation, real exchange rates, and sovereign risk responses. These results are consistent with theoretical expectations and the related literature. Our findings offer a credible empirical strategy for isolating global demand shocks and have direct implications for empirical macroeconomic modeling of emerging market economies. |
| Keywords: | Proxy SVAR; oil futures prices; global demand shocks; Emerging Markets; high frequency identification; labor reports releases |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/253 |
| By: | Kim, Dohan; Milesi-Ferretti, Gian Maria |
| Abstract: | Over the past two decades, many emerging markets and developing economies have been viewed as increasingly resilient to external financial shocks. This paper assesses whether such resilience is broadly shared across emerging markets and developing economies by classifying them into three tiers based on economic size, income level, institutional strength, and financial integration. The analysis shows that first-tier emerging markets and developing economies have improved their external balance sheets and reduced dependence on official support. However, second- and third-tier emerging markets and developing economies have experienced growing external vulnerabilities since the global financial crisis, marked by rising external debt liabilities and declining foreign exchange reserves. Using a range of indicators, including sovereign defaults, arrears, partial defaults, and International Monetary Fund lending, the paper identifies episodes of external financial distress and shows that distress remains widespread among second- and third-tier emerging markets and developing economies. The empirical analysis confirms that key components of the net international investment position—especially external debt and foreign exchange reserves—predict the onset of external financial distress, with institutional quality shaping the impact. Weak institutions amplify risks, while strong institutions mitigate them. These findings highlight the importance of recognizing heterogeneity across emerging markets and developing economies, strengthening institutional quality alongside external balance-sheet management, and rebuilding buffers to safeguard against renewed global financial stress. |
| Date: | 2025–12–04 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11274 |
| By: | John Beirne (Asian Development Bank); Pradeep Panthi (Policy Research Institute); Guna Raj Bhatta (Nepal Rastra Bank) |
| Abstract: | This paper examines the role of financial development as a buffer for the appreciating effects of remittances on exchange rates using annual data from 1996 to 2021 for 146 economies, with a focus on 43 high remittance-receiving economies. A panel regression framework is employed in the baseline analysis, which remains robust to an instrumental variables approach. The findings reveal that remittances have appreciating effects on real effective exchange rates (REER), especially in high remittance-receiving economies, consistent with the “Dutch disease” mechanism. Examining subcomponents of financial development, we find that stronger domestic financial markets and market-based financial deepening are critical channels for absorbing the REER appreciation effects of remittances |
| Keywords: | remittances;exchange rates;financial development |
| JEL: | F24 F31 G21 O16 |
| Date: | 2025–11–27 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:021791 |
| By: | David Worms |
| Abstract: | I document that high-frequency euro area monetary policy surprises – measured as changes in risk-free rates around the Eurosystem‘s policy announcements – are not exogenous to information regarding macroeconomic news and financial market developments that pre-date the announcements. More specifically, around 20% of the variation of surprises can be explained by pre-dated information. I show that the violation of the exogeneity of conventional surprise measures introduces a considerable bias into estimates on the effects of monetary policy on euro area macroeconomic outcomes. |
| Keywords: | High-Frequency Identification; Macro News; Monetary Policy |
| JEL: | E43 E52 E58 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:850 |
| By: | Charles Yuji Horioka (Center for Computational Social Science and Research Institute for Economics and Business Administration, Kobe University, Asian Growth Research Institutem, Institute of Social and Economic Research, Osaka University, Asian Growth Research Institute, JAPAN, and National Bureau of Economic Research, U.S.A.); Nicholas Ford (Wolfson College, University of Cambridge, U.K.) |
| Abstract: | In this paper, we show that the existing models and descriptions of the transfer of capital between countries that are provided in international economics are inadequate because they fail to explain the causes of, or the consequences of, persistent trade imbalances and because the assumption that there is a world interest rate, r* at which all countries can theoretically lend or borrow is extremely misleading.Instead, we argue that a more fruitful modeling approach is to regard the world as consisting of a number of regions, each of which has a particular rate of return on capital, which is a function of the local marginal product of capital (MPK). We demonstrate that such a modeling approach can provide some additional insights into who gains and loses from persistent trade deficits and how this might be affected by the Trump Administration's tariff policy. |
| Keywords: | Capital flows; Capital market imperfections; Capital mobility; Capital transfers; Current account deficits; Current account imbalances; Exchange rate; Feldstein-Horioka Paradox; Feldstein-Horioka Puzzle;Financial frictions; Financial market imperfections; Globalization; Goods market imperfections; International capital flows; International capital mobility; International financial markets; Investment; Marginal product of capital; MPK; Net capital transfers; Open economy macroeconomics; Rate of return on capital; Saving; saving-investment correlations; Tariffs; Trade barriers; Trade costs; Trade deficits; Trade frictions; Trade imbalances; Trade policy; Trump tariffs; World interest rate |
| JEL: | E43 F13 F21 F32 F41 F62 G15 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-31 |