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on International Finance |
| By: | Yu An; Amy W. Huber |
| Abstract: | We study geoeconomic competition and capital reallocation in global financial markets, using the foreign exchange (FX) funding market as our empirical setting. FX funding, obtained by borrowing one currency while pledging another through FX swaps, is instrumental to cross-border investment and provides high-frequency measures of capital reallocation. Countries compete for FX funding through policy actions that shift investment returns or funding costs, thereby inducing global portfolio rebalancing by private investors. We quantify this competition by measuring how one country’s inflow responds to another country’s actions, which we call “reallocation exposure.” Because observed funding flows reflect common shocks and strategic interactions across countries, bilateral influence is difficult to identify. We resolve this challenge by identifying “funding fronts, ” the independent margins of portfolio adjustment that enable systematic estimation of reallocation exposure. Applying our framework to a proprietary dataset, we find that FX funding competition is concentrated in a small number of funding fronts, with a dominant U.S. dollar front accounting for most capital reallocation. Consequently, changes in U.S. conditions generate disproportionately large reallocations elsewhere. We use reallocation exposure to construct time-varying measures of geoeconomic power and show that variations systematically track major monetary, fiscal, and geopolitical events. Finally, we characterize the network of financial competition and cooperation and show that strategic responses implied by reallocation exposure align with cross-country movements in policy rates. |
| JEL: | F31 G12 G15 G28 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34908 |
| By: | Ka Lok Wong (Steve) (UN Economic Commission for Africa); Mark Manger (University of Toronto); Ugo Panizza (Geneva Graduate Institute and CEPR) |
| Abstract: | Emerging market economies (EMEs) regularly tap domestic and international capital markets through scheduled sovereign bond auctions. In this paper, we leverage a novel dataset covering over 75, 000 sovereign issuance events and 20, 000 securities from 20 EMEs between the early 2000s and 2023 to analyze the determinants of bond issuance choices, focusing on volume, maturity, and currency denomination. We find that local currency debt issuance is largely associated with refinancing needs, while foreign currency issuance reflects more strategic and cyclical considerations. In particular, foreign currency issuance correlates with global macroeconomic conditions, interest rate differentials, and investor sentiment. Our findings suggest that EME governments differentiate their debt management strategies based on the currency of issuance, with local currency issuance shaped by domestic budget mechanics and foreign currency issuance by external constraints and opportunities. |
| Keywords: | Sovereign Borrowing; Public Debt Management; Emerging Markets |
| JEL: | F34 H63 E44 |
| Date: | 2026–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp06-2026 |
| By: | Bahaj, Saleem; Reis, Ricardo |
| Abstract: | While the USD dominates cross-border transactions today, a few other currencies are also used internationally. This paper shows that central bank policies that reduce the volatility of borrowing costs for foreign firms in domestic currency can trigger a jumpstart of the currency’s international status, because firms’ choices of the currency of their working capital complement their sales invoicing. Empirically, the creation of swap lines by the People’s Bank of China between 2009 and 2018 supports this theoretical claim. Signing a swap line with a country is associated with an increase in the probability that the country would use the RMB at all by 12%, and a four-fold increase in the value of the country’s RMB payments. |
| Keywords: | lender of last resort; internationalization; dollar dominance |
| JEL: | E44 E58 F33 F41 G15 |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128001 |
| By: | Mr. Eugenio M Cerutti; Melih Firat; Martina Hengge; Takaaki Sagawa |
| Abstract: | We develop novel measures of stablecoin shocks and use them to identify the causal effects of stablecoin adoption on U.S. financial markets. Combining a daily narrative dataset of stablecoin-specific news with changes in the combined market capitalization of USDC and USDT, we measure high-frequency movements in stablecoin market capitalization and implement heteroskedasticity-based identification within an event-study and SVAR-IV framework. Stablecoin demand shocks have triggered persistent declines in short-term Treasury yields, a depreciation of the U.S. dollar, and gradual spillovers into crypto and equity markets. We also document heterogeneous effects across firms: payment providers benefit from greater stablecoin adoption, whereas banks—including community and small banks—show no evidence of priced disintermediation risk. Our findings highlight stablecoin demand as a novel channel of asset-market transmission. |
| Keywords: | Stablecoin; Payment Systems; Crypto; Financial Markets |
| Date: | 2026–03–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/044 |
| By: | Meghana Ayyagari; Vojislav Maksimovic; Rodimiro Rodrigo; Ariel Weinberger |
| Abstract: | The yen depreciation from 2012–2015 reduced robot prices for U.S. firms. Paradoxically, financially constrained firms dramatically increased adoption relative to their unconstrained peers. We rationalize this with a collateral model: robots are pledgeable assets requiring non-pledgeable intangibles, raising the effective cash invoice for constrained firms and amplifying their elasticities. Linking robot and automation machinery imports to Compustat, we find constrained firms are twice as responsive to exchange rate and interest rate shocks, with capital prices dominating (45-60% larger) borrowing costs. Results reveal a collateral channel reallocating technology adoption toward constrained incumbents, with implications for technology diffusion and competitive dynamics. |
| Keywords: | automation, robots, financial constraints, investment, prices of capital goods, technology adoption, monetary policy, foreign exchange |
| JEL: | E22 E52 F31 L10 O14 D22 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12526 |
| By: | Yan Bai; Dan Lu; Xu Tian; Yajie Wang |
| Abstract: | This paper reassesses the role of financial frictions in capital misallocation through a model disciplined by both firm-level borrowing costs and the average revenue product of capital (ARPK). Using Chinese manufacturing data, we document substantial dispersion in ARPK, alongside a strong positive relationship between ARPK and the borrowing costs firms face---patterns absent in U.S. data. We develop a heterogeneous-firm model with endogenous firm-specific borrowing costs and additional capital distortions modeled as exogenous wedges. In this model, eliminating financial frictions raises total factor productivity (TFP) by 25 percentage points. In contrast, without other capital distortions, removing financial frictions increases TFP by less than 2 percentage points. The stark difference arises from the interaction between financial frictions and permanent firm-level distortions, which generate endogenous financial heterogeneity and selection, making productive firms the most constrained. Our findings suggest that financial frictions can be highly distortionary when other sources of misallocation are present. |
| JEL: | E2 F3 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34930 |
| By: | William N. Goetzmann; K. Geert Rouwenhorst |
| Abstract: | We use security-level data from the Investors Monthly Manual (IMM) to construct capital-weighted return indexes for the London Stock Exchange over the period 1870–1929. We find a significant and persistent equity risk premium of 3.7% over commercial paper and 4.5% over long-term government bonds, with significant co-movement with GDP growth. Returns decline monotonically with claim seniority: common stocks earn more than preferred shares, which earn more than corporate bonds. Both equity risk premia are highly significant, and the rolling 10-year return spread for stocks minus bonds is positive for every interval in the 60-year sample period. |
| JEL: | G1 G10 G12 G30 G32 N20 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34899 |
| By: | Benk, Szilárd; Gillman, Max |
| Abstract: | This study examines how U.S. monetary policy shocks influence global asset prices by tracing their effects through real oil prices and the excess stock returns of oil-exporting nations. We show that expansionary U.S. monetary policy raises real oil prices, which in turn increase excess stock premiums in countries dependent on oil exports. These resource-driven wealth effects intensify geopolitical dynamics between the United States and major oil-exporting economies. Building on structural VAR frameworks that incorporate global oil market fundamentals, we augment the model with U.S. monetary variables, including money supply, inflation expectations, and measures of monetary policy uncertainty. Our results provide robust evidence that monetary-policy-induced oil price shocks elevate excess stock returns in oil-exporting nations, thereby identifying a new transmission channel through which U.S. policy actions shape international financial and strategic outcomes. |
| Keywords: | US monetary policy shocks; real oil prices; SVAR; oil exporting nations; excess premiums; US money supply and inflation expectations |
| JEL: | E31 E51 Q43 |
| Date: | 2026–01–04 |
| URL: | https://d.repec.org/n?u=RePEc:cvh:coecwp:2026/01 |
| By: | Altavilla, Carlo; Boucinha, Miguel; Burlon, Lorenzo; Adalid, Ramón; Fortes, Roberta; Maruhn, Franziska |
| Abstract: | This paper studies the effects of stablecoin adoption—crypto-assets designed to maintain a stable value relative to a reference asset—on bank intermediation and the transmission of monetary policy. Using evidence from the rapid expansion of stablecoins combined with confidential granular data on euro area banks and their individual borrowers, we document three main findings. First, stablecoin adoption induces a deposit-substitution mechanism, whereby funds shift from retail bank deposits to digital assets. This reallocation increases banks’ reliance on wholesale funding and can ultimately constrain their intermediation capacity. Second, we show that stablecoins alter the passthrough of policy rates to bank funding costs and lending conditions and potentially weaken the predictability of policy actions. These effects are nonlinear and depend critically on the scale of stablecoin adoption, their design features, and their regulatory treatment. Third, we document a potential risk associated with the growing prevalence of foreign-currency-denominated stablecoins. Their diffusion is likely to increase banks’ reliance on foreign-currency wholesale funding. We show that banks with greater exposure to this source of funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a weakening of monetary policy transmission and a potential erosion of monetary sovereignty. JEL Classification: E52, E44 |
| Keywords: | bank lending, deposit substitution, monetary transmission, stablecoins |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263199 |
| By: | Wollenweber, Alexander; Wang, Dieter; Ranger, Nicola |
| Abstract: | This paper investigates the uneven consequences of nature and biodiversity loss for the cost of sovereign government borrowing. A growing literature documents the adverse economic consequences of climate change. However, little attention has been devoted to the influence of nature degradation on sovereign bond yield spreads, which determine government’s funding costs and fiscal policy space. Employing panel interactive fixed effects and quantile regressions with latent factors, we extend the literature to the nature context with three proxies for countries’ nature-related financial vulnerability. Across 28 advanced and 25 emerging economies over the 2000-2020 period and 2, 5, and 10-year bond maturities, our results indicate substantial average impacts from within-country degradation for sovereign borrowing costs whilst controlling for conventional economic and institutional determinants, and common global financial factors. Our second-stage heterogeneity analysis reveals significant variation in impacts. We find that countries with elevated sovereign risk are disproportionally impacted by nature vulnerability, up to three times the average marginal effect of forty-to-fifty basis points for countries in the 90th percentile of borrowing costs. Our novel empirical results underline the asymmetric macro-criticality of nature for sovereign borrowing costs with disproportional effects that exacerbate existing macro-financial fragilities. Yet the financial effects are unlikely to be confined to debt-distressed, high-risk and nature-dependent countries, considering the integrated nature of global supply chains and sovereign debt markets. |
| JEL: | F3 G3 N0 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137486 |