|
on International Finance |
| By: | Ricardo J. Caballero; Alp Simsek |
| Abstract: | We analyze monetary policy responses to noisy financial conditions in an open economy where exchange rates and domestic asset prices affect aggregate demand. Noise traders operate in both markets, and specialized arbitrageurs have limited risk-bearing capacity. Monetary policy creates cross-market spillovers: by adjusting the interest rate to stabilize one market, the central bank influences volatility in the other. We show that targeting a financial conditions index (FCI)—a weighted average of exchange rates and domestic asset prices—delivers substantial macroeconomic benefits. FCI targeting commits the central bank to respond to unexpected movements in financial conditions beyond what discretionary monetary policy implies. These stronger responses improve diversification across markets: each market becomes more exposed to external shocks but less exposed to its own. This reduces volatility in both markets and activates the recruitment effect from Caballero et al. (2025b) in each market—lower variance induces arbitrageurs to trade against noise, further dampening volatility. Foreign exchange (FX) targeting can also be effective when the exchange rate is the primary source of noise, with benefits that increase as the economy becomes more open. In this case, FX targeting recruits arbitrageurs to stabilize the FX market, reducing volatility and dampening the macroeconomic impact of noise. However, FX targeting also raises volatility in non-targeted markets through anti-recruitment effects, limiting its effectiveness relative to FCI targeting, especially when domestic asset markets also matter for financial conditions and are comparably noisy. |
| JEL: | E32 E40 E44 E52 F30 F41 G12 G15 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34974 |
| By: | Yining Ding; Ruyi Liu; Marek Rutkowski |
| Abstract: | The role of collateral in derivative pricing has evolved beyond credit risk mitigation, particularly following the global financial crisis, when funding costs and basis spreads became central to valuation practices. This development coincided with the transition from the London Interbank Offered Rate (LIBOR) to risk-free rates (RFRs) and the increasing standardization of collateralised trading. We study the valuation and hedging of a class of differential swaps referencing backward-looking averages of overnight rates, with SOFR swaps appearing as a particular instance. The focus is on the impact of the collateral currency. Extending earlier results Ding et al. [Math. Finance 36 (2026), pp.~180--202], we allow the collateral account to be denominated in a currency different from that of the contractual cash flows and derive explicit pricing and hedging strategies using a futures-based replication approach. We show that the choice of collateral currency can have a non-trivial effect on both valuation and risk management. In particular, foreign-currency collateral can introduce additional risk exposures even when contractual cash flows are entirely denominated in the domestic currency. Numerical study demonstrates that collateral effects can lead to significant valuation adjustments and therefore need to be properly incorporated in modern multi-currency modelling frameworks. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.07863 |
| By: | Gonzalo E. Basante Pereira; Ina Simonovska |
| Abstract: | We develop a framework to measure the severity of financial constraints for young firms across countries. Using ORBIS balance-sheet data for 23 economies, we show that short-term leverage rises while long-term leverage falls early in firms’ life cycles, with this pattern persisting longer where contract enforcement is weaker. We build a model of optimal financing under limited enforcement with endogenous debt maturity and blueprint capacity that matches these patterns and enables structural measurement of financial constraints. The framework decomposes the funding gap into within-firm borrowing constraints that ease with repayment history and a scale distortion identifiable through cross-country comparisons. |
| JEL: | F34 G15 G3 G33 O43 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34985 |
| By: | Lorenz Emter; Laura Kuitunen; Arnaud Mehl; Peter McQuade; Swapan-Kumar Pradhan; Goetz von Peter |
| Abstract: | This paper examines asymmetries in the effects of geopolitical events on international bank credit, contrasting adverse events, such as the 2022 invasion of Ukraine, with positive events like the fall of the Berlin Wall in 1989. Using confidential data from the BIS International Banking Statistics from 1977 to 2024, we analyze credit dynamics between up to 12, 000 pairs of countries through the lens of their geopolitical differences. Our findings reveal that such differences impact international banking activity over time. Negative events reduce credit by 10-20% more between geopolitical blocs than they do within blocs. In contrast, positive events have no comparable effect on credit, even when boosting trade flows. We hypothesize that this asymmetry stems from the higher level of trust required for international bank credit compared to trade in goods, as the former involves a more pronounced intertemporal dimension, demanding a greater degree of commitment over time. |
| Keywords: | geoeconomics, geopolitics, international finance, global banking, residence, nationality, asymmetric effects, trust |
| JEL: | F2 F3 D74 H56 N40 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1338 |
| By: | Pol Antràs; Adrian Kulesza |
| Abstract: | We develop a general equilibrium model of international trade in which the temporal structure of production is a key determinant of comparative advantage. Building on Böhm-Bawerk’s theory of capital, the model formalizes the idea that production processes with longer average periods of production (APPs) entail higher financing costs due to the time lag between input payments and revenue realization. We embed this insight into a multi-sector Ricardian framework with endogenous interest rates. Under autarky, countries with more patient consumers or more developed financial markets exhibit lower equilibrium interest rates and higher wage rates. With international trade, these countries typically gain a comparative advantage in sectors with longer APPs, though the model can also generate multiple equilibria and unconventional specialization patterns. We extend the framework to include trade costs (inclusive of shipment delays), global value chains, and international capital-market integration. Empirically, we present evidence showing that countries with more developed financial systems export disproportionately more in sectors with longer APPs, even after controlling for standard neoclassical and institutional determinants of comparative advantage. |
| JEL: | F1 F2 F3 F4 F6 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34983 |
| By: | Vladimir Asriyan; Priit Jeenas; Alberto Martin |
| Abstract: | Financial crises are characterized by depressed asset prices, tight financial constraints, and misallocation of resources. Standard policy responses—such as asset purchases and low interest rates—are generally intended to alleviate these symptoms. This paper distinguishes between two types of crises that appear similar but differ fundamentally in their underlying mechanisms: fire-sale crises, where productive firms are forced to sell assets; and demand-freeze crises, where productive firms are unable to purchase assets. While both lead to similar observable outcomes, they have contrasting general equilibrium effects and may call for different policy interventions. Notably, conventional policies can be counterproductive in demand-freeze crises, as they may exacerbate financial constraints and further distort resource allocation. Empirical evidence on the pattern of capital reallocation among U.S. firms suggests that demand-freeze crises are, in fact, more common. |
| Keywords: | Financial crises, financial frictions, demand freezes, fire sales, asset purchases, monetary loosening, credit easing, capital reallocation, cleansing effects. |
| JEL: | E22 E44 E60 D53 G01 G18 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1941 |
| By: | Ferrari Minesso, Massimo; Lebastard, Laura; Bagur, Olga Triay |
| Abstract: | This paper provides the first causal estimate of the economic impact of interlinking payment systems across countries. We exploit a new dataset of payment systems interlinking initiatives, which identifies over 2, 000 connections, and employ standard gravity methods to estimate their impact on trade flows. Consistent with trade costs theory, we find that inter-connected countries have around 4% higher trade volumes, roughly half the effect of a trade agreement and a quarter of the effect of a common currency area. Our results isolate the average effect on trade, of directly connecting fast payment systems, net of country pairs already accessing the correspondent banking network. The estimated impact is larger for payment systems that allow wholesale transactions, those that link small countries, which, typically, are less connected to the correspondent banking network, and for geographical areas that face high cross-border payment costs. This suggests that the benefits from interlinking are derived from reduced cross-border trade costs. Our findings are causal – proved by parametric and semi-parametric estimators – and robust to numerous additional controls, including exclusion of the largest interlinked country group, the euro area. JEL Classification: E42, F15, F30 |
| Keywords: | fast payment systems, interlinking, trade |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263202 |
| By: | Giannetti, Mariassunta; Jasova, Martina; Mendicino, Caterina; Supera, Dominik |
| Abstract: | We show that losses on banks’ securities portfolios matter for the transmission mechanism of monetary policy even in the absence of financial stability concerns. When banks experience losses in their pledgeable securities, their ability to tap liquidity through the interbank market is impaired, and they subsequently reduce illiquid corporate lending, regardless of whether the securities were recorded at market or historical value. These effects are less pronounced for banks with abundant collateral and reserves and for banks that receive liquidity through their group’s internal capital market. Our results highlight a collateral channel in the bank-based transmission of monetary policy. JEL Classification: G21, E43, E52, E58 |
| Keywords: | banking groups, foreign banks, interbank market, monetary policy tightening, securities losses |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263209 |
| By: | Òscar Jordà; Fernanda Nechio; Toan Phan; Felipe Schwartzman |
| Abstract: | We show, both theoretically and empirically, that tight financial conditions shift investment toward cheaper but less energy-efficient capital. In a small open-economy model with vintage capital, higher financing costs reduce the present value of future energy savings, tilting firms’ choices along a cost efficiency frontier. Using 150 years of macroeconomic and energy data from 17 advanced economies, we find that tighter financial conditions reduce output, capital, and total energy consumption, but raise the amount of energy per unit of capital (energy intensity), a composition effect that persists for 6 to 8 years. Tight financial conditions lower energy use in the short run by depressing activity, but increase energy use in the medium run through worse energy efficiency. |
| Keywords: | energy efficiency; capital vintages; monetary policy; interest rates; local projections; small open economy |
| Date: | 2026–02–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102910 |
| By: | Dario Caldara; Matteo Iacoviello; Mike McHenry; Immo Schott |
| Abstract: | We study the investment effects of the Russia-Ukraine war using a novel, text-based measure of firm-level exposure derived from earnings call transcripts. Combining this measure with financial statement data for over 6, 500 firms across 50 countries, we show that exposure to the conflict led to sizable and persistent declines in corporate investment. Firms that discussed the war in early 2022 invested significantly less than otherwise similar firms. The results hold across multiple empirical strategies and highlight the role of geopolitical risk in shaping firm behavior during global crises. |
| Keywords: | Business fluctuations and cycles; Economic uncertainty; Corporate finance and governance; Investment |
| JEL: | C55 E22 E32 |
| Date: | 2026–03–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:102900 |