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on International Finance |
| By: | Pierre De Leo; Lorena Keller; Giuliano Simoncelli; Mauricio Villamizar Villegas; Tomas Williams |
| Abstract: | When foreign investors acquire local-currency bonds, they must also exchange foreign for local currency. In a model with intermediation frictions, foreign inflows thus generate correlated movements in intermediaries' bond and currency positions, and, in turn, in term and currency premia. Using data from Colombia's bond and foreign exchange markets, we show that this mechanism accounts for key empirical patterns in intermediaries’ positions, bond yields, and exchange rates—including during inflow episodes, and in response to asset purchase policies. Consistent with the model, countries with more prevalent unhedged foreign investor flows exhibit stronger positive comovement between bond and currency returns. |
| Keywords: | foreign investors; local-currency bond markets; exchange rates; bond yields; financial intermediaries; capital flows. |
| JEL: | E43 E52 F31 G12 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2026-007 |
| By: | Andrés Fernández (International Monetary Fund); Alejandro Vicondoa (Pontificia Universidad Católica de Chile) |
| Abstract: | We study the joint dynamics in the volume and prices of capital flows to emerging market economies (EMEs). A dynamic factor model augmented with sign and zero restrictions allows us to identify demand/supply shocks of idiosyncratic/common nature. While common credit supply shocks are the main driver of prices, idiosyncratic credit demand and supply shocks account for most of the variation in quantities. A structural multi-country SOE/RBC model is calibrated to EMEs data to further shed light on the main transmission channels. Augmented with correlated productivity and interest rate shocks, the model matches the comovement between prices and quantities as well as business cycle moments. Common credit demand drivers, captured as correlated TFP shocks, account for around half of the observed comovement in quantities but they are not a significant driver of price comovement. Fundamentals matter significantly more for capital flows than for country spreads, which are driven by a sizeable global financial cycle. |
| Keywords: | capital flows, sovereign spread, small open economy, credit supply, credit demand, external factors |
| JEL: | E31 E32 E43 E52 E58 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:393 |
| By: | Martijn Boermans; Laurens Swinkels |
| Abstract: | Governments across the world have issued inflation-linked debt to finance their deficits. Recent advances in asset pricing models recognize that there may be clientele effects that affect relative prices, especially in bond markets. We study investor demand for inflation-linked bonds using detailed bond portfolio data. Our analysis reveals pronounced market segmentation: insurance companies, with predominantly nominal liabilities, underinvest in inflation-linked securities, while pension funds overinvest. Investors hedging inflation risk exhibit a strong preference for bonds indexed to domestic rather than foreign inflation. A regulatory reform announcement provides quasi-experimental evidence that the demand for inflation-linked bonds may be shaped by regulatory requirements. |
| Keywords: | Inflation-linked bonds, investor clientele, securities holdings, sovereign bonds, TIPS |
| JEL: | F21 G11 G15 G22 G23 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2026/08 |
| By: | Erdinc Akyildirim; Gonul Colak; Giray Gozgor; Thang Ho |
| Abstract: | This paper constructs a novel firm-level measure of geopolitical risk using textual analysis of 130, 061 earnings conference call transcripts and examines its impact on firms' reliance on bank-based financing. Using a panel of 4, 692 listed firms across 38 countries over 2005–2024, we find that higher firm-level geopolitical risk is associated with a significant increase in the bank debt ratio. Instrument-level analysis shows that this effect is driven by greater reliance on term loans, while revolving credit facilities exhibit no systematic response. The relationship holds across United States and non-United States firms, as well as across developed and emerging economies, with stronger effects in emerging markets and in institutional environments that facilitate contracting and enforcement. A comprehensive set of robustness tests confirms that the results are not driven by industry composition, regional concentration, crisis periods, or omitted institutional factors. Difference-in-differences evidence around the Russia–Ukraine war provides additional support, showing that firms with higher pre-war geopolitical risk increase their reliance on bank debt after 2022. Overall, the findings identify geopolitical risk as a time-varying determinant of corporate financing decisions. |
| Keywords: | geopolitical risk, bank debt, term loans, capital structure, institutional environment, difference-in-differences |
| JEL: | G32 G21 F34 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12624 |
| By: | Arrigoni, Simone; Ferrari Minesso, Massimo |
| Abstract: | This paper provides novel evidence on how income inequality shapes the heterogeneity of US monetary policy spillovers to GDP across foreign economies. Using state-dependent local projections and exploiting variation in disposable income inequality across 87 countries over 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary tightening. GDP contracts up to one and a half times more when inequality is above average. However, while higher inequality amplifies negative spillovers in advanced economies, it mitigates them in emerging markets. To rationalise this finding, we use a three-country open economy Two-Agent New Keynesian (TANK) model, which suggests this divergence is driven by differences in participation in international financial markets. Households in emerging markets face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock. JEL Classification: D31, E21, E52, E58, F42 |
| Keywords: | income inequality, local projections, spillovers, state-dependence, US monetary policy |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263221 |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Müller; Sebastian Schmidt; Ben Schumann; Gernot Müller |
| Abstract: | We confront the notion that flexible exchange rates insulate countries from external disturbances with new evidence for the euro area (EA) and 20 of its neighbors. Using high-frequency data, we first establish that countries with flexible exchange rates ("floats") let their currencies depreciate in response to EA monetary policy shocks, while "pegs" raise interest rates. Yet at business cycle frequency, these depreciations do not translate into insulation: floats contract just as much as pegs—not only in response to monetary policy shocks but also to other shocks originating in the EA. This result appears puzzling in light of received wisdom, but we show that it can be rationalized within a state-of-the-art HANK model and flesh out the underlying transmission channels. |
| Keywords: | exchange-rate regime, Insulation, external shock, exchange-rate disconnect, monetary policy |
| JEL: | F42 E31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12635 |
| By: | Lorenzo Menna (Banco de México); Martín Tobal (Banco de México); Alejandro Werner (Georgetown Americas Institute) |
| Abstract: | We provide the first micro-level evidence on the mechanisms through which monetary policy transmits in an emerging market. Using high-frequency identification and a dataset covering over 10 million firm-month bank-loan observations, we move beyond only documenting policy effects to identify the transmission itself in Mexico. Credit falls earlier, more sharply, and persistently for young firms, SMEs, and firms with recent delinquencies, consistent with a financial-frictions channel. Credit to durable-goods producers also declines more, consistent with an interest-rate channel. However, unlike the pattern documented for advanced economies, the financial-frictions channel dominates. Further evidence suggests that this dominance extends to employment growth. |
| Keywords: | monetary policy, financial frictions, emerging markets; credit growth; bank capitalization |
| JEL: | E52 E51 E44 O54 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:394 |
| By: | Ufuk Can |
| Abstract: | This paper examines how expansionary fiscal policy shapes asset prices and economic sentiment in the United States. I estimate a daily heteroskedastic VAR within a Bayesian framework, in which fiscal shocks, capturing changes in government spending and tax policy, are identified through shifts in volatility. The model includes stock prices, implied volatility, a text-based daily economic sentiment index, the one-year Treasury yield, and the corporate bond spread. The empirical findings show that expansionary fiscal shocks generate a persistent increase in equity valuations, a pronounced decline in implied volatility and uncertainty, and a sustained improvement in news-based economic sentiment. Corporate credit spreads narrow, signaling easier external financing conditions, while short-term yields rise, consistent with expectations of subsequent monetary tightening. These results point to a clear risk-on response driven by risk-premium and confidence channels. Fiscal actions quickly reprice risk and credit conditions, offering valuable guidance for policymakers, investors, and portfolio managers assessing the macro-financial effects of discretionary fiscal measures. By combining high-frequency fiscal identification with both market-based and text-based indicators, the paper provides a more nuanced perspective on the transmission of fiscal policy to financial markets. |
| Keywords: | fiscal policy, asset prices, economic sentiment, uncertainty, Bayesian VAR |
| JEL: | E62 C22 G12 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-27 |
| By: | George Cui; Xiaosheng Guo; Leticia Juarez |
| Abstract: | This paper examines the impact of trade credit and bank loans on firms’ exchange rate passthrough. Using a comprehensive dataset combining customs transaction records and balance sheet data for Chinese exporters during 2000–2011, we document that firms that more intensively extend trade credit to their buyers exhibit more complete exchange rate pass-through. Further empirical investigation sheds light on the underlying mechanism. First, the use of trade credit is positively correlated with exporters’ dependence on bank loans. Second, firm-level bank loan interest rates decline following home currency depreciation. Motivated by these findings, we develop a theoretical model in which exporters constrained by working capital simultaneously extend trade credit to buyers and rely on bank borrowing. The model shows that home currency depreciation improves exporters’ profitability, lowers default risk, and reduces borrowing costs, ultimately enhancing exchange rate pass-through. By endogenizing the interest rate through firm-level default risk, the model reveals a novel channel through which firms’ financial activities shape the dynamics of exchange rate pass-through. |
| Keywords: | Exchange rate pass-through; Trade credit; Financial constraints |
| Date: | 2026–04–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/084 |
| By: | Kris James Mitchener; Gonçalo A. Pina |
| Abstract: | State-contingent debt (SCD) instruments have been proposed as an improvement to sovereign debt markets, but their issuance costs are not well understood. We estimate the SCD premium at issuance and for more than a decade thereafter, employing a quasi-twin bond strategy that uses two very similar French government bonds issued in 1956: one conventional bond and one state-contingent bond with coupons linked to industrial production. At issuance, the expected yield on the SCD bond was 77 basis points higher than its twin. Due to robust growth in the French economy ex-post, the realized SCD premium at issuance was roughly twice as large (146 basis points). However, rising market prices of the state-contingent bond reduced both spreads to zero by 1964. They rose again in May 1968 following an unexpected general strike, which significantly reduced French industrial production; however, by 1970, the SCD premium had fallen to values close to zero. |
| JEL: | E43 E65 F4 H63 N14 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35136 |