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on International Finance |
| By: | Cara Bordier; Lukas Frei; Simon Stalder |
| Abstract: | The US dollar (USD) is involved in 88% of global foreign exchange transactions, partly due to its role as a vehicle currency. Using high-frequency data from primary interdealer platforms, we develop a novel methodology to identify USD cross-trades. We show both theoretically and empirically that such trades can generate price fluctuations in USD exchange rates. Employing an instrumental variables approach, we find that increased cross-trading activity amplifies aggregate USD volatility. These results highlight a fundamental trade-off: while dollar dominance enhances market liquidity, it also increases the currency’s exposure to shocks originating in other currency pairs. |
| Keywords: | Dollar dominance, Volatility, Foreign exchange markets, High-frequency trading |
| JEL: | F31 G12 G14 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-05 |
| By: | Bahaj, Saleem; Fuchs, Marie; Reis, Ricardo |
| Abstract: | At the end of 2025, there were 177 cross-border liquidity lines between central banks connecting countries that accounted for 81% of world GDP. This paper maps the evolution of these arrangements since 2000. We show that the lines form a network through which banks can indirectly obtain access to the USD even when their central bank has no agreement with the Federal Reserve. These indirect connections give the People’s Bank of China a central role and show the fragility of liquidity provision to geopolitical tensions. We present cross-country evidence that the indirect connections reduce CIP deviations at the tails, and causal evidence that liquidity lines are substitutes to FX reserves. |
| Keywords: | swap lines; capital flow; financial crises; IMF; cross-currency basis |
| JEL: | E44 F33 G15 |
| Date: | 2026–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137636 |
| By: | Simone Arrigoni; Massimo Ferrari |
| 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 a panel of 87 countries over the period 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary policy tightening. GDP contracts by 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 that this divergence is driven by differences in participation in international financial markets. Households in emerging market economies face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock. |
| Keywords: | US Monetary Policy, Spillovers, Income Inequality, Local Projections, State-Dependence |
| JEL: | D31 E21 E52 E58 F42 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1043 |
| By: | Gerald Alex Cisneros Rojas (Central Bank of Peru) |
| Abstract: | This paper provides issuance-level evidence from an emerging economy with a dual-currency primary bond market, showing that currency denomination not only affects the level of corporate bond spreads but also fundamentally reshapes the transmission of macro-financial shocks across credit ratings. Using a comprehensive dataset of 1, 323 corporate bond issuances between 2008 and 2024, we combine bond level characteristics, macro-financial conditions, and firm-level financial indicators to analyze how credit risk is priced across currency segments. We find clear evidence of currency segmentation in the pricing of corporate bonds. Spreads on USD-denominated bonds exhibit greater sensitivity to macro-financial conditions than those issued in local currency, particularly with respect to inflation and monetary policy variables. In addition, we document substantial heterogeneity across credit ratings, with lower-rated bonds displaying markedly stronger responses to macroeconomic shocks. A variance decomposition analysis shows that credit ratings are the dominant determinant of spread variation, explaining approximately 23% of total spread variance and more than 60% in the USD-denominated segment. |
| Keywords: | Corporate bond spreads; Currency denomination; Credit ratings; Primary bond market; Macroeconomic shocks; Emerging markets; Peru |
| JEL: | G12 G32 F31 E44 |
| Date: | 2026–05–21 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp16-2026 |
| By: | K. Peren Arin; Ozan Eksi; Neslihan Kaya Eksi; Moo-Sung Kim |
| Abstract: | We examine the international transmission of US monetary policy shocks to European firms using high-frequency identification and granular firm-level panel data. Exploiting monetary policy surprises around FOMC announcements combined with firm-level data across eight European economies over 2004-2024, we document a sharp divergence in spillover effects. A contractionary US monetary shock significantly reduces investment rates and sales growth among UK firms, with investment declining by approximately 4% and sales growth by around 0.7-0.8% at peak, with effects persisting for two to four years. By contrast, Continental European firms, whether members of the euro area or independent-currency economies such as Sweden and Switzerland, do not exhibit a significant response. Heterogeneity analysis reveals that large and small UK firms bear broadly similar average burdens, with large firms showing more precisely estimated responses, while leverage does not systematically differentiate transmission. The UK-EU divergence is not explained by the exchange rate regime: the null result for Continental Europe extends to non-euro countries, pointing instead to the exceptional depth of UK-US financial integration, and the centrality of London in global dollar funding markets. |
| Keywords: | monetary policy spillovers, firm-level heterogeneity, international transmission channels |
| JEL: | E52 F43 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-33 |
| By: | Yevheniia Bondarenko; Nayeon Kang; Vivien Lewis; Matthias Rottner; Yves Schueler |
| Abstract: | Geopolitical risk is a major concern for the euro area, yet widely used measures largely reflect a US perspective. We introduce a geopolitical risk indicator tailored to the euro area using local European news sources. Shocks to this index have significant recessionary and inflationary consequences in the euro area, effects that would be missed when relying on the corresponding US-based measure. We estimate that the war in Ukraine imposed substantial output losses and inflationary pressures on the euro area in 2022. Combining structural scenario analysis with end-of-sample nowcasting, we show that euro area prospects are highly sensitive to future developments in geopolitical risk. We complement these analyses with two news-based measures of sanctions intensity and shortages for the euro area. |
| Keywords: | euro area, geopolitical risk, inflation, sanctions, shortages |
| JEL: | E31 E32 F42 F51 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1348 |
| By: | Chiţu, Livia; Gori, Sofia; Gürkaynak, Refet S. |
| Abstract: | This paper is the first to simultaneously examine firms’ market-based and bank-based external finance premia and investigate the behavior of corporate bond markets in the United States and the euro area, with a focus on country- and state-level heterogeneity in monetary unions. Using a unique micro-level dataset, we show that market finance premia, measured with corporate bond spreads, are remarkably similar in both the euro area and the US in terms of how little they depend on the issuer’s state or country of origin. In neither monetary union is the transmission of monetary policy to corporate bond rates differentiated as a function of the state or country of issuer. Unconditionally, the state or country of origin of the bond issuers explains very little of the variance among corporate bond spreads, in stark contrast to bank loan spreads that are determined at the country level for the same sample of bond-issuing firms. The euro area corporate bond market is as integrated as the US one, contrary to conventional beliefs. The marked difference between country influences on bank loan and corporate debt spreads is not due to selection effects in bond issuing firms but owes directly to the nature of market finance. JEL Classification: E44, E52, E58, G12, G23 |
| Keywords: | bank finance, bank loan spreads, corporate bond spreads, external finance premium, firm and country heterogeneity, market finance, monetary policy transmission, monetary unions |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263235 |
| By: | Petre Caraiani (Institute for Economic Forecasting, Romanian Academy, Romania, Bucharest University of Economic Studies, Romania); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | Using a unique firm-level survey from the Bureau of Economic Research in South Africa covering a panel of 1, 444 South African firms surveyed at quarterly frequency between 2000 and 2023, we examine how global oil news shocks shape firms' inflation and wage expectations. We identify exogenous oil supply news shocks following Kanzig (2021) and embed them in a fixed-effects panel regression that controls for domestic macroeconomic and financial conditions through four estimated factors. A one-quarter-lagged oil news shock has a positive and statistically significant effect on firm-level inflation expectations (0.14 percentage points at the one-year horizon, 0.09 at two years) and wage expectations (0.13 percentage points). The responses are robust to alternative shock identifications and sub-sample estimations. Sectoral analysis reveals heterogeneity, more substantial for wage, that we interpret in light of two channels documented in the literature -- cost pass-through and salience. The findings have direct implications for inflation-targeting policy in emerging economies, particularly in light of South Africa's ongoing debate over a lower target. |
| Keywords: | oil shocks, firm-level expectations, inflation, wages |
| JEL: | C67 E31 E32 Q43 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202615 |
| By: | Maximilian Fandl; Boris Fišera; Adam Geršl; Christian Schmieder |
| Abstract: | This paper investigates how changes in monetary policy interest rates affect credit loss rates in advanced and emerging market economies using annual data for 113 countries over the past three decades. Applying local projections, we find that a 1 percentage point increase in policy rates raises loan loss rates, on average, by 0.1 percentage points - an economically significant effect that is larger in relative terms in advanced economies than in emerging market economies. These rule-of-thumb estimates are robust across methodologies, including instrumental-variable estimation, exogenous monetary policy shocks, and bank-level data. Crucially, the effect of rate hikes is strongly state dependent: it intensifies when pre-tightening monetary policy is loose, private debt is high, fiscal policy is contractionary, the economy is in a downturn, and central bank balance sheets are shrinking at the same time. Banks with riskier pre-tightening loan portfolios record larger increases in credit losses. Our findings suggest that central banks and prudential authorities should account for the side effects of monetary policy and incorporate credit-risk dynamics into macroprudential and stress-testing frameworks to safeguard financial stability. |
| Keywords: | credit loss rates, interest rates, monetary policy, financial stability, macro-financial conditions |
| JEL: | E32 E52 G21 G28 G32 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1346 |
| By: | J. Scott Davis; Pon Sagnanert |
| Abstract: | During the initial weeks of the COVID-19 crisis, imbalances in the offshore dollar funding market led to safe-haven appreciation of the dollar. Fed swap lines between the U.S. central bank and counterparts abroad addressed these imbalances, subsequently helping reduce the cost of offshore dollar borrowing, reversing dollar appreciation and providing liquidity. |
| Keywords: | international economics; monetary policy; inflation; financial crises; COVID-19; swaps |
| Date: | 2024–05–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:98271 |