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on International Finance |
| By: | Daniel Marcel te Kaat; Alexander Raabe |
| Abstract: | How do international investors adjust portfolios in response to biodiversity risk? Using monthly data on investment fund portfolios, we show that the 2021 Kunming Declaration led fund managers to reallocate portfolios from high-biodiversity risk countries to less risky ones, while ultimate fund investors remained unresponsive. Fund managers reduced exposures to extremely high biodiversity risk without seizing low biodiversity risk as an opportunity for profit, characterizing biodiversity as downside risk factor. Investment funds drive cross-country spillovers as the reallocation triggers significant capital flows beneï¬ ting countries in the same geographic region, but outside of a fund's hitherto established portfolio. Using a novel measure of legal action to protect nature, we demonstrate that countries adopting more legal acts are partially shielded from funds reducing their exposure to high-biodiversity risk countries. |
| Keywords: | biodiversity, risk, portfolio reallocation, cross-border capital flows, spillovers, investment fund, Kunming Declaration |
| JEL: | F3 G1 G2 Q5 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-41 |
| By: | Sebastian Horn; Carmen M. Reinhart; Christoph Trebesch |
| Abstract: | States are major international financiers, but their role is poorly understood. We study state-driven cross-border lending over two centuries using a new database covering 1.2 million official loans and grants by 134 governments and 70 multilateral institutions since 1790. We document a dual, state-contingent structure of international credit. In normal times, private creditors dominate cross-border lending. In adverse states of the world, such as wars and financial crises, official creditors step in, at times on a massive scale. These official flows are driven by great powers, are highly subsidized, and are largely absent from canonical models in international macroeconomics. |
| JEL: | E42 F33 F34 F35 F36 G01 G20 N01 N2 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35225 |
| By: | Thomas Drechsel; Michael McLeay; Silvana Tenreyro; Enrico D. Turri |
| Abstract: | We show that the optimal monetary policy and exchange rate framework depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions may vary with the commodity cycle, and we compute the welfare-optimal policy in the presence of price and wage rigidities. Stabilizing domestic prices is welfare-optimal for commodity exporters, in line with standard open-economy policy prescriptions. But for economies that use commodities as inputs in production, optimal policy largely ‘looks through’ the direct and indirect effects of commodity shocks on domestic prices; this contrasts with some earlier findings and policy practice (which only ‘looks through’ the direct effect). Exchange-rate pegs increase welfare for commodity importers because they stabilize wages and employment, though it is not a robustly optimal policy. In emerging and developing economies, where financial conditions are more tied to the commodity cycle, trade-offs are starker and implementing the optimal policy may be challenging, since it requires enough credibility to keep inflation expectations anchored amidst greater volatility in some nominal variables. |
| JEL: | E31 E52 E58 Q02 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35164 |
| By: | Adnan Mazarei (Peterson Institute for International Economics); Maurice Obstfeld (Peterson Institute for International Economics) |
| Abstract: | Over the past century, the United States has provided dollar liquidity abroad through both the US Treasury and the Federal Reserve, but the appropriate mode of liquidity injection depends on the economic, financial, and geopolitical contexts. The Treasury is the more appropriate lending conduit when geopolitical concerns dominate, while Fed dollar provision should primarily be targeted toward global stability objectives and be more insulated from short-term foreign policy motives. Up to now, political abuses of these foreign lending channels have been constrained to some degree by laws, norms, and intergovernmental understandings, but adherence can no longer be assumed, so more formal guardrails are needed. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:iie:pbrief:pb26-9 |
| By: | Luca Fornaro; Veronica Guerrieri; Will Hotten; Lucrezia Reichlin |
| Abstract: | This paper studies how financial conditions affect research and development (R&D) by firms specialized in green innovation. Using U.S. patent data matched with Compustat, we identify “green innovators” as firms with a high cumulative share of green patents. Although they account for a small share of total green patenting, these firms occupy central positions in the green-innovation ecosystem. Estimating firm-level impulse responses to exogenous changes in broad financial conditions, we find that tightening has a disproportionately large and persistent negative effect on the R&D of specialized green innovators. In contrast, R&D by diversified innovators and non-innovators responds only weakly. Green innovators are younger, smaller, and more dependent on external finance, suggesting that financial tightening introduces a systematic bias against upstream green technological development. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1946 |
| By: | Matteo Aquilina; Peter Cincinelli; Giovanni Urga |
| Abstract: | We investigate the systemic risk contribution of 3, 500 Money Market Funds (MMFs) in normal periods and during asset price bubbles in the US from January 2004 to December 2022. Using state-of-the-art statistical techniques for bubble detection and granular fund-level data, we show that MMF characteristics significantly influence systemic risk. Large MMFs and government MMFs, which invest exclusively in US Treasury securities, are associated with reduced systemic risk, while prime MMFs contribute to higher systemic risk. MMFs denominated in US dollars but domiciled offshore exhibit no significant differences from their US-domiciled counterparts. |
| Keywords: | financial crises, financial bubbles, backward supremum augmented Dickey-Fuller test, systemic risk measures, panel data |
| JEL: | C23 G21 G15 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1358 |
| By: | Christopher Clayton; Antonio Coppola |
| Abstract: | We study whether AI methods applied to large-scale portfolio holdings data can improve macroprudential financial regulation. We build a graph-based deep learning model tailored to security-level data on the holdings of financial intermediaries. The architecture incorporates economic priors and learns latent representations of both assets and investors from the network structure of portfolio positions. Applied to the universe of non-bank financial intermediaries, covering nearly $40 trillion in wealth, the model substantially outperforms existing approaches in out-of-sample forecasts of intermediary trading behavior, including in crisis episodes. The model has more than ten times the explanatory power for the cross-sectional variation in asset returns during stress events compared to traditional approaches, and it outperforms existing systemic risk metrics at the institution level. Its learned representations show that the holdings network encodes rich, economically interpretable information about fire- sale vulnerability. The architecture is fully inductive, producing informative estimates even when entire asset classes or investors are withheld from training. We embed our empirical approach into a macroprudential optimal policy framework to formalize why these objects matter for policy and welfare. We show that even in an equilibrium environment subject to the Lucas critique, the predictive information from the model improves welfare by sharpening the cross-sectional targeting of policy interventions, and we demonstrate a complementarity between prediction and structural knowledge. |
| JEL: | C4 G1 G2 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35227 |
| By: | Shekhar Aiyar (Indian Council for Research on International Economic Relations (ICRIER)); Franziska Ohnsorge; Hakan Yilmazkuday |
| Abstract: | Geoeconomic fragmentation—the phenomenon of international transactions being increasingly restricted to politically aligned partners-creates risks for individual countries but also opportunities that some hope to seize by becoming "connector" countries. We modify a standard trade model by introducing iceberg costs that increase with geopolitical distance between country pairs. The response of per capita consumption to a geopolitical shock is shown to depend on two related but distinct indices: vulnerability, which is a country's transaction-weighted geopolitical distance from its trade partners, and connectedness, which is a country's transaction-weighted standard deviation of geopolitical distance from trade partners. The latter captures a country's geopolitical diversification. We distinguish between this type of "horizontal" connectedness and the supply chain-related "vertical" connectedness discussed by previous authors, arguing that the horizontal measure is more relevant in a geoeconomically fragmenting world. We construct a comprehensive database to examine geoeconomic vulnerability and connectedness across multiple types of international transactions, documenting several stylized facts. |
| Keywords: | geoeconomic fragmentation, geopolitics, economic vulnerability, database, trade, international lending, foreign direct investment, FDI, portfolio investment, BIS-reporting banks, icrier |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bdc:wpaper:430 |
| By: | Sangyup Choi (Yonsei University); Hyunpyung Kim (University of Texas at Austin) |
| Abstract: | This paper estimates Korea's long-run real neutral interest rate and quantifies the structural forces behind its decline since 1990. Using semiannual data for 12 advanced economies over 1990-2024, we estimate a cross-country panel state-space model that separates country-specific productivity and demographic trends from common global components. Korea's neutral rate falls from about 1.6% in 1990 to roughly 0.7% in 2024. The model attributes this decline mainly to slower trend productivity growth, the post-2014 reversal in the working-age population share, and spillovers from major advanced economies. Safe-asset market forces also contribute, but supply and demand effects partly offset each other. Counterfactual simulations suggest that removing global spillovers would raise the 2024 estimate by about 0.6 percentage points, while holding the working-age share at its 2014 level would raise it by about 0.5 percentage points. Conditional demographic scenarios imply continued downward pressure absent offsetting structural changes, highlighting implications for monetary policy space. |
| Keywords: | Neutral interest rate; Demographic changes; Korean economy; Global spillovers; State space model |
| JEL: | E43 E47 E58 F15 F62 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-292 |
| By: | Rolando Avendano (Asian Development Bank); Emily Blanchard (Dartmouth College); William Olney (Williams College); Amelia Santos Paulino (United Nations Conference on Trade and Development); Claudia Trentini (United Nations Conference on Trade and Development) |
| Abstract: | This paper examines how global greenfield foreign direct investment (FDI) flows are evolving amid rising geoeconomic fragmentation. We use difference-in-differences and event study approaches to analyze changes in FDI around key bilateral inflection points. We find a decline in FDI from the US and broader Group of Seven Plus (G7+) into the PRC, concentrated in trade-exposed, efficiency-seeking sectors. Investment diversion—particularly from the PRC to Association of Southeast Asian Nations (ASEAN) members and Latin America—is evident, but this growth was concentrated in less global value chain (GVC)-integrated activities, suggesting that GVC links may act as a constraint on investment relocation. These findings suggest that while tensions may be reshaping global investment, GVC dependencies are likely limiting firms’ ability to reallocate production at scale, making the “great reallocation” least evident where it was most expected. |
| Keywords: | FDI;tensions;global value chains;globalization;reallocation |
| JEL: | F21 F23 L23 C23 |
| Date: | 2026–06–10 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:022699 |