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on International Finance |
| By: | Dao, Mai Chi; Gourinchas, Pierre-Olivier |
| Abstract: | We study the behavior of Covered Interest Parity (CIP) deviations – aka the CIP basis - in Emerging Markets (EM). A major challenge in computing the CIP basis in EM’s lies in measuring local currency interest rates which are free of local credit risk. To do so, we construct a ‘purified’ CIP basis for eight major EM currencies using supranational bonds issued in EM local currencies and US dollar going back twenty years. We show that this ‘purified’ CIP basis aligns well with theory-implied predictions. In the cross-section and the time-series, the basis correlates with fundamental forces driving supply and demand for dollar forwards. Shocks to global dollar funding costs, global intermediary’s balance sheet capacity, and the demand for dollar safe assets interact with currency-specific dollar hedging and funding needs in moving the CIP basis in EM’s. |
| Keywords: | Emerging markets |
| JEL: | F31 G15 G12 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20927 |
| By: | Tarek Alexander Hassan; Thomas M. Mertens; Jingye Wang; Tony Zhang |
| Abstract: | This paper develops a calibrated general-equilibrium model to study how different configurations of trade and financial policy reshape the hierarchy of global currencies—and the U.S. dollar's position at its anchor. Currency safety and anchor status arise endogenously from each economy's 'effective size'—the weight its domestic shocks carry in setting world prices. Tariffs reduce this effective size on the goods side; capital controls do the same on the financial side. A unifying result emerges: The economy that maintains the deepest integration with the global trading network retains the largest safety premium and gains anchor status. We use this framework to evaluate the effects of three policy levers for Europe that affect the effective size of the euro: internal harmonization and enlargement, trade openness, and capital-account openness. The stakes are large: In our model, shifts in currencies' safety can redirect global capital flows and alter sovereign borrowing costs by hundreds of billions of dollars annually. |
| JEL: | F13 F31 F33 F36 F38 F41 G15 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35386 |
| By: | Bolhuis, Marijn; Grigoli, Francesco; Kolasa, Marcin; Meeks, Roland; Presbitero, Andrea; Zhang, Zhao |
| Abstract: | Emerging markets have shown remarkable resilience during risk-off episodes in recent years. While favorable external conditions — good luck — contributed to this resilience, improvements in policy frameworks — good policies — played a critical role in bolstering the capacity of emerging markets to withstand the adverse consequences of these events. Improvements in monetary policy implementation and credibility have reduced reliance on foreign exchange (FX) interventions and capital flow management measures, and stricter macroprudential regulation also contributed to less FX interventions. Also, central banks have become less sensitive to fiscal interference and hold sway over domestic borrowing conditions. Looking ahead, countries with robust frameworks face easier policy trade-offs and are better positioned to navigate risk-off episodes. In contrast, economies with weaker frameworks risk de-anchoring inflation expectations and larger output losses if monetary tightening is delayed, especially when persistent price pressures emerge. In these settings, FX interventions offer only temporary relief and are less necessary when policy frameworks are sound. |
| Keywords: | Emerging markets; Monetary policy; Risk-off shocks |
| JEL: | F14 F60 I18 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20857 |
| By: | Wong, Ka Lok; Manger, Mark; Panizza, Ugo |
| 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. |
| JEL: | F34 H63 E44 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21251 |
| By: | Boyarchenko, Nina; Elias, Leonardo |
| Abstract: | We estimate the global price of credit risk from a large cross section of global corporate bond returns. We show that a single factor, constructed as a nonlinear function of past credit spreads, equity market volatility, and their interactions, prices bond returns in both the time series and the cross section. The factor significantly outperforms alternative measures of global financial conditions, explaining up to 13% of variation in bond-level three-month-ahead returns. A high global price of credit risk further translates into deteriorations in local credit conditions, outflows from global funds, and higher expected returns to global funds. |
| Keywords: | Global financial cycle; Return predictability |
| JEL: | F30 G15 G12 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21268 |
| By: | Kim, Dohan; Milesi-Ferretti, Gian Maria |
| Abstract: | Over the past two decades, many emerging market economies have become more resilient to external financial shocks. This paper assesses whether such resilience is broadly shared across emerging markets and developing economies by classifying them into three tiers based on economic size, income level, institutional strength, and financial integration. The analysis shows that first-tier emerging markets and developing economies have improved their external balance sheets and reduced dependence on official support. However, second- and third-tier emerging markets and developing economies have experienced growing external vulnerabilities since the global financial crisis, marked by rising external debt liabilities and declining foreign exchange reserves. Using a range of indicators, including sovereign defaults, arrears, partial defaults, and International Monetary Fund lending, the paper identifies episodes of external financial distress and shows that distress remains widespread among second- and third-tier emerging markets and developing economies. The empirical analysis confirms that key components of the net international investment position — especially external debt and foreign exchange reserves — predict the onset of external financial distress, with institutional quality shaping the impact. Weak institutions amplify risks, while strong institutions mitigate them. These findings highlight the importance of recognizing heterogeneity across emerging markets and developing economies, strengthening institutional quality alongside external balance-sheet management, and rebuilding buffers to safeguard against renewed global financial stress. |
| JEL: | F34 F36 F65 G15 H63 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21015 |
| By: | HacıoÄŸlu Hoke, Sinem; Ostry, Daniel; Rey, Hélène; Rousset Planat, Adrien; Stavrakeva, Vania; Tang, Jenny |
| Abstract: | Drawing on 100 million transactions, we show how speculators, hedgers, and market makers interact in the world’s largest FX derivatives market, and that derivatives trading can affect exchange rates. Firms in the largest client sectors — pension and investment funds, insurers, and nonfinancials — use FX derivatives primarily to hedge currency risk, with dealer banks providing the liquidity. Hedge funds, with comparatively smaller net exposures, trade speculatively, whereas dealer banks insulate themselves from changes in speculative demand by taking offsetting positions with hedgers, especially nonfinancials. Non-bank market makers, instead, take residual exchange-rate exposures "on the margin". Hedge funds' speculative flows help transmit monetary policy shocks to exchange rates, while investment funds' unwinding of hedges contribute to dollar appreciations when credit risk rises. Our results highlight that exchange rates depend on the composition of trading activities in FX derivatives markets. |
| Keywords: | Exchange rates; Hedging; Speculation; Market making; Heterogeneity |
| JEL: | F30 F31 G15 G20 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20978 |
| By: | Benhima, Kenza; Bolliger, Elio; Davenport, Margaret |
| Abstract: | We identify a novel channel of international financial contagion driven by investor expectations. Using a unique dataset linking investors’ cross-country GDP growth expectations to their equity mutual fund investments and to funds’ country allocations, we show that inflows into mutual funds respond strongly to fund-level expected growth, whereas funds’ country allocations react only weakly to country-specific expectations. This asymmetry generates co-ownership spillovers: negative expectations about one country propagate mechanically to other countries held in the same funds, even in the absence of changes in the country's own expected fundamentals. We develop a portfolio choice model with delegated investment and portfolio stickiness to rationalize this pattern. Because country weights in global portfolios are highly granular, these spillovers are quantitatively important, accounting for about 80% of expectation-driven capital flow reallocation. Small countries are disproportionately exposed to these spillovers, while large countries are their main sources. |
| JEL: | D84 F32 G11 G15 G23 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21134 |
| By: | Miranda-Agrippino, Silvia; Nenova, Tsvetelina; Rey, Hélène |
| Abstract: | Using a novel indicator for the People’s Bank of China monetary policy stance, we estimate a policy rule that accounts for the dual nature of its price stability mandate—encompassing domestic inflation and the exchange rate—and for the evolution of its operational framework. The Ins: The domestic transmission follows textbook patterns, with exceptions due to the active management of the renminbi and the financial account. The Outs: International spillovers are powerful and affect commodity markets, global production and trade. The pass-through to foreign (US) prices is substantial. Financial spillovers are second-order, and mostly derivative from trade spillovers. |
| Keywords: | Monetary policy; International spillovers; China |
| JEL: | E44 E52 F33 F42 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20958 |
| By: | Forbes, Kristin; Ha, Jongrim; Kose, M. Ayhan |
| Abstract: | Business cycles are increasingly driven by global shocks, rather than the domestic demand shocks prominent in earlier decades, posing challenges for central banks seeking to meet domestic mandates and communicate their policy decisions. This paper analyzes the evolving influence and characteristics of global and domestic shocks in advanced economies from 1970-2024 using a new FAVAR model that decomposes movements in interest rates, inflation, and output growth into four global shocks (demand, supply, oil, and monetary policy) and three domestic shocks (demand, supply, and monetary policy). We find that the role of global shocks has increased sharply over time and that their characteristics differ from those of domestic shocks across multiple dimensions. Compared to domestic shocks, global shocks have a larger supply component, higher variance, more persistent effects on inflation, and are more asymmetric (contributing more to tightening than to easing phases of monetary policy). As global supply shocks have become more prominent, central banks have also been less willing to “look through†their effects on inflation than for comparable domestic shocks. The distinct characteristics and rising influence of global shocks—particularly global supply shocks—have significant implications for modeling monetary policy and designing central bank frameworks. |
| Keywords: | Federal funds rate |
| JEL: | E31 E32 E52 F41 F42 F44 F47 G2 Q43 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21109 |