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on International Finance |
| By: | Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu |
| Abstract: | We construct a two-country New Keynesian model in which the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates since the demand for high quality collateral drives up the “convenience yield” earned by U.S. government bonds. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. The model can account for the observed exchange rate and external position behavior of the U.S. While the model incorporates only a small change from a workhorse New Keynesian model with segmented financial markets, it synthesizes and reconciles three major perspectives: on exorbitant privilege, global financial intermediation, and convenience yields. |
| Keywords: | exchange rates, financial frictions, liquidity, convenience yield, dollar dominance |
| JEL: | F3 F4 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_13008 |
| By: | Guillaume Bazot (Aix Marseille Univ, CNRS, AMSE, Marseille, France); Eric Monnet (Paris School of Economics); Matthias Morys (University of York [York, UK]) |
| Abstract: | The origins of modern financial globalization are often traced to the emergence of the Eurodollar market in the 1960s, but its implications for monetary policy under Bretton Woods remain unclear. This paper revisits international monetary transmission between 1948 and 1971 using a new monthly series of exogenous U.S. monetary policy shocks based on unanticipated daily changes in the Fed discount rate. We show that U.S. monetary tightening strongly affected U.S. inflation, output, and unemployment, while attracting capital inflows primarily through borrowing Eurodollars from the foreign branches of U.S. banks. After the restoration of current account convertibility in 1958, U.S. monetary shocks also increased Eurodollar and foreign interest rates, pointing to growing international financial integration. However, they had no significant effects on foreign output or credit, suggesting that domestic financial regulation and market segmentation continued to insulate Japanese and European economies from international shocks despite the expansion of offshore dollar markets. |
| Keywords: | US monetary policy shocks; International monetary transmission; Trilemma; Financial globalization; Capital controls; Eurodollar market; Bretton Woods system |
| JEL: | E44 E52 F33 F36 F42 N10 N20 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2625 |
| By: | Lucas ter Steege (Deutsche Bundesbank); Sofia Velasco (Banco de España) |
| Abstract: | This paper studies the financial-market transmission of the April 2025 U.S. tariff announcements, with a particular focus on the unusual combination of dollar depreciation and rising long-term U.S. Treasury yields. We ask whether the market reaction can be understood as the propagation of a single tariff-announcement shock or whether it instead reflects the interaction of distinct macro-financial disturbances. To address this question, we exploit time variation in the volatility and excess kurtosis of structural shocks to recover macro-financial forces without imposing event-based restrictions or exclusion assumptions. Our results show that the initial market reaction is consistent with a conventional safe-haven shock, but this mechanism cannot account for the subsequent joint behaviour of exchange rates and long-term U.S. Treasury yields. Instead, different segments of financial markets are dominated by distinct orthogonal shocks associated with safe-haven demand, confidence in U.S. institutions, Treasury-market intermediation and changes in the convenience value of dollar-denominated safe assets. |
| Keywords: | exchange rates, Treasury yields, risk premia, trade policy shocks, safe-haven dynamics, heteroskedastic identification, financial spillovers |
| JEL: | F31 F41 G14 E44 C32 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2629e |
| By: | Illenin O. Kondo; César Sosa-Padilla; Zachary J. Swaziek |
| Abstract: | China's rise as a major lender to emerging economies since the early 2000s has introduced a unique form of lender power: borrowers cannot default on the subsidized loans they receive, but may still face sudden rollover demands outside their control. We argue this distinctive structure—bilateral rollover risk without default risk—disciplines recipient countries' borrowing on international markets. In a quantitative long-term sovereign debt model, we show that such rollover-prone nondefaultable Chinese loans expose market debt to dilution risk: governments may need to tap international lenders when repayment to China comes due, and therefore choose to deleverage from private markets when Chinese inflows arrive. Market debt and bond yield dynamics in the data are consistent with this “disciplining effect.” We then use the model to study two geopolitical scenarios: a bloc-formation exercise in which China offers take-it-or-leave-it loans to induce the borrower's exit from international debt markets, and an optimal exposure-to-China problem under the risk of a permanent and sudden retrenchment of Chinese funding. Together, these results show how official finance à la China can simultaneously improve market borrowing conditions and become a new destabilizing force to the global sovereign debt architecture as geopolitical alliances shift. |
| JEL: | F34 F41 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35767 |
| By: | Ece Ozge Emeksiz; Andres Fernandez; Nikhil Patel; Ivan Petrella; Tatjana Schulze |
| Abstract: | Exchange rate movements in emerging market and developing economies (EMDEs) can reflect shifts in macroeconomic fundamentals or, alternatively, financial shocks that impair currency market functioning. Distinguishing between these fundamental and non‑fundamental drivers is central to the IMF’s Integrated Policy Framework (IPF) and to assessing when foreign exchange (FX) intervention may be appropriate to smooth currency risk premia. This Staff Discussion Note develops an empirical framework to distinguish between these two types of drivers using deviations from uncovered interest parity (UIP), which capture currency risk premia and limits to arbitrage. Using 15 years of monthly data from 25 EMDEs, the paper documents stylized facts on UIP premia and introduces a toolkit that combines macro‑financial data, model‑based sign restrictions, and narrative evidence to identify episodes in which exchange rate movements are driven by financial shocks rather than fundamentals. Applications to Chile and Brazil show that such financial shock driven episodes account for around one third of UIP premium fluctuations—but are associated with sizable contractions in economic activity. The framework can be applied both retrospectively and in real time, providing policymakers with a structured approach to interpreting exchange rate pressures. |
| Keywords: | exchange rates; financial shocks; uncovered interest parity; narrative VARs |
| Date: | 2026–09–17 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfsdn:2026/003 |
| By: | Michael D. Bauer; Maik Schmeling; Andreas Schrimpf |
| Abstract: | We construct a new high-frequency measure of risk appetite shifts around Federal Open Market Committee (FOMC) meetings, the common component of changes in risk-sensitive indicators. Fed policy actions and communication have substantial effects on risk appetite. Interest-rate surprises explain only about one-fifth of the variation in risk appetite, so most policy-induced changes in risk asset prices are orthogonal to the expected rate path. We therefore use both surprises as external instruments in a proxy SVAR with two separately identified shocks. Risk appetite shocks have large and persistent contractionary effects, lowering output and prices while raising unemployment. By contrast, the effects of risk-free rate shocks tend to be small and imprecisely estimated, and some have puzzling signs. Monetary transmission appears to operate primarily through risk appetite and risk asset prices. Estimates relying on interest-rate surprises alone miss most of these effects, for two reasons: the link from interest rates to risk appetite is state-dependent, and Fed communication moves it independently of the expected rate path. |
| Keywords: | monetary policy shocks; risk appetite; external instruments; proxy SVAR; central bank communication |
| JEL: | E43 E52 E58 |
| Date: | 2026–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103796 |
| By: | Pol Antràs; Adrian Kulesza; Andrea F. Presbitero |
| Abstract: | We study how the U.S.-China trade war has reshaped global trade patterns, creating significant spillovers to third countries. Using recent tariff policy changes and monthly international trade flow data, we document a redirection of Chinese exports away from the U.S. market and toward third countries. To interpret the impact of these reallocations on third countries, we introduce a taxonomy that separates four exposure margins - export competition, import competition, consumer gains, and sourcing gains - and construct theoretically-derived indices that map countries into these channels. Recent work often proxies such exposure with trade-basket similarity. We show why this can be problematic: similarity measures are symmetric and omit the size of product-specific shocks, Chinese market penetration, substitution elasticities, and incidence weights. Our model-based indices therefore generate country rankings that differ substantially from conventional similarity measures. |
| JEL: | F1 F2 F4 F6 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35785 |
| By: | Kakeru Sudo (Bank of Japan); Naoki Funada (Bank of Japan); Ryoichi Okuma (Bank of Japan) |
| Abstract: | Major Japanese banks are increasingly focusing on foreign currency deposits for stable funding of overseas lending. Against this background, this paper provides a quantitative analysis using granular data on foreign currency deposits at major banks. Specifically, it decomposes recent developments in overall deposit balances into depositor dynamics to characterize their pattern, identifies factors affecting depositor attrition and tenure length, and examines the determinants of deposit spreads -- metrics for assessing deposit acquisition costs. The results confirm that recent deposit growth is driven by existing non-Japanese depositors adding to their balances. Furthermore, expanding transaction banking services that attract transactional deposits contributes to containing depositor attrition, extending tenure, and lowering deposit acquisition costs. Using these findings to engage in further discussions with major banks and foreign authorities will be important for enhancing foreign currency funding stability and advancing monitoring methods. |
| Date: | 2026–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojrev:rev26e12 |
| By: | Daniel O. Beltran; Canlin Li |
| Abstract: | We develop a rich demand system framework to quantify the yield effects of shifts in U.S. Treasury supply and demand. Our model captures time-varying holdings shares and estimates sectoral demand elasticities using instrumental variables. We find that the Treasury market has become increasingly price-sensitive over time, driven by the declining participation of less price-sensitive foreign official investors and the rising role of more price-sensitive hedge funds and other private investors. A $100 billion increase in Treasury supply currently raises five-year yields by approximately 3 basis points. We validate the model by showing that the shifts in investor base explain a significant portion of historical yield changes. Our framework provides a flexible tool for policy analysis and counterfactual scenarios, including the yield effects of foreign official investor sales and Federal Reserve balance sheet policies. |
| Keywords: | balance sheet policies; Treasury markets; asset pricing; demand elasticity; foreign official sales; term premium |
| JEL: | E43 E52 G11 G12 |
| Date: | 2026–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103792 |
| By: | OECD |
| Abstract: | Mobilising finance at scale is essential to halt and reverse biodiversity loss. This paper provides a comprehensive assessment of global biodiversity finance from all sources – public and private, domestic and international – drawing on currently available data. The paper also identifies persistent gaps in the consistency, international comparability, coverage and transparency of biodiversity finance data reported by countries to the Convention on Biological Diversity. It presents options to improve reporting by aligning it with international statistical standards, enhancing transparency in methodologies and strengthening measurement of private finance, while reducing duplication and reporting burdens. |
| Keywords: | Biodiversity finance, environmental expenditure, environmental-economic accounting, finance tracking, KMGBF Target 19, public expenditure |
| JEL: | Q57 Q58 H50 |
| Date: | 2026–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:oec:envaac:51-en |