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on International Finance |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We propose a general equilibrium model in which U.S. monetary policy affects global risk premia by revaluing the wealth of currency-mismatched arbitrageurs. Assuming their portfolios are mean-variance efficient, arbitrageurs must be short the dollar. A U.S. tightening thus erodes arbitrageurs' net worth and raises the global price of risk. We discipline this mechanism to rationalize the effects of U.S. monetary policy on international asset prices, and we quantify the associated macroeconomic spillovers and role of policy responses abroad. In a potential future with higher dollar interest rates, arbitrageurs' dollar funding and U.S. monetary policy spillovers are dampened. |
| JEL: | E44 E52 F31 G15 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35902 |
| By: | Caitlin Hegarty; Matias Moretti; Pablo Ottonello; Diego J. Perez |
| Abstract: | We study how global financial conditions transmit to firms’ investment. We document that increases in risk premia are followed by large investment contractions, particularly among firms with higher default risk. We develop a quantitative heterogeneous-firm open-economy model where firms finance investment with defaultable debt priced by risk-averse global investors. We identify a strong risk channel linking changes in the global price of risk to financing costs through firms’ quantity of risk—the sensitivity of debt repayment to global shocks. This introduces a risk dimension to stabilization policy: smoothing cash flows reduces firms’ quantity of risk and dampens international financial transmission. |
| JEL: | E22 F00 F30 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35918 |
| By: | Gerardo Ferrara; Andreas Schrimpf; Ganesh Viswanath-Natraj; Zijie Wang |
| Abstract: | We study how offshore non-deliverable forward (NDF) markets transmit exchange-rate pressures to domestic currency markets. Using unique transaction-level data on the universe of centrally cleared NDFs for ten emerging-market currencies over 2013–2025, we show that offshore NDF order flow moves both offshore forward and domestic spot exchange rates and widens the offshore–onshore forward spread. To our knowledge, this is the first transaction-level evidence on price formation in these markets. A $1 billion long-USD order flow depreciates the domestic spot rate by about 10 basis points and the offshore NDF rate by about 18 basis points. The spot impact is larger when dealer balance sheets are tight. Policy episodes in the Chinese renminbi, Malaysian ringgit, and Indian rupee show how changes in offshore speculative activity and arbitrage between offshore and onshore markets affect the spread and domestic exchange rates. We rationalize these findings with a model in which offshore demand pressure generates NDF order flow, dealers hedge inventory through domestic spot markets, and capital controls limit intermediation between offshore and onshore forward markets. |
| Keywords: | exchange rates, non-deliverable forwards, capital controls, price discovery |
| JEL: | E44 E58 F3 F38 G15 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1383 |
| By: | Daniel Marcel te Kaat (University of Groningen); Jiancong Liu (Paris School of Economics); Alexander Raabe (Asian Development Bank) |
| Abstract: | Why do stock markets appear resilient to geopolitical risk? Using firm-level measures of geopolitical risk exposure and data on investment funds’ holdings, we show how funds help swiftly restore valuations compressed during bouts of heightened geopolitical risk. More intense geopolitical shocks strengthen this stabilizing role. Declines in valuations of exposed but otherwise sound firms raise expected returns, attracting funds to acquire these assets at depressed prices, consistent with a search for yield mechanism. This behavior is more pronounced among funds with greater risk-taking capacity and weaker past performance. Funds’ tilt toward exposed stocks increases portfolio concentration, partly offset by higher cash buffers. In contrast, ultimate investors withdraw from exposed funds. The results are not driven by any particular industry—including defense or dual-use production—and are robust to a rich set of controls, fixed effects, and placebo tests. |
| Keywords: | geopolitical risk;investment funds;portfolio reallocations;stock markets |
| JEL: | F3 F5 G1 G3 |
| Date: | 2026–10–16 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:023797 |
| By: | Marcel Brambeer (University of Bonn); Michael Joyce (National Institute of Economic and Social Research); Alex Kontoghiorghes (Bank of England) |
| Abstract: | UK insurance companies hold a large share of UK corporate bonds, while US insurers are also significant investors in dollar-denominated issues by UK firms. Using a unique security-level dataset combining UK and US regulatory transactions data, we study how UK and US monetary policy shocks affect the demand of life insurers for UK corporate bonds. Employing a panel local projections framework, we find that UK monetary tightening raises domestic insurer demand but reduces foreign demand, counteracting the overall demand impact. US monetary contractions generate similar asymmetries, increasing demand from UK insurers and decreasing it from US insurers. These patterns are consistent with differences in regulation, portfolio allocation incentives, and liability structures across UK and US insurers. |
| Keywords: | International portfolio choice;insurance companies;corporate debt;monetary policy. |
| JEL: | E44 G11 G15 G23 G30 |
| Date: | 2026–10–09 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023786 |
| By: | Stéphane Auray; Frédéric Loss (CY Cergy Paris Université, THEMA) |
| Abstract: | Domestic polarization and identity politics have long been treated as background conditions for foreign-policy crises, not as objects of formal analysis in their own right. This paper develops a simple microstructure-cum-geopolitics framework in which a scalar sentiment index, capturing the intensity of a given identity cleavage, simultaneously distorts portfolio choices in sovereign bond markets and shifts the government’s incentives in international crises. On the financial side, we embed a Kyle-type trading environment with rational informed investors, liquidity traders, and a class of portfolio-biased investors whose demand loads on sentiment. In equilibrium, higher sentiment makes order flow less informative, raises price impact and return volatility, and generates a political component of the sovereign spread with a well-defined sentiment beta. On the policy side, we place this financial block inside a parsimonious foreign-policy game in which the government chooses between confrontation and concession, taking as given both domestic political costs and sentiment-dependent financing conditions. We show that there exists a sentiment threshold—a “constraint” associated with the relevant identity cleavage—above which the joint political and financial cost of confrontation exceeds its geopolitical benefit, so that concession becomes strictly optimal even for governments that would otherwise prefer to stand firm. We extend the analysis to dynamic sentiment, delegated-portfolio environments, and multi-asset settings, and we show that higher delegated-portfolio shares and stronger identity tilts tighten the constraint by making spreads more sensitive to sentiment. The framework nestles naturally around classic and modern episodes—from the Kulturkampf to the Russian Civil War, from Suez to the euro-area crisis—in which domestic polarization, institutional fragility, and sovereign risk interact to shape the outer bounds of foreign policy. |
| Keywords: | sovereign risk, market microstructure, Kyle model, identity politics, polarization, delegated portfolios, foreign policy, war and peace, political spreads |
| JEL: | G12 G15 E44 F34 F51 N24 N44 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2026-14 |
| By: | Stefano Carattini; Giseong Kim; Givi Melkadze; Aude Pommeret |
| Abstract: | Many emerging economies tend to rely considerably on carbon-intensive sectors, exposing themselves to potential transition risk. This paper quantifies the impact of this risk and the role of various policies and policy designs in mitigating it. It does so with a two-country two-sector environmental dynamic stochastic general equilibrium model, where each “country” represents a bloc of advanced or emerging economies, respectively. The model includes real-world features such as financial frictions and financial and trade linkages across blocs. With it, we simulate climate policy in advanced economies, in the form of carbon taxes and tariffs, and international coordination around a minimum global carbon price. This paper identifies and quantifies important vulnerabilities among emerging economies to the implementation of climate policy in advanced economies. |
| Keywords: | transition risk, emerging economies, financial frictions, environmental dynamic stochastic general equilibrium model |
| JEL: | E44 E58 F38 F42 G18 O11 Q58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_13069 |
| By: | Selvaraju, Sangeeth; Bastos Goncalves Martin, Guillaume; Weston, Alexander |
| JEL: | F3 G3 N0 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:141062 |
| By: | Lukas Rischen; Achim Hagen |
| Abstract: | Climate change strains public finances through direct economic effects, yet interconnected economies also face indirect climate exposure via trade networks. These spillovers can amplify costs but are widely ignored. We systematically examine foreign climate risk transmission into sovereign financing conditions by mapping and quantifying local and spillover impacts through global value chain linkages. We use a simple static model of production networks to conceptualize climate effects on sovereigns via international spillovers. Deploying regression models for 75 countries (2000-2022), we exploit exogenous variation in temperature to estimate domestic and spillover impacts on financing conditions, measured by sovereign credit ratings. Results are threefold. First, local temperatures exhibit negative and heterogeneous impacts on ratings, with a 1°C anomaly implying an average 0.2 notch downgrade. Second, ignoring foreign climate spillovers underestimates total climate risk by 30%, most severely for cold and small open economies. Third, climate-driven rating changes imply a 36 basis point sovereign borrowing cost increase, of which 11 basis points are attributable to spillovers. Findings hold implications for investors and policymakers regarding asset valuation, climate adaptation and fiscal sustainability. |
| Keywords: | climate change, climate risk propagation, international spillovers, public finance, sovereign credit ratings, global value chains |
| JEL: | F18 F64 G24 H63 Q54 Q56 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_13066 |
| By: | Artuc, Erhan; Barattieri, Alessandro; Noukwe, Isambert Leunga; Mattoo, Aaditya |
| Abstract: | Three key developments, protectionism, aging, and automation, are affecting the global pattern of industrial production and trade. While these trends affect many countries, they are especially consequential for China, which currently dominates global manufacturing. Using a multi-country model fitted with global trade and robotization data, this paper shows that automation can mitigate the adverse effects of protection and aging on competitiveness, particularly in sectors with a high share of automatable tasks. The impact of a 10 percent decline in labor force in China would be offset by doubling of robot productivity in vehicles, but robot productivity would need to more than triple in computers. |
| Date: | 2026–09–28 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11468 |