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on International Finance |
| By: | Stefan Avdjiev; Kristin Forbes; Tsvetelina Nenova; Marjorie Santos |
| Abstract: | This paper analyses the evolution and drivers of the stock of global imbalances in order to assess associated vulnerabilities and potential adjustment scenarios. These imbalances have recently increased sharply, with a deterioration in the US net international investment position (NIIP) mirrored by NIIP improvements in most other major economies. We decompose these NIIP changes into their proximate drivers for a sample of 28 economies and find that financial factors (including valuation changes and investment income flows) are the primary drivers of global imbalances at both short and long horizons, while trade also plays a significant role (especially at long horizons). Valuation gains on international investment positions have supported economic growth in many countries since 2010, while also increasing their vulnerability to financial market adjustments. To assess the implications and potential risks, we simulate the spillovers through this cobweb of global imbalances from: (i) a sharp dollar depreciation, (ii) a repricing of equity markets, (iii) higher interest rates, and (iv) a halving of trade imbalances. These scenarios highlight the large international spillovers that would be associated with any reduction in global imbalances, the heterogeneous impact of various rebalancing mechanisms on individual countries and the limits of popular proposals for reducing these imbalances. The persistence of global imbalances underscores the importance of building resilience to the large spillovers that can occur through this cobweb of international exposures. |
| JEL: | F01 G15 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35962 |
| By: | Christoph E. Boehm; Husang Kim; T. Niklas Kroner |
| Abstract: | We propose a novel procedure to identify a main monetary policy (MMP) shock as the linear combination of monetary policy surprises that best explains macroeconomic fluctuations. Implemented with two standard high-frequency yield-curve surprises and the Boehm and Kroner (2024) non-yield shock, the MMP shock explains nontrivial business-cycle variation over the last 30 years, in contrast with prior findings. Moreover, the MMP shock differs markedly from a textbook monetary policy shock: a contractionary shock leaves interest rates mostly unchanged but persistently lowers headline prices and appreciates the dollar, while temporarily tightening financial conditions and depressing industrial production. |
| Keywords: | federal reserve, monetary policy, stock market, exchange rates, asset prices, risk premia, information effects, high-frequency identification |
| JEL: | E43 E44 E52 E58 F31 G10 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_13117 |
| By: | Eric T. Swanson; Wang Renxuan; Yanbin Wu |
| Abstract: | When the Federal Reserve raises interest rates, standard macroeconomic models and VARs predict that output, employment, and inflation should fall over the next several quarters. However, monthly-frequency professional macroeconomic forecast revisions are sometimes positively correlated with Fed interest rate changes, leading to a debate about what could explain these puzzling correlations. We bring to bear new high-frequency data on this question from macroeconomic event contracts traded on Kalshi, a CFTC-licensed, U.S.-based event trading exchange and prediction market. These high-frequency event contracts allow us to isolate and estimate the effects of monetary policy and other announcements on Kalshi market-implied macroeconomic expectations. Our results are consistent with standard transmission channels from monetary policy to the macroeconomy, with little or no role for a “Fed Information Effect”. |
| JEL: | E43 E52 E58 G14 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35968 |
| By: | Matteo Leombroni; Carolin Pflueger; Adi Sunderam |
| Abstract: | Does the compensation investors require for holding government bonds vary with their risk? We measure expected excess returns using market yields and professional forecasts of future yields, showing that they are tightly linked to a standard measure of risk: bonds’ betas with respect to the stock market. In a month-by-maturity panel of U. S. Treasuries from 1988 to 2024, the correlation between expected excess returns and bond–stock betas is 67%. The correlation is driven by variation in market yields rather than forecasters’ expectations. The relationship between realized excess returns and betas is weak in a univariate regression, but it becomes economically large and significant when we control for monetary-policy and macroeconomic forecast errors. Similar results obtain in an international panel of developed countries from 1989 to 2024. Our findings suggest that variation in risk premia driven by changing bond risk accounts for more than half of both the decline in U.S. long-term bond yields since the mid-1980s and their increase since 2020. |
| JEL: | E0 E40 E44 G1 G10 G12 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35973 |
| By: | Poinelli, Andrea; Pelizzon, Loriana; Nguyen, Benoît; Linzert, Tobias; Tomio, Davide |
| Abstract: | The functioning of sovereign bond markets is closely intertwined with repo markets, where investors finance long positions and source bonds for short sales. We show, theoretically and empirically, how conditions in the cash bond market fundamentally shape repo rates: When demand for cash bonds exceeds available supply, arbitrageurs, notably hedge funds, step in to bridge the gap by shorting bonds and borrowing them in the repo market. These arbitrage strategies drive a wedge between monetary policy rates and repo rates, generating “specialness”. To investigate the drivers of investors’ demand for repo contracts, we obtain regulatory data covering the entire universe of repos backed by German sovereign bonds. We identify the ultimate borrowers and lenders of securities and estimate their demand and supply elasticities for the repo market. Supply, dominated by the public sector, accounts for 87% of the aggregate elasticity. Demand, driven mainly by hedge funds, is strongly inelastic: a 10% increase in borrowing costs reduces their borrowing by only 1%. Despite being among the most price-elastic investors in cash bond markets, hedge funds are inelastic in repo markets because their bond borrowing bridges the preferred-habitat demand in the cash bond market: their elasticity is inherited from their cash-market counterparties rather than being a primitive. As a result, repo rate specialness emerges as the equilibrium price reflecting demand pressures in the cash bond market, of which collateral scarcity from central bank purchases is a special case. Consequently, the same cash bond market imbalances affect both the pricing of safe assets and repos, two markets that are of crucial importance for the transmission of monetary policy. JEL Classification: E51, E52, E58, G21 |
| Keywords: | bond market, monetary policy, repo market, safe assets |
| Date: | 2026–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263305 |
| By: | Charlotte Hoopes; Pinar Uysal; Ilknur Zer |
| Abstract: | We study whether sovereign risk continues to affect banks a decade after Europe began reshaping its financial architecture. Combining daily bank and sovereign credit default swap spreads with supervisory data on banks' domestic sovereign portfolios, we show that the sovereign-bank relationship remains economically meaningful but is highly conditional. Banks with larger sovereign holdings respond more sharply to home-sovereign risk, and this amplification is substantially stronger for mark-to-market than amortized-cost exposures, consistent with more immediate recognition of valuation losses. Sovereign-to-bank transmission is stronger for less-capitalized, wholesale-funded, and peripheral banks, during periods of elevated market uncertainty, and when the home sovereign has less fiscal capacity. The policy reforms aimed at weakening the sovereignbank relationship only managed to reduce the extent of the link, but not eliminate it. |
| Keywords: | sovereign-bank nexus; sovereign exposures; bank risk; fiscal space |
| JEL: | G15 G21 G28 |
| Date: | 2026–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103994 |
| By: | Matthias Fleckenstein; Sven Klingler; Francis A. Longstaff |
| Abstract: | We present a new no-arbitrage relation which we denote as fixed/floating interest rate parity. This relation can be viewed as a domestic version of covered interest rate parity. We test this relation using fixed-rate bonds and floating-rate notes in the multi-trillion U.S. agency debt market and document significant violations. These violations are largely unrelated to other arbitrage spreads and measures of intermediary constraints. Instead, they are closely tied to the behavior of money market funds which hold the vast majority of agency floating-rate notes. Our results identify clientele effects as a source of persistent mispricing. |
| JEL: | G12 G23 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35977 |
| By: | Larissa Nawo (HEC Montréal) |
| Abstract: | How do financial conditions shape U.S. macroeconomic tail risk, and what is their incremental forecasting value beyond standard macroeconomic predictors? Using quarterly U.S. data from 1971Q1 to 2026Q1, this paper compares macro-only and macro-financial Bayesian VARs. First-lag financial-conditions coefficients are negative for GDP growth and positive for unemployment, with 95% posterior credible intervals excluding zero; second-lag coefficients have opposite signs. Adding financial conditions to the Gaussian VAR raises predicted probabilities of negative GDP growth by 1.5 and 2.5 percentage points at four- and eight-quarter horizons and lowers GDP tail quantiles. However, out-of-sample tests do not establish a general forecast-accuracy improvement. Student- forecast innovations, simulated with the same Gaussian posterior parameter draws, produce heavier predictive tails. Their positive GDP log-score differences reverse when 2020Q1–2021Q4 forecast targets are excluded, while CRPS favors Gaussian innovations in several comparisons. Financial conditions change measured tail risk without consistently improving forecast accuracy. |
| Keywords: | Financial conditions; macroeconomic tail risk; recession risk; macroeconomic vulnerability |
| JEL: | C53 E32 E44 G01 |
| Date: | 2026–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:ris:riskmr:023860 |
| By: | Jef Boeckx (National Bank of Belgium, Economics and Research Department); Leonardo Iania (UCLouvain, CORE, KULeuven); Joris Wauters (National Bank of Belgium, Economics and Research Department) |
| Abstract: | We develop a decomposition of debt-to-GDP dynamics that distinguishes infla tion compensation, real interest rates, and compensation for bearing interest-rate and sovereign risk. Using security-level data from the Eurosystem’s Securities Hold ings Statistics, we apply it to the five largest euro-area sovereign issuers. We find that low ex ante real interest rates relative to real GDP growth substantially re duced debt ratios, whereas short-term inflation surprises contributed only modestly. Compensation for interest-rate and sovereign risk was economically important and varied markedly across countries and over time. News about future inflation gen erated sizeable return surprises, driving a wedge between realised returns and the compensation for interest-rate risk priced ex ante. Finally, central-bank bond hold ings transferred interest-rate and sovereign-risk exposure from private investors to the consolidated public sector. This transfer initially reduced consolidated debt ratios, but subsequently raised them as policy rates and bond yields increased. |
| Keywords: | Public debt dynamics, sovereign bond returns and fiscal- monetary interactions |
| JEL: | E43 E62 H63 G12 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202610-497 |
| By: | Ruipeng Liu (Department of Finance, Deakin Business School, Deakin University, Melbourne, VIC 3125, Australia); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Elie Bouri (School of Business, Lebanese American University, Lebanon) |
| Abstract: | Gold is commonly viewed as a safe haven asset to which investors rush in times of economic and financial crises. It is attractive during a bank run because it is not a li- ability of any party and does not involve counterparty or bank credit risk. Thus, bank runs as a type of financial crisis should significantly affect the conditional return and volatility of gold prices. Surprisingly, the implications of bank runs for gold price dynamics have not been studied. Our empirical study addresses this gap. To this end, and using annual data going back to 1694, we estimate variants of GARCH models that account for time-varying conditional volatility, as well as time-varying higher-order moments (conditional skewness and conditional kurtosis). We find that accounting for bank runs improves the in-sample performance of the estimated GARCH models and also significantly leverages their out-of-sample performance in terms of standard statistical and economic criteria. We, thereby, establish that taking bank runs into account, as well as the dynamics of conditional higher-order moments, matters for the empirical modeling of the dynamics of the gold price and, thus, for the the safe-haven property of gold. In addition, we show that the higher-order GARCH models extended to include bank runs help investors to improve the statistical and the economic value of out-of-sample forecasts of gold-price returns and volatility. |
| Keywords: | Gold, Safe haven, GARCH models, Higher-order moments, Forecasting |
| JEL: | C22 C53 G01 G15 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202637 |