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on International Finance |
| By: | Mai Dao; Pierre-Olivier Gourinchas |
| 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 timeseries, 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: | Covered Interest Parity; intermediation frictions; emerging markets; forward exchange rates |
| Date: | 2025–03–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/057 |
| By: | Ralf R. Meisenzahl; Friederike Niepmann; Tim Schmidt-Eisenlohr |
| Abstract: | This paper documents a new dollar channel that transmits monetary policy across borders. Exploiting unique features of the syndicated loan market for identification, we show that changes in the euro-dollar exchange rate around ECB monetary policy announcements that are orthogonal to simultaneous changes in euro-area interest rates and stock prices affect U.S. leveraged loan spreads. Specifically, in response to dollar appreciation, investors require higher compensation for risk, and borrowing costs for U.S. firms increase. These findings imply a causal link between the U.S. dollar and investors’ risk appetite. |
| Keywords: | loan pricing, monetary policy spillovers, dollar, institutional investors, risk taking |
| JEL: | F15 G15 G21 G23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11777 |
| By: | Björn Imbierowicz; Arne Nagengast; Esteban Prieto; Ursula Vogel; Arne J. Nagengast |
| Abstract: | The pace of globalization has slowed since the global financial crisis, raising concerns about widespread deglobalization and market fragmentation. We examine the effects of a deglobalization shock on bank lending, firm internal capital markets, and the real economy. Leveraging a unique dataset that combines a credit register with foreign direct investment (FDI) data, we are able to observe both domestic and cross-border credit exposures of German banks as well as internal capital market dynamics within multinational corporations (MNCs) – a feature rarely available in other countries’ data. We analyze the response to the Brexit referendum shock. On average, German banks reduced lending to United Kingdom (UK) firms following the shock due to increased uncertainty about future losses. More prudent banks reduced their credit more extensively, and less profitable subsidiaries experienced greater reductions. However, UK subsidiaries of large MNCs, with access to internal capital markets, offset this credit supply shock through internal funding, shielding them from negative real effects. We find that non-UK subsidiaries play a crucial role in internal capital markets by securing external financing and reallocating funds to support UK affiliates. Well capitalized banks reallocated lending to firms outside the UK, particularly those of German MNCs. Our findings underscore that while international financial frictions following deglobalization shocks can imply negative real effects, firms integrated into global networks mitigate these impacts through internal capital markets. |
| Keywords: | bank lending, deglobalization shock, policy uncertainty, real-financial linkages, internal capital markets |
| JEL: | F23 F34 F36 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11775 |
| By: | Nieminen, Mika; Norring, Anni |
| Abstract: | Countries choose diverse policy mixes of macroprudential and capital flow management measures, yet the drivers behind these policy choices remain largely unexplored. We identify potential conditions for the adoption and determinants of the use of macroprudential and capital flow management measures from the theoretical literature and test them empirically. Rich and high-growth economies tend to rely on macroprudential policy measures, while the use of capital flow management measures decreases as the regulatory environment improves. Countries with a large foreign bank presence tend to implement fewer macroprudential and capital flow management measures. |
| Keywords: | Macroprudential policy, Capital controls, Foreign banks |
| JEL: | E58 F33 F38 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:315479 |
| By: | Gopinath, Gita; Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph |
| Abstract: | Theory suggests that corporate and sovereign bonds are fundamentally different, also because sovereign debt has no bankruptcy mechanism and is hard to enforce. We show empirically that the two assets are more similar than you think, at least when it comes to high-yield bonds over the past 20 years. We use rich new data to compare high-yield US corporate ("junk") bonds to high-yield emerging market sovereign bonds 2002-2021. Investor experiences in these two asset classes were surprisingly aligned, with (i) similar average excess returns, (ii) similar average risk-return patterns (Sharpe ratios), (iii) similar default frequency, and (iv) comparable haircuts. A notable difference is that the average default duration is higher for sovereigns. Moreover, the two markets co-move differently with domestic and global factors. US "junk" bond yields are more closely linked to US market conditions such as US stock returns, US stock price volatility (VIX), or US monetary policy. |
| Keywords: | Sovereign debt and default, default risk, corporate bonds, corporate default, junk |
| JEL: | F3 G1 F4 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:315469 |
| By: | Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad |
| Abstract: | We develop a new dynamic factor model to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption and investment) and financial variables (equity and house prices and interest rates). The global macro factor plays a major role in explaining G-7 business cycles, but there are also sizeable spillovers from equity and house price shocks onto macroeconomic aggregates, at least over the past two decades, accounting for up to 20 percent of the variation in global business cycle fluctuations. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find weaker evidence of spillovers from macroeconomic cycles to financial variables, perhaps reflecting the predictive power of global financial markets. |
| Keywords: | global business cycles; global financial cycles; common shocks; international spillovers; dynamic factor models |
| JEL: | E32 F4 C32 C1 |
| Date: | 2025–04–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99897 |