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on International Finance |
| By: | Yang Zhou (Graduate School of Economics, Nagoya City University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, JAPAN) |
| Abstract: | This study empirically examines the effectiveness of capital flow management measures (CFMs) in India. Using the local projection method and monthly de jure data constructed by Binici et al. (2024), we find that CFMs are effective across all examined asset categories: portfolio, equity, debt, and FDI inflows, as well as portfolio and FDI outflows. |
| Keywords: | Capital flow management measures (CFMs); Capital controls; India; Local projection |
| JEL: | F38 F32 G15 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-35 |
| By: | Oscar Botero-Ramírez; Andrés Murcia; Hernando Vargas-Herrera |
| Abstract: | Foreign investor participation in Colombia’s domestic sovereign bond market surged after 2014, lowering yields, and supporting local-currency debt issuance and local market liquidity. However, it also increased the market’s sensitivity to global financial shocks. Empirical analysis suggests that during periods of high foreign participation in the local sovereign debt market (2014–2022), global risk factors had a stronger impact on domestic financial conditions, while the recent decline in foreign participation since 2023 has somewhat reduced this sensitivity. The Central Bank’s flexible inflation-targeting regime, supported by a fully flexible exchange rate regime and robust external buffers, has helped manage these risks, as demonstrated during the Covid-19 pandemic. The evolving composition of foreign investors remains a key channel for the transmission of global shocks to Colombia’s financial conditions. *****RESUMEN: La participación de inversionistas extranjeros en el mercado local de deuda soberana de Colombia aumentó significativamente después de 2014, reduciendo los rendimientos y apoyando la emisión de deuda en moneda local y la liquidez del mercado. Sin embargo, esto también incrementó la sensibilidad del mercado a los choques financieros globales. El análisis empírico sugiere que, durante los periodos de alta participación extranjera en el mercado local de deuda soberana (2014–2022), los factores de riesgo global tuvieron un impacto más fuerte sobre las condiciones financieras internas, mientras que la reciente disminución en la participación extranjera desde 2023 ha reducido parcialmente esta sensibilidad. El régimen de metas de inflación flexible del Banco Central, respaldado por un régimen cambiario totalmente flexible y sólidos colchones externos, ha ayudado a gestionar estos riesgos, como se demostró durante la pandemia del Covid-19. La composición cambiante de los inversionistas extranjeros sigue siendo un canal clave para la transmisión de choques globales a las condiciones financieras de Colombia. |
| Keywords: | sovereign bond markets, foreign investors, benchmark-driven investors, global risk transmission, financial conditions, original sin, inflation-targeting, exchange-rate flexibility, central banking, Colombia, mercados de deuda soberana, inversionistas extranjeros, inversionistas indexados, transmisión del riesgo global, condiciones financieras, pecado original, metas de inflación, flexibilidad cambiaria, banca central |
| JEL: | E44 E52 F30 F32 F34 F31 F38 G12 G15 G18 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1336 |
| By: | Wenxin Du; Ritt Keerati; Jesse Schreger |
| Abstract: | We document a strong decoupling between the convenience yield on the US Dollar and US Treasuries. We measure the convenience of the U.S. dollar using covered interest parity (CIP) deviations between risk-free bank rates, such as secured overnight rates since the benchmark reform. In parallel, we measure the convenience of U.S. Treasury bonds through CIP deviations between government bond yields. We find a pronounced divergence between the two convenience measures in recent years: while the U.S. dollar exhibits strong convenience post-Global Financial Crisis, the U.S. Treasury convenience has not only declined substantially but has turned negative, most strongly so at medium- to long-term maturities. We argue that the relative supply of government bonds between the US and other developed markets is a key driver of the U.S. Treasury convenience compared to other government bonds. Finally, we present a simple framework with a constrained global financial intermediary to link dollar and Treasury convenience. |
| Keywords: | Safe assets; Covered interest parity; Benchmark reform |
| JEL: | F30 G15 |
| Date: | 2025–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1427 |
| By: | Georgios Bampinas (Department of Economics, University of Macedonia); Ioannis Karfakis (Hertfordshire Business School, University of Hertfordshire); Theodore Panagiotidis (Department of Economics, University of Macedonia); Georgios Papapanagiotou (Department of Economics, University of Macedonia) |
| Abstract: | This study investigates how geopolitical risk shapes the relationship between stock and currency markets. We address the limited evidence on their joint dynamics under uncertainty. While prior literature shows that geopolitical risk affects individual financial markets, less is known about its role in the stock currency interdependence across different economies. Using local Gaussian partial correlations and bootstrap inference for advanced and emerging economies, we analyze nonlinear and asymmetric dependence patterns. Our results show that in advanced economies, stock returns and currency changes are negatively linked, consistent with portfolio balance and flow-oriented theories, whereas emerging markets display positive dependence, reflecting capital flow and risk-based channels. Lead–lag effects reveal that exchange rates dominate in emerging markets, while advanced markets exhibit bidirectional interactions. Under elevated geopolitical risk, dependence strengthens and tail risks become more synchronized, particularly in emerging markets. These findings advance our understanding of cross market transmission and inform policies on financial stability during geopolitical crises. |
| Keywords: | Stock market, Currency market, Geopolitical risk, Bootstrap analysis Local Gaussian partial correlation |
| JEL: | Q02 Q43 Q47 E44 G1 C11 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:mcd:mcddps:2025_08 |
| By: | Johannes Eugster; Giovanni Rosso; Pinar Yesin |
| Abstract: | This paper investigates the interaction between the rise of inelastic intermediaries, e.g. mutual funds and exchange traded funds (ETFs), and exchange rate dynamics. By leveraging regulatory microdata on the universe of mutual funds domiciled in Switzerland, we first document the remarkable rise of the market share of this industry. Mutual funds went from holding 5% of domestic currency fixed income instruments in 2005 to 51% in 2024. We show that these intermediaries have strict mandates and trade only when faced with in(out)-flows. This makes the market more price-inelastic on aggregate in response to asset demand shocks. We develop an analytical model that we bring to the microdata. We find that (i) an inflow into domestic mutual funds with a large portfolio weight on the domestic currency appreciates it and (ii) the reduced aggregate elasticity makes the exchange rate more sensitive to capital flows. Finally, using a weekly panel of five advanced economies, we document the external validity of this mechanism. We show that the currencies whose markets see a higher prevalence of inelastic intermediaries react significantly more strongly to capital inflows. |
| Keywords: | Inelastic intermediaries, Mutual funds, Exchange rate dynamics, Capital flows |
| JEL: | F31 G23 G15 F21 E44 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2025-17 |
| By: | Ma, Chang; Rebucci, Alessandro; Zhou, Sili |
| Abstract: | Chinese private portfolio equity outflows, though small compared to other Chinese outflows, are growing rapidly because of capital account liberalization and capital flight. Using granular stock-holding data on Qualified Domestic Institutional Investor (QDII) mutual funds, we identify a nascent financial channel of international transmission of Chinese monetary policy to world stocks. Event study analysis around monetary policy announcement days reveals that monetary policy tightening depresses returns of country equity indexes and individual U.S. stocks with QDII fund exposure relative to non-exposed stocks. The results are robust to controlling for the real transmission channel of Chinese monetary policy and other confounders. The effect is driven by smaller and less liquid firms, but not by China-concept stocks or those highly exposed to China's macroeconomic shocks. We also find that the results are driven by household portfolio rebalancing from more to less risky assets following the announcement. |
| Keywords: | QDII Funds, Chinese Monetary Policy, Household Rebalancing, Foreign Portfolio Equity Flows |
| JEL: | F30 G10 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:333958 |
| By: | Alisson Curatola-Melo; Bernardo Guimarães |
| Abstract: | This paper disentangles the causal effects of commodity price movements on emerging market indicators from those driven by correlated external factors, such as global growth expectations and financial conditions. We employ an identificationthrough- heteroskedasticity approach using USDA Grain Stock reports, which have an exogenous impact on soybean, corn, and wheat prices. Our findings show that the causal effects of grain price shocks on default risk, stock indexes, and exchange rates are typically less than half the size of the unadjusted estimates. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:639 |
| By: | Kujtim Avdiu; Jochen Güntner; Karin Mayr-Dorn; Esther Segalla |
| Abstract: | This paper studies the external and internal financing decisions of multinational enter prises (MNEs) and their role in the transmission of shocks across borders. We augment the costly-state-verification model of Bernanke et al. [1999] with the internal capital market constraint of an MNE and derive predictions for the optimal response of external and internal borrowing, both at home and abroad, to a change in the return on capital of a foreign affiliate. Using mandatory-reporting data on all Austrian MNEs and their FDI relationships with German affiliates for 2007–2022, we validate our theoretical pre dictions empirically and find that Austrian parent firms extend less internal credit to more productive German affiliates and reduce their own stock of external liabilities with domestic banks relative to the affiliate’s total assets, whereas more productive German affiliates reduce their share of internal liabilities with Austrian parents and increase their external leverage instead. |
| Keywords: | Bank lending, external finance, financial frictions, internal capital markets, multinational firms |
| JEL: | D24 E44 F23 G32 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:jku:econwp:2025-13 |
| By: | Hegemann, Hendrik; Wieland, Volker |
| Abstract: | This study reviews new perceptions of an imminent decline of the international role of the US dollar and implications for the euro. It considers developments in international reserves, invoicing, debt and payment systems. Strengths and weaknesses of the US and euro area economies are discussed along with new policy initiatives and proposals. The study concludes that a quick decline of the US dollar or a shift towards a multipolar currency system with similarly important reserve currencies is highly unlikely. For the foreseeable future, the euro's role is likely to remain one of primarily regional importance. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 6 October 2025. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:333885 |
| By: | Andreas Schrimpf; Markus Sihvonen |
| Abstract: | We generalize the yield spanning condition in the bond literature to non-linear models and to exchange rates. In standard macro-finance models, no variable should predict yield or exchange rate changes once standard yield curve factors are controlled for. We provide novel evidence that this spanning condition is violated, with inflation as a common unspanned predictor of both bond and exchange rate returns. Investors' incomplete information about the Federal Reserve's monetary policy rule emerges as the key driver of this result. We find high inflation to be followed by unexpected monetary policy tightening, which leads to dollar appreciation and low bond returns. We explain these findings by a simple model that departs from full information rational expectations. |
| Keywords: | inflation, bond markets, exchange rates, central bank reaction function, investor expectations |
| JEL: | G12 E43 E58 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1320 |