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on International Finance |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research); Sritama Ray (Indira Gandhi Institute of Development Research) |
| Abstract: | Reducing borrowing costs for emerging markets (EMs) is a challenge. The additional country risk premia that foreign investors seek are primarily driven by a fear of unexpected currency depreciation; which often does not take place. It follows there are positive excess returns from EM assets. We find while the interest rate differential (IRD) is near-zero for advanced economies, it is always positive for EMs. Excess exchange rate volatility is often due to global and not domestic factors, so that a pure float aggravates instead of mitigating shocks. Lower exchange rate volatility, risk and risk-perceptions can reduce EM IRDs. A suitable exchange rate regime and domestic as well as international prudential regulation on cross-border capital flows can lower volatility. Different phases of India's flexible float illustrate these issues well. |
| Keywords: | Exchange rate volatility, emerging markets, advanced economies, interest rate differentials, excess returns, global shocks, policies |
| JEL: | F31 F41 E65 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-026 |
| By: | Linda S. Goldberg; Oliver Hannaoui |
| Abstract: | The share of US dollar assets in the official foreign exchange reserve portfolios of central banks, at times, is taken as an indicator of the dollar's global status. We provide a decomposition that shows two distinct channels contributing to the changes in the dollar share of reserves aggregated across countries: shifts in preferences for dollar assets, and changes in reserve balances driven by countries whose portfolio allocations differ from the aggregate. We document how the concentrated nature of foreign exchange reserve holdings allows countries that contribute a large share of aggregated reserves to exert substantial influence on aggregate dollar shares over time, potentially dominating the narrative. In recent periods, the key contributors to changes in aggregate preference shifts for dollar assets are changes in bilateral country trade with the United States and dollar debt share, with geopolitics additionally working through the investment tranches of central bank portfolios. Diversification away from dollar assets is more prevalent conditional on official reserves of countries being large enough to satisfy country liquidity needs. |
| JEL: | F33 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34888 |
| By: | Ruth A. Judson; Nyssa Kim |
| Abstract: | Understanding the effects of cross-border securities holdings depends critically on accurate data, and two significant data sources in this area are the U.S. Treasury’s Treasury International Capital (TIC) system and the IMF’s Portfolio Investment Positions by Counterpart Economy (PIP, formerly known as CPIS). |
| Date: | 2026–02–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:102800 |
| By: | Ballensiefen, Benedikt; Somogyi, Fabricius; Winterberg, Hannah |
| Abstract: | We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. Leveraging granular FX trading data and forward looking expectations, we present three results. First, currency investors increase their dollar holdings when expecting US dollar appreciation or improved US macroeconomic fundamentals, whereas synthetic dollar funding is driven by forecasted CIP deviations. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, responses to professional forecasts weaken when uncertainty or forecaster disagreement rises, and are lower for forecasters with poorer past accuracy. Our findings demonstrate that long-horizon expectations accurately predict dollar demand across spot, swap, and forward currency markets. We rationalize those finding in a theoretical model of currency demand. |
| Keywords: | Exchange rate expectations, dollar demand, currency flows, FX swaps, survey forecasts |
| JEL: | F31 G15 F37 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfrwps:337468 |
| By: | Ayse Sila Koc; Irfan Cercil |
| Abstract: | The rapid increase in climate change risks has given rise to multinational and country-level efforts to mitigate its effects. In recent decades, and particularly after the Paris Agreement in 2016, climate change policies (CCPs) have intensified across both advanced countries and emerging market economies. These developments have heightened transition risks stemming from the adaptation of green policies, with potential implications for international capital flows, most notably, foreign direct investment (FDI). This paper investigates the impact of country-specific CCPs on FDI flows using a panel of 40 advanced and EM economies over the period of 1990-2019, employing the local projections (LP) method. The results indicate that CCPs are significantly associated with a decline in both gross and net FDI inflows in EM economies, whereas the effects of CCPs on FDI flows in advanced economies are more muted and statistically insignificant. Further empirical analysis reveals no statistically robust relationship between CCPs and overall portfolio (equity and debt) flows. Our findings contribute to the growing literature on the macro-financial consequences of CCPs and offer valuable insights for both policymakers and international investors. |
| Keywords: | Climate change, Climate change policies, Emerging markets, Capital flows, Foreign direct investment, Local projections |
| JEL: | F21 F64 Q54 Q58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2604 |
| By: | Anna Cole; Christopher J. Neely |
| Abstract: | One of the U.S. dollar’s influential international roles is as the dominant reserve currency, widely used in international foreign exchange reserves, which are rainy day funds for governments. |
| Date: | 2026–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00100:102817 |
| By: | Tobias Krahnke; Wenjie Li |
| Abstract: | Capital flow restrictions have long been debated as a tool to manage external financial vulnerabilities, as volatile international capital flows and high external debt can contribute to financial crises. However, empirical evidence on whether capital flow management measures (CFMs) can shift the composition of countries’ external liabilities toward more stable types of funding is limited. Using a novel dataset of granular capital account openness indicators measuring policy intensity, we show that an asymmetric liberalization favoring equity over debt can tilt external capital structures toward equity. This effect is stronger in countries with higher institutional quality, underscoring the role of governance in attracting stable foreign investment. |
| Keywords: | Capital Controls; Foreign Direct Investment; Portfolio Equity; External Debt; External Liabilities |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/037 |
| By: | Berger, Allen N.; Karlström, Peter; Karolyi, Stephen A.; Ossandon Busch, Matias; Pinzon-Puerto, Freddy; Roman, Raluca A. |
| Abstract: | How does global banking impact financial stability and the real economy, particularly in emerging market economies? This paper revisits this question through the lens of new data and recent empirical findings in the banking literature. Considering this evidence, we illustrate how global banks are more prone to engaging in quantity and price credit rationing during crises, particularly when dealing with opaque borrowers abroad. However, in a context where shocks emerge in the real sector — for instance, through trade shocks — global banks can play a key role in making trade flows more resilient. We primarily use Latin America as our region of study as it is a region where globalization and deglobalization have had substantial impacts. Our findings support the notion that prudential financial stability frameworks can help to grasp the benefits of banking globalization while mitigating its downside risks. |
| Keywords: | international banking; global supply chains; financial stability; financial crises |
| JEL: | F15 F36 G15 G21 |
| Date: | 2026–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130318 |
| By: | Gert Peersman |
| Abstract: | This paper employs a joint SVAR-IV model for the United States and the euro area to estimate the pass-through of energy and food commodity cost shocks to inflation. Exogenous commodity cost shocks — such as those triggered by the Russian invasion of Ukraine — had only a modest impact on inflation during the post-pandemic period. However, counterfactual analyses based on the pass-through estimates indicate that overall commodity cost fluctuations — including their endogenous responses to macroeconomic conditions — can almost fully account for the rise and subsequent decline of energy, food, and core CPI inflation over this period. These findings highlight that commodity costs constitute a key transmission channel through which macroeconomic developments affect inflation. Estimates of a standard Phillips Curve specification, including its slope, are shown to be severely biased when this channel is ignored. |
| Keywords: | commodity costs, post-pandemic inflation, Phillips curve |
| JEL: | E31 Q11 Q43 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12415 |
| By: | Bletzinger, Tilman; Martorana, Giulia; Mistak, Jakub |
| Abstract: | Financial Conditions Indices (FCIs) are a widely used tool for assessing the broader monetary policy stance beyond the central bank’s direct control. This paper presents a novel vector autoregressive (VAR) model that includes key macroeconomic variables and maps financial variables into a single index, named Macro-Finance FCI. The VAR coefficients and the FCI weights are estimated jointly in one step, ensuring a model-consistent microfinance feedback. The model-implied long-run mean of the index provides a neutral benchmark to which financial conditions converge when inflation is at target and output is at potential. For the euro area, the proposed FCI incorporates nine asset prices – including risk-free rates, sovereign spreads, risk assets, and the exchange rate – and assigns a dominant role to nominal interest rates. It outperforms existing indices in out-of-sample forecasts of inflation and output. A structural identification of supply, demand, and financial shocks indicates that financial conditions require up to one year to transmit to the real economy and almost up to two years to inflation. JEL Classification: C32, E44, E52 |
| Keywords: | financial conditions index, monetary policy, structural macro-finance VAR |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263193 |