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on International Finance |
| By: | Cerutti, Eugenio; Claessens, Stijn |
| Abstract: | We quantify the importance of the Global Financial Cycle (GFCy) in domestic credit and various local asset prices and compare it with that in capital flows. Using 2000-2021 data for 76 economies and a simple methodology, we find that each respective series’ common factor and conventional US GFCy-drivers together typically explain about 30 percent of the variation in domestic credit, up to 40 percent in stock market returns, about 60 percent in house prices, and more than 75 percent in interest rates and government bond spreads. These median estimates much exceed the 25 percent for capital flows. Our findings help to put the existing literature into context and have important implications for economic and financial stability policies, notably for the usage of quantity tools (e.g., FX interventions) that impact asset prices. |
| JEL: | F32 F36 F65 G15 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19271 |
| By: | Forbes, Kristin; Ha, Jongrim; Kose, M. Ayhan |
| Abstract: | We analyse cycles in policy interest rates in 24 advanced economies over 1970-2024, combining a new application of business cycle methodology with rich time-series decompositions of the shocks driving rate movements. “Rate cycles†have gradually evolved over time, with less frequent cyclical turning points, more moderate tightening phases, and a larger role for global shocks. Against this backdrop, the 2020-24 rate cycle has been unprecedented in many dimensions: it features the fastest pivot from active easing to a tightening phase, followed by the most globally synchronized tightening, and an unusually long period of holding rates constant. It also exhibits the largest role for global shocks— with global demand shocks still dominant, but an increased role for global supply shocks in explaining interest rate movements. Inflation and the growth in output and employment have, on average, largely returned to historical norms for this stage in a tightening phase. Any recalibration of interest rates going forward should be gradual, however, taking into account the interactions between increasingly important global factors and domestic circumstances, combined with uncertainty as to whether rate cycles have reverted to pre-2008 patterns. |
| Keywords: | Interest rates |
| JEL: | E31 E32 E52 E58 F42 F44 N10 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19272 |
| By: | Zixuan Huang; Mr. Aki Yokoyama |
| Abstract: | This paper analyzes a global map of dollar exposures and examines the relationship between net dollar exposures, defined as the difference between dollar assets and liabilities, and covered interest parity (CIP) deviations. We find that the cross-sectional relationship is significantly negative in advanced economies but positive in emerging markets. CIP deviations represent the hedging cost that foreign holders of dollar assets or liabilities incur to manage exchange rate risk. To explain, we develop a model in which the CIP deviations are determined by the demand and the supply side of hedging. The negative correlation in advanced economies can be explained by the variations in hedging demand. Larger net dollar exposures increase the hedging demand, raising hedging costs (reflected as more negative CIP deviations) and producing a negative correlation. In contrast, the positive correlation in emerging markets is explained by the supply side of the hedging market. Limited hedging supply leads to wider CIP deviations (more negative), encouraging firms to borrow in U.S. dollars rather than local currencies, thereby reducing net dollar exposures and generating a positive correlation. |
| Keywords: | Dollar assets; dollar liabilities; banks and non-banks; covered interest parity |
| Date: | 2026–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/169 |
| By: | Bahaj, Saleem; Della Corte, Pasquale; Massacci, Daniele; Seyde, Eduard |
| Abstract: | This paper studies how cross-border financial connections affect the response of exchange rates to trade shocks. Theoretically, we develop a multi-country model whereby a country's exchange rate depends on the financiers' ability to manage capital flows between this country and its counterparties (direct connection) and between its counterparties and their trading partners (indirect connection). Empirically, we quantify the network of financial connections using granular data on cross-border claims and liabilities of globally active banks. Consistent with our theoretical predictions, we find that indirect connection can either amplify or mitigate the impact of trade shocks on future exchange rate returns, depending on the shock's origin and size, while direct connection always dampens these effects. |
| JEL: | F21 F30 F31 G12 G15 G21 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19310 |
| By: | Avdjiev, Stefan; Burger, John D.; Hardy, Bryan |
| Abstract: | It is well-known that dollar credit to emerging market (EM) corporates has expanded dramatically in the past two decades. However, the concurrent expansion of local currency credit, facilitated by more developed domestic financial systems, has been less recognized. This paper first uses data on EM corporates' borrowing through bonds and syndicated loans to show the considerable rise of their local currency debt. It then utilizes comprehensive firm-level data to document that EM corporates' local currency borrowing can offset shocks to their dollar debt, and how this varies across firms and countries. A broad dollar appreciation is associated with a decline in credit to ''local'' firms (smaller, non-exporting, with low profitability) but has no significant impact on ''global'' firms (larger, exporting, highly profitable). Firms in the mid-range (of these dimensions) see lower dollar debt in response to a stronger dollar, but replace it with local currency debt, thus offsetting the shock. |
| JEL: | F30 G30 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19288 |
| By: | J. Scott Davis; Lillian Derr |
| Abstract: | Government debt financed from domestic savings has a smaller effect on interest rates than government debt financed from foreign borrowing, and nations that are net international creditors can borrow more cheaply than net international debtors. These observations help explain massive government borrowing since 2008 while bond yields remained persistently low. |
| Keywords: | government debt; foreign borrowing; domestic savings; interest rates |
| Date: | 2026–08–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:103648 |
| By: | Faia, Ester; Lewis, Karen K.; Zhou, Haonan |
| Abstract: | We re-examine monetary policy spillovers to Emerging Market Economies (EME) in the form of capital flow reversals, using sectoral-level securities holdings data for Euro Area investors. In response to a surprise monetary tightening, active investors such as investment funds re-balance their portfolios away from EME, while more passive, long term investors such as insurance funds and banks exhibit no significant reaction on average. For active investors, the reallocation out of EME appears stronger under synchronized monetary tightening between the Fed and the ECB. However, these investors may even inject more capital to EME securities when the monetary tightening surprises contain positive news about the Euro Area economy. Issuers’ monetary-fiscal stability may explain the heterogeneous impact of these spillovers. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19389 |
| By: | Donato, Giovanni; Tille, Cédric |
| Abstract: | Financial globalization has led to a large increase in international asset holdings. While the rise of associated dividend and interest flows has until now been muted by the decreasing trend in interest rates, this pattern could change, leading to a larger role of investment income flows in the balance of payments. We use a broad sample of countries to document the heterogeneous evolution of the various components of investment income flows, with a rising role of FDI and equity income, especially in advanced economies. We then assess the impact of various variables on yields with a panel analysis. Various drivers have highly heterogeneous effects across investment categories and country groups, often impacting the yields on both assets and liabilities. This translates into substantial heterogeneity in the response of countries’ income balance, due to different compositions of asset and liabilities. This heterogeneity is amplified if we consider country-specific estimates in complement to the panel ones. Focusing on the impact of changes in interest rates, we find that higher rates only had a limited impact in the 2013 taper tantrum, investment income balances are likely to benefit from higher US rates in the current phase of higher rates, with offsetting effects of higher domestic rates. |
| Keywords: | Financial integration |
| JEL: | F32 F36 F40 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19251 |
| By: | Paul Bergin; Woo Jin Choi; Ju H. Pyun |
| Abstract: | Macroeconomics tends to view exchange rate movements as transitory. However, persistent exchange rate realignments and the associated capital flows can have long-run implications for structural change and productivity growth. We provide empirical evidence that policies of reserve accumulation and currency undervaluation have had significant effects on manufacturing productivity, as well as on manufacturing share, product varieties, and domestic orientation of production chains. We develop a dynamic two-country model with two sectors, firm dynamics, and trade hysteresis to demonstrate a novel mechanism by which exchange rate policy reorients global supply chains and industrial structure. The model identifies conditions under which such a policy raises productivity and welfare in the home country. It also identifies conditions under which the policy leads to either permanent or reversible deindustrialization in a trading partner. Findings have implications for the long-run relationship between China and the U.S. |
| JEL: | E58 F31 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35609 |
| By: | Milesi-Ferretti, Gian Maria |
| Abstract: | Estimates of cross-border portfolio equity liabilities are substantially larger than the corresponding cross-border claims (some $4 trillion in 2021, about 4 percent of world GDP). Resolving this discrepancy would strengthen the understanding of the cross-border implications of changes in asset prices, an important element in maintaining financial stability, and would shed light on whether unreported assets are properly covered by domestic tax systems. We show that the equity discrepancy arises primarily from equity holdings in Ireland, Luxembourg, and the United States whose ownership is not reflected in partner countries’ positions. Using data from these countries’ surveys of portfolio liabilities and the IMF’s Coordinated Portfolio Investment Survey, we show that an important share of unidentified equity holdings (close to $3 trillion in 2021) reflects transactions through intermediaries based in the United Kingdom. This likely reflects some underestimation of UK portfolio equity holdings as well as holdings of foreign equity on behalf of nonresident investors not captured by their countries’ statistics. Reducing data gaps would require stronger data collection in financial centers, including provision of information on securities’ holdings through domestic custodians also for cases where neither the issuer nor the ultimate holder of the security is a resident of the country. |
| Keywords: | International portfolio holdings; Equity flows; International investment positions; Mutual funds |
| JEL: | F36 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19253 |