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on International Finance |
| By: | Agustin S. Benetrix (Department of Economics, Trinity College Dublin); Beren Demirolmez (European Stability Mechanism) |
| Abstract: | We study currency dominance in global portfolio debt, focusing on the US dollar and the euro. Our key contribution is the Dominance Ratio (DR), a new indicator that refines the measurement of currency internationalisation by excluding debt held by the regions issuing those currencies (the US for dollars, the Euro Area for euros). Using the DR, we find that the internationalisation of the dollar and euro evolves slowly and remains unaffected by short-term uncertainty shocks. However, these shocks affect the geographical distribution of dollar and euro debt. Trade policy uncertainty reduces euro concentration, increasing relative dollar concentration, whilst geopolitical risk shocks diminish both absolute and relative dollar concentrations, particularly when adjusted for currency scale using the DR. |
| Keywords: | currency dominance, dollar, euro, portfolio debt, uncertainty shocks |
| JEL: | E4 F21 F34 F41 F51 G1 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1025 |
| By: | Linda S. Goldberg; Samantha Hirschhorn |
| Abstract: | Global factors, like monetary policy rates from advanced economies and risk conditions, drive fluctuations in volumes of international capital flows and put pressure on exchange rates. The components of international capital flows that are described as global liquidity—consisting of cross-border bank lending and financing of issuance of international debt securities—have sensitivities to risk conditions that have evolved considerably over time. This risk sensitivity has been driven, in part, by the composition and business models of the financial institutions involved in funding. In this post, we ask whether these same features have led to changes in the pressures on currency values as risk conditions evolve. Using the Goldberg and Krogstrup (2023) Exchange Market Pressure (EMP) country indices, we show that the features of financial institutions in the source countries for international capital do influence how destination countries experience currency pressures when risk conditions change. Better shock-absorbing capacity in financial institutions moderates the pressures toward depreciation of currencies during adverse global risk events. |
| Keywords: | currency; depreciation; Foreign exchange market; risk; bank capital |
| JEL: | F3 |
| Date: | 2025–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101760 |
| By: | Castells-Jauregui, Madalen; Kuvshinov, Dmitry; Richter, Björn; Vanasco, Victoria |
| Abstract: | Using novel data on sectoral safe asset positions in 21 advanced economies since 1980, we document the central role of the foreign sector in the market for safety and its macroeconomic implications. We show that safe asset holdings have expanded significantly relative to GDP, driven by rising net holdings of the foreign sector and accommodated by increased issuance from the financial and public sectors. Furthermore, fluctuations in safe assets are almost exclusively driven by the foreign and financial sectors, with close links between the two. Finally, increases in foreign demand for safety-or its counterpart, the supply by financials-are associated with domestic credit expansions and weaker medium-term output growth, both in raw data and when using FX reserve accumulation in Asian economies as instrument. JEL Classification: E42, E44, E51, F33, F34, G15 |
| Keywords: | business cycles, capital flows, financial accounts, financial stability, safe assets |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253126 |
| By: | Eduardo Amaral; Rafael Guerra; Ilhyock Shim; Alexandre Tombini |
| Abstract: | Global factors shaped financial conditions in Latin America in 2025, with exchange rate appreciations against the US dollar loosening conditions in most countries. Short-run monetary policy transmission in the region operates through financial conditions. In general, monetary easing leads to looser financial conditions and faster short-term output growth. Measurement of overall financial conditions depends on the methodologies and assumptions used to construct financial conditions indices (FCIs). Understanding these differences helps central banks to use FCIs as an input to monetary policy. |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:113 |
| By: | Dalgic, Husnu C. |
| JEL: | E44 F32 F41 G15 D84 E71 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325452 |
| By: | Urban Jermann; Bin Wei; Vivian Yue |
| Abstract: | This paper develops an asset-pricing model to evaluate the credibility of Hong Kong’s Linked Exchange Rate System (LERS). Allowing for imperfect peg credibility, we derive closed-form solutions for exchange rates and option prices under potential regime shifts. Using HKD option data, we estimate market-implied probabilities of peg survival and the fundamental value of the HKD. Our results show that credibility fluctuates with U.S. interest rate hikes, local liquidity conditions, and Chinese currency dynamics. Compared with more standard Black-Scholes-based models, our approach provides more realistic assessments of peg sustainability. |
| JEL: | F3 F31 G13 G15 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34300 |
| By: | Tetiana Unkovska; Sergei Konoplyov |
| Abstract: | Global imbalances have been building up in the world economy for decades and have reached critical levels, giving rise to tariff confrontations, trade wars, and geopolitical tensions. This paper presents our systemic analysis of three global imbalances: international trade, debt dynamics, and finance. Based on our new systemic concept of global imbalances and analysis of a large body of historical and latest financial and economic data in various countries and the world economy, we have concluded that these three global imbalances are closely interconnected and mutually influence each other through different channels and nonlinear feedback mechanisms that we describe. These three global imbalances are interrelated symptoms of deep structural problems in the global economy that require corrective measures both at the level of individual countries, especially the US and China, and at the global coordinated efforts by key countries within the G7 and G20. We highlight the key structural problems in the global economy, suggest a modern interpretation of the Triffin dilemma through the prism of equilibrium levels of exchange rates, and suggest possible measures to mitigate the global imbalances. |
| Keywords: | Trade, Foreign Direct Investment |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:252 |
| By: | Chang Ma; Alessandro Rebucci; Sili Zhou |
| 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. |
| JEL: | F30 G10 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34291 |
| By: | Arvai, Kai; Coimbra, Nuno |
| JEL: | E42 F02 F33 N10 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325376 |
| By: | Colin Weiss |
| Abstract: | I examine how governments have managed their holdings of gold and dollar reserves in recent decades, a period when gold’s share of aggregate international reserves rose and the dollar’s share fell. Using data on central banks’ reserve currency composition and official sector purchases of U.S. assets, I argue that gold reserve accumulation is generally not associated with de-dollarization of international reserves at the country level, except in a few prominent cases. Instead, gold purchases are more consistent with most countries pursuing a modest diversification of international reserves that does not solely target a reduced dollar share. My evidence suggests that this characterization also applies to gold reserve accumulation in 2022 and 2023. Finally, I show that, while gold’s importance as a store of value for the official sector has grown since 2000, its use as a unit of account and a medium of exchange remains limited. |
| Keywords: | International Reserves; Gold; Dollar |
| JEL: | F30 F31 F33 |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1420 |