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on International Finance |
| By: | Ingomar Krohn; Andreas Uthemann; Rishi Vala; Jun Yang |
| Abstract: | We establish an empirical framework that causally identifies how Treasury demand shocks transmit across foreign exchange and global bond markets, providing direct validation of quantity-driven theories of international risk premia. Our identification exploits predetermined auction supply to isolate demand shocks from high-frequency movements in Treasury futures prices around Treasury auctions. A one-standard-deviation increase in Treasury demand causes the U.S. dollar to depreciate by 2 basis points against G9 currencies while generating 10-basis-point increases in foreign bond prices. Effects persist for two weeks, indicating meaningful economic impacts. The transmission mechanism varies systematically across countries: those with lower U.S. short-rate correlations exhibit stronger currency responses but weaker bond effects, while higher-correlation countries show the opposite pattern. This cross-sectional variation provides empirical support for models of segmented markets where global arbitrageurs link exchange rates and bond risk premia. |
| Keywords: | Asset pricing; Exchange rates; International financial markets; Interest rates; Market structure and pricing |
| JEL: | F30 F31 G12 G15 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-29 |
| By: | Mai C. Dao; Pierre-Olivier Gourinchas; Oleg Itskhoki |
| Abstract: | We offer a unifying empirical model of covered and uncovered currency premia, interest rates and spot and forward exchange rates, both in the cross section and time series of currencies. We find that the rich empirical patterns are in line with a partial equilibrium model of the currency market, where hedged and unhedged currency is supplied by intermediary banks subject to value-at-risk balance-sheet constraints, emphasizing the frictional nature of equilibrium currency premia and exchange rate dynamics. In the cross section, the excess supply of local-currency savings is the key determinant of low relative interest rates, negative covered and uncovered currency premia, cheap forward dollars; and vice versa. In the time series, covered currency premia change infrequently and in concert across currencies, driven by aggregate financial market conditions. In contrast, uncovered currency premia move frequently in response to currency-specific demand shocks, which we capture with the dynamics of net currency futures positions of dealer banks. Exchange rate depreciations in response to negative shifts in currency demand are followed by small persistent appreciations that generate predictable expected returns necessary to ensure intermediation of currency demand shocks, irrespective of their financial or macroeconomic origin. Changes in net futures positions of dealer banks account for most of the variation in the spot exchange rate for every currency. |
| JEL: | E4 F3 G12 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34443 |
| By: | J. Scott Davis; Kevin X. D. Huang; Zheng Liu; Mark M. Spiegel |
| Abstract: | We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high development adjust little. Domestic interest rate responses are not systematically related to financial development. A model with borrowing constraints and foreign-currency debt rationalizes these findings: the associated pecuniary externality is maximized at intermediate levels of financial development. Calibrated to match the observed leverage and currency composition, the model reproduces the empirical U-shaped relationship under optimal FX reserve policy, and this relation is robust under a range of conventional interest-rate policy regimes. |
| Keywords: | foreign reserves; financial development; capital flows; optimal policy |
| JEL: | F32 F38 E52 |
| Date: | 2025–11–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:102072 |
| By: | Pasquale Della Corte (Imperial College Business School; Centre for Economic Policy Research (CEPR)); Can Gao (University of St.Gallen; Swiss Finance Institute; Swisss Institute for Banking and Finance); Daniel P. A. Preve (Singapore Management University); Giorgio Valente (Hong Kong Institute for Monetary and Financial Research (HKIMR)) |
| Abstract: | This paper investigates the long-horizon predictive variance of an international bondstrategy where a U.S. investor holds unhedged positions in constant-maturity long-term foreign bonds funded at domestic short-term interest rates. Using over two centuries of data from major economies, the study finds that predictive variance grows with the investment horizon, driven primarily by uncertainties in interest rate differentials and exchange rate returns, which outweigh mean reversion effects. The analysis, incorporating both observable and unobservable predictors, highlights that unobservable predictors linked to shifts in monetary and exchange rate regimes are the dominant source of long-term risk, offering fresh insights into international bond investment strategies. |
| Keywords: | Currency risk, Long-term bonds, Predictability, Long-term investments |
| JEL: | F31 G12 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2595 |
| By: | Du, Wenxin; Keerati, Ritt; Schreger, Jesse |
| 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. |
| Date: | 2025–11–05 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:7u9kn_v1 |
| By: | Corsetti, G.; Lloyd, S.; Marin, E.; Ostry, D. |
| Abstract: | We document a rise in investors' assessment of U.S. risk relative to other G.7 economies since the late 1990s, driven by higher permanent risk but not reflected in currency returns. Using a two-country framework with trade in a rich maturity structure of bonds which earn convenience yields, alongside risky assets and currencies, we establish an equilibrium relationship between cross-border convenience yields, relative country risk and carry-trade returns. Empirically, we identify a cointegrating relationship between relative permanent risk and long-maturity convenience yields. Counterfactual experiments show rising relative permanent risk explains around one-third of declining long-maturity convenience yields over 2002-2006 and 2010-2014. |
| Keywords: | Convenience Yields, Exchange Rates, Long-Run Risk, U.S. Safety, Equity Risk Premium |
| JEL: | F30 F31 G12 |
| Date: | 2025–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2570 |
| By: | Corsetti, G.; Lloyd, S.; Marin, E.; Ostry, D. |
| Abstract: | We document a rise in investors' assessment of U.S. risk relative to other G.7 economies since the late 1990s, driven by higher permanent risk but not reflected in currency returns. Using a two-country framework with trade in a rich maturity structure of bonds which earn convenience yields, alongside risky assets and currencies, we establish an equilibrium relationship between cross-border convenience yields, relative country risk and carry-trade returns. Empirically, we identify a cointegrating relationship between relative permanent risk and long-maturity convenience yields. Counterfactual experiments show rising relative permanent risk explains around one-third of declining long-maturity convenience yields over 2002-2006 and 2010-2014. |
| Keywords: | Convenience Yields, Exchange Rates, Long-Run Risk, U.S. Safety, Equity Risk Premium |
| JEL: | F30 F31 G12 |
| Date: | 2025–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2526 |
| By: | Ferrando, Annalisa; Lamboglia, Sara; Offner, Eric |
| Abstract: | We study how survey-based measures of funding needs and availability influence the transmission of euro area monetary policy to investment. We first provide evidence that funding needs are primarily driven by fundamentals, while perceived funding availability captures financial conditions. Using these two measures, we assess how the effectiveness of monetary policy varies with fundamentals and financial conditions. Our results indicate that monetary policy is most effective when firms’ fundamentals are strong. In contrast, firms with favorable financial conditions exhibit a more muted investment response to monetary policy. By combining these two survey-based measures, we construct an indicator of financial constraints and show that financially constrained firms are more sensitive to monetary policy. These findings offer new light on the transmission of monetary policy to corporate investment, emphasizing not only the role of financial conditions, but also the importance of fundamentals, which are beyond the direct influence of central banks JEL Classification: C83, E22, E52 |
| Keywords: | central banking, financial conditions, firm heterogeneity, investment opportunities, survey data |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253150 |
| By: | Mr. Yan Carriere-Swallow; Gene Kindberg-Hanlon; Danila Smirnov |
| Abstract: | We provide empirical evidence on the impact of the Bank of Japan’s unconventional monetary policies on domestic economic variables and their spillovers to international sovereign yields. Using high-frequency asset price surprises to Bank of Japan (BOJ) policy announcements, we identify shocks to forward guidance (FG) and large-scale asset purchase (LSAP) policies. We show that expansionary LSAP and FG shocks increase Japanese activity and stock prices, lower unemployment, and depreciate the yen. We find that FG and LSAP shocks produce spillovers to sovereign bond yields in other countries. Spillovers from BOJ LSAP shocks seem to transmit through term premia, and the strength of spillovers is strongest to those markets where Japanese investors have a larger participation. |
| Keywords: | monetary policy transmission; quantitative easing; spillovers; Japan |
| Date: | 2025–11–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/227 |
| By: | Alfred V Guender; Jacob Greig; Kuntal Das; Jakub Pesek |
| Abstract: | This paper assesses the global reach of US monetary policy over the 2007-2022 period in a sample of 78 countries and currency unions. Our findings show that the zero-lower-bound (ZLB) problem was restricted to advanced economies or those with currencies tied to the US dollar during the Global Financial Crisis (GFC) but became more widespread following the outbreak of COVID-19. The enormous and rapid expansion of the Fed’s balance sheet was not common elsewhere in the GFC period. Only three central banks expanded the size of their real balance sheet by more in relative terms than the Fed during the GFC and its aftermath. In contrast, six central banks did so after hitting the ZLB bound during the COVID-19 pandemic. The strongest support for a leading global role of Fed policy action comes from a pairwise assessment of central bank balance sheet changes during the two crises. Positive comovements, both contemporaneous and lagged, between US balance sheet changes and changes in other countries were common, with correlations being considerably more widespread and higher during the pandemic than the GFC. |
| Keywords: | unconventional monetary policy, zero lower bound, balance sheet management, international spillover effects, economic crises |
| JEL: | E5 E6 F4 F6 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-60 |