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on International Finance |
| By: | Iñaki Aldasoro; Paula Beltran; Federico Grinberg |
| Abstract: | Using data on four USD-pegged stablecoins and 27 fiat currencies, this paper documents spillovers from stablecoin-based foreign exchange (FX) to traditional FX markets. We document a gap between the cost of acquiring dollars via stablecoins and via the spot FX market (parity deviations). To establish a causal link between stablecoin flows and FX markets, we use a granular instrumental variable that exploits idiosyncratic shocks to stablecoin net inflows in other currencies. Our estimates indicate that a 1% exogenous increase in net stablecoin inflows raises parity deviations by 40 basis points, depreciates the local currency, and widens the dollar premium in synthetic funding markets (covered interest parity (CIP) deviations). A model of constrained arbitrage rationalizes these findings and provides structural foundations for the identification strategy. Counterfactual simulations show that halving cross-market frictions would attenuate CIP spillovers by roughly one-half and cut exchange rate effects by nearly one-third. A dynamic extension that closely matches the empirical impulse responses shows that spillovers grow disproportionately when intermediaries suffer losses, as depleted capital reduces their capacity to absorb further shocks. Our results establish stablecoins as an emerging segment of global currency markets with direct implications for financial stability. |
| Keywords: | Stablecoins; foreign exchange; market segmentation; capital flows; arbitrage |
| Date: | 2026–03–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/056 |
| By: | Andres Fernandez; Alejandro Vicondoa |
| Abstract: | We study the joint dynamics in the volume and prices of capital fows to emerging market economies (EMEs). A dynamic factor model augmented with sign and zero restrictions allows us to identify demand/supply shocks of idiosyncratic/common nature. While common credit supply shocks are the main driver of prices, idiosyncratic credit demand and supply shocks account for most of the variation in quantities. A structural multicountry SOE/RBC model is calibrated to EMEs data to further shed light on the main transmission channels. Augmented with correlated productivity and interest rate shocks, the model matches the comovement between prices and quantities as well as business cycle moments. Common credit demand drivers, captured as correlated TFP shocks, account for around half of the observed comovement in quantities but they are not a signicant driver of price comovement. Fundamentals matter signicantly more for capital flows than for country spreads, which are driven by a sizeable global financial cycle. |
| Keywords: | capital flows; sovereign spread; small open economy; credit supply; credit demand; external factors. |
| Date: | 2026–03–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/060 |
| By: | Mr. Adrian Alter; Julia Bersch; Albert Touna Mama; Bright Quaye |
| Abstract: | Central bank independence (CBI) is a key institutional feature for price stability, but its role in sovereign debt markets is less understood. This paper examines whether CBI lowers borrowing costs in local-currency sovereign debt markets in emerging and developing economies. Using data for up to 137 countries from 2000--2024, we first reaffirm that stronger CBI substantially reduces inflation and its volatility. We then show that, in normal times, a 0.1-point increase (on a 0–1 scale) in CBI is associated with lower five-year local-currency sovereign yields of 0.6–0.7 percentage points. A decomposition reveals two important mechanisms through which CBI reduces local-currency sovereign yields: lowering near-term risk compensation and compressing the term premium. In addition, we find evidence that this relationship is stronger under inflation-targeting regimes and larger in sub-Saharan Africa, but does not hold during systemic global crises. Finally, using dominance analysis, we show that domestic fundamentals explain more of the variation in yields than global factors. These findings demonstrate that debt markets directly price institutional credibility, offering clear guidance for the design of monetary frameworks. |
| Keywords: | Sovereign yields; Local-currency bonds; Risk premium; Term premium; Inflation; Central bank independence |
| Date: | 2026–03–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/058 |
| By: | Niloofar Adel (Fondazione Eni Enrico Mattei); Andrea Bastianin (University of Milan and Fondazione Eni Enrico Mattei); Luca Pedini (Marche Polytechnic University and Fondazione Eni Enrico Mattei); Marta Visconti (Fondazione Eni Enrico Mattei) |
| Abstract: | We quantify the contribution of Venezuela’s oil sector collapse to changes in global oil market responsiveness after 2007. We extend the multi-country structural model of Baumeister and Hamilton (2024) by modeling Venezuela explicitly and constructing a counterfactual production path that abstracts from the 2007 institutional shift. This counterfactual isolates the mechanical contribution of Venezuelan supply and provides an upper bound on its impact. We document a sharp decline in global short-run supply elasticity and a more than doubling of the oil price multiplier after 2007. Decomposition results show that this increase is driven primarily by a reduction in the effective inventory-related adjustment margin, with changes in other producers’ supply elasticities accounting for most of the remainder. By contrast, Venezuela’s contribution through its production share and contemporaneous supply elasticity is small. Restoring Venezuelan output raises global supply elasticity modestly but has limited effects on price amplification. |
| Keywords: | Crude oil, Sanctions, Supply shocks, Venezuela, OPEC |
| JEL: | C32 E32 L71 Q43 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:fem:femwpa:2026.12 |
| By: | Jess Benhabib; Feng Dong; Pengfei Wang; Zhenyang Xu |
| Abstract: | While standard sudden-stop models explain well the sharpness of financial crises, it remains challenging to account for the persistent growth stagnation that typically follows credit-driven capital account liberalizations in emerging markets. This paper presents a small open economy model with endogenous growth and borrowing constraints to ex- plain this phenomenon. The model highlights a valuation optimistic growth expectations, fueled by foreign credit with perfectly elastic supply, raise asset prices and relax liquidity constraints, inducing investment that validates the initial optimism. This positive feed- back loop generates multiple balanced growth paths and self-fulfilling cycles. However, in closed economies or with only FDI inflows, funding supply for investment is limited by consumption smoothing, dampening this feedback and leading to a unique growth path. Belief-driven regime switches can replicate crisis dynamics, including sharp drops in asset prices and growth. The framework also exhibits periodic orbits, producing endogenous deterministic fluctuations under perfect foresight. Countercyclical macroprudential measures can disrupt the detrimental feedback loop, while policies prioritizing FDI over credit prevent bad equilibria altogether, guiding the economy toward a stable, high-growth trajectory. |
| JEL: | E32 E44 F41 G01 G15 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35035 |
| By: | Joshua Ostry (Geneva Graduate Institute and CEPR) |
| Abstract: | This paper constructs a high-frequency, news-based measure of rare earth supply shocks to examine how disruptions in these critical inputs affect global firm valuations. Using news articles between 2021 and 2025, I identify exogenous rare earth supply events, distinguishing between Chinese trade-restriction and global production shocks. Using a sample of 5800 public firms, I show that negative rare earth supply shocks, which are expected to raise input prices, cause significant and persistent declines in the equity prices of rare earth-exposed firms, especially those in the battery, semiconductor, and motor vehicle industries. Both trade and production shocks depress valuations, though trade restrictions shocks are particularly impactful. These findings highlight a financial channel through which the weaponization of critical-material supply chains transmits across global markets. |
| Keywords: | Rare earth elements; critical minerals; supply chains; supply shocks; large language models; geoeconomics; financial markets |
| JEL: | G14 F14 F51 Q02 |
| Date: | 2026–04–09 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp10-2026 |
| By: | Metzler, Julian; Danisewicz, Piotr; Dieler, Tobias; Mancini, Loriano; Mazzari, Francesco |
| Abstract: | Repo markets clear either bilaterally over the counter (OTC) or through central counterparties (CCPs), which differ in how counterparty risk is priced. In bilateral markets, repo rates reflect borrower-specific risk, while CCP clearing pools counterparties and applies a common pricing rule. We develop a model of security-driven repo in which repo rates are non-linear in borrower risk. As a result, averaging borrower-specific OTC prices yields more negative rates than pricing the pooled borrower in CCP markets. The model predicts that the CCP–OTC specialness gap compresses during periods of counterparty uncertainty and varies with borrower and collateral characteristics. Using transaction-level data from the euro-area interbank repo market around the March 2020 COVID-19 shock, we find evidence consistent with these predictions. Our results show that central clearing dampens specialness in normal times but stabilizes repo pricing during stress. JEL Classification: D47, D82, G14, G15, G21 |
| Keywords: | asymmetric information, collateral risk, counterparty risk, interbank markets, uncertainty |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263214 |
| By: | Hanming Fang; Xian Gu; Hanyin Yan; Wu Zhu |
| Abstract: | We develop a high-precision classifier to measure artificial intelligence (AI) patents by fine-tuning PatentSBERTa on manually labeled data from the USPTO’s AI Patent Dataset. Our classifier substantially improves the existing USPTO approach, achieving 97.0% precision, 91.3% recall, and a 94.0% F1 score, and it generalizes well to Chinese patents based on citation and lexical validation. Applying it to granted U.S. patents (1976–2023) and Chinese patents (2010–2023), we document rapid growth in AI patenting in both countries and broad convergence in AI patenting intensity and subfield composition, even as China surpasses the United States in recent annual patent counts. The organization of AI innovation nevertheless differs sharply: U.S. AI patenting is concentrated among large private incumbents and established hubs, whereas Chinese AI patenting is more geographically diffuse and institutionally diverse, with larger roles for universities and state-owned enterprises. For listed firms, AI patents command a robust market-value premium in both countries. Cross-border citations show continued technological interdependence rather than decoupling, with Chinese AI inventors relying more heavily on U.S. frontier knowledge than vice versa. |
| JEL: | C55 G14 O31 O33 O34 O57 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35022 |
| By: | Jamel Saadaoui; Vanessa Strauss-Kahn; Jerome Creel |
| Abstract: | This paper investigates how geopolitical relationships shape Chinese exports, asking whether exporters systematically favor politically aligned countries - and whether that preference holds during periods of geopolitical turbulence. We leverage a unique high-frequency panel of over 17 million monthly firm-product-destination transactions from Chinese Customs (2000-2006), matched with the Political Relationship Index (𠑃𠑅ð ¼) developed by Tsinghua University, which captures monthly bilateral diplomatic relations from a Chinese perspective. Unlike most studies on geopolitics and trade, we move beyond the typical Western-centric lens of geopolitical risk and focus on export-side behavior. Our empirical strategy is robust: it combines rich fixed effects (firm-product, destination, time), sectorial tariff controls, and interactions with indicators of extreme positive and negative diplomatic events. Our results consistently show that stronger political alignment increases Chinese firms’ exports in both value and quantity. We also find evidence of non-linearity and asymmetric responses: exporters react more strongly to diplomatic improvements than to deteriorations. Using extreme geopolitical events, we show that positive events amplify the export response to political alignment, while negative events tend to dampen it. The patterns are strongest for foreign-invested firms and for differentiated products, suggesting that geopolitical alignment plays a critical role in global value chain dynamics. These findings contribute to understanding how firms incorporate political signals into trade decisions. In a world of growing political fragmentation, "friendtrading" is not just a policy discourse - it is reflected in the strategic behavior of exporters, even in the absence of formal sanctions. |
| Keywords: | international trade, firms' export, geopolitics, countries alignment |
| JEL: | F14 F13 F51 F23 D74 L25 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-22 |
| By: | Marc Burri; Daniel Kaufmann |
| Abstract: | We extend the heteroskedasticity IV estimator of Rigobon and Sack (2004) from one to multiple monetary policy shocks by imposing recursive zero restrictions on the impact matrix. Unlike high-frequency identification, the approach requires neither intraday tick data nor precise announcement timestamps, making it applicable to countries or historical periods where such data are unavailable. Applied to US FOMC announcements, we find causal effects similar to those of high-frequency identification. The heteroskedasticity-based instrument passes weak-instrument tests for the target shock, whereas high-frequency surprises fail. For the path shock, we also find strong heteroskedasticity-based instruments in key specifications, and we show that the underlying shocks are similar to those based on high-frequency identification. |
| Keywords: | Monetary policy shocks, causal effects, forward guidance, heteroskedasticity, high-frequency, instrumental variables |
| JEL: | C3 E3 E4 E5 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:irn:wpaper:26-06 |