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on International Finance |
| By: | Jonathan Federle; Robin Greenwood; Josefin Meyer; Carmen Reinhart; Christoph Trebesch |
| Abstract: | We study how wars and military threats affect financial markets. Leveraging more than 300, 000 monthly price observations since 1822, we create an external currency bond index for more than 90 countries—the EXBI. Using the EXBI, we document large effects of wars on returns and borrowing costs. In a global external bond portfolio, a one-standard-deviation war shock lowers returns by five percentage points. At the country level, wars at home generate sharp losses and increase default risk. Military threats depress bond prices in threatened states, but not in threatening ones, highlighting their role as a channel for geoeconomic coercion. |
| Keywords: | sovereign bond returns; war risk; geopolitical risk; militarized disputes; sovereign default; global financial history; conflict and finance; international capital markets |
| JEL: | F34 G15 H56 N20 E44 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2186 |
| By: | Daniel Marcel te Kaat; Jiancong Liu; Alexander Raabe |
| Abstract: | Why do stock markets appear resilient to geopolitical risk? Using ï¬ rm-level measures of geopolitical risk exposure and data on investment funds' holdings, we show how funds help swiftly restore valuations compressed during bouts of heightened geopolitical risk. More intense geopolitical shocks strengthen this stabilizing role. Declines in valuations of exposed but otherwise sound ï¬ rms raise expected returns, attracting funds to acquire these assets at depressed prices, consistent with a search for yield mechanism. This behavior is more pronounced among funds with greater risk-taking capacity and weaker past performance. Funds' tilt toward exposed stocks increases portfolio concentration, partly offset by higher cash buffers. In contrast, ultimate investors withdraw from exposed funds. The results are not driven by any particular industry - including defense or dual-use production - and are robust to a rich set of controls, ï¬ xed effects, and placebo tests. |
| Keywords: | geopolitical risk, investment funds, portfolio reallocations, stock markets |
| JEL: | F3 F5 G1 G3 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-88 |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | We show first that the dominance of the dollar as the world currency is bound to decline. Second, there is no other currency today capable of taking over the dollar. The euro is handicapped by a fast decline of the economic importance of the euro area countries in the world. Even a Capital Markets Union will not compensate this, because a Capital Markets Union by itself does not create a safe asset. The latter is necessary as a benchmark to price the myriad of financial assets that make capital markets interesting for investors. Only a political union in which a federal European government has the authority to issue a common debt can achieve this. The most likely scenario, therefore, is that the world monetary system develops into a multi-polar currency system, where a limited number of currencies achieve a strong regional importance without any of them achieving the status of the dominant currency, in a way that the dollar has done in the post-war period. That seems to be the future for the euro, a future that can become a reality faster by developing a euro payment system alternative to the dollar and by creating a full-fledged digital euro. |
| Keywords: | global currency;international payment systems;euro;capital markets union;rule of law |
| JEL: | J1 F3 G3 |
| Date: | 2026–10–26 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:141657 |
| By: | Evans, Alexander |
| Abstract: | This paper explores whether the US dollar’s dominance in global finance – long a pillar of American geopolitical influence – is being quietly eroded. While the dollar remains the world’s primary reserve currency, its centrality in international payments is increasingly contested. The weaponisation of the dollar, particularly through sanctions and the extraterritorial reach of the New York banking licence, has prompted strategic responses from states such as China, Russia, and India. These strategic responses include the development of alternative payment systems, local currency trade settlements, and digital infrastructure. The paper argues that a ‘hollowing’ of the dollar’s infrastructural dominance is underway – (perhaps very) gradual, partial, but geopolitically significant. This shift may not end dollar supremacy, but it could fragment the global financial system, weaken US sanctions leverage, and diminish the centrality of New York and London as financial hubs. The implications for global order are subtle but potentially profound. A less dollar-dependent system may facilitate a more multipolar world yet diminish liberal democratic power. |
| JEL: | F3 G3 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:141656 |
| By: | Simone Arrigoni (Banque de France); Agustin S. Benetrix (Department of Economics, Trinity College Dublin) |
| Abstract: | This paper studies whether bilateral portfolio equity integration is associated with convergence or divergence in wealth distributions across countries. We combine bilateral portfolio equity positions from the IMF's Portfolio Investment Positions database with wealth‐share data from the World Inequality Database for 2001‐2023. For each country pair, we relate bilateral equity exposure to gaps in the wealth shares of the Bottom 50%, Middle 40%, Next 9%, and Top 1%. Stronger bilateral integration is not associated with broad‐based convergence. It is associated with wider wealth‐share gaps for the Middle 40% and Next 9%, but not for the Bottom 50% or Top 1%. Once differences in aggregate national wealth are incorporated, these effects disappear and the main result shifts to the Top 1%, whose wealth‐weighted gap widens. Decomposition results point to distinct distributional and aggregate‐wealth channels, while country‐pair estimates reveal substantial heterogeneity by level of development and direction of investment. Our findings add a bilateral dimension to the literature on financial globalisation and wealth inequality. |
| Keywords: | cross-border investment positions, portfolio equity, wealth inequality |
| JEL: | D31 F36 G15 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep2426 |
| By: | Silvia Sgherri |
| Abstract: | A global digital liability is a contract with three clauses that can be written separately at issuance: denomination, which governs what the liability pays and how well it insures its holders; the unit of account, which governs pass-through into prices; and backing, the government bonds held against it, which governs the yield privilege and the issuer’s currency exposure. Dollar stablecoins set all three to the dollar; multilateral proposals would move them to a basket. In a three-country New Keynesian model with currency-disaster risk in the periphery, a convenience yield on reserve assets, and original sin, we show that, however it is written, the contract cannot remove peripheral currency risk, only decide who bears it. Insuring against the peripherys currency creates an open position for the issuer. With fixed capital, that exposure places a limit on the scale at which the liability can be supplied credibly: a new Triffin dilemma that can be overcome by capital that grows with the open position. The mechanism behind the old dilemma reappears in general equilibrium: the country whose bonds back the liability runs a permanent trade deficit financed by the world’s demand for them, and the yield privilege it draws exceeds the interest it saves, as its terms of trade improve. |
| Keywords: | stablecoins, digital dollarization, unit of account, convenience yield, original sin, portfolio balance, international monetary system, Triffin dilemma |
| JEL: | F31 F33 F41 E42 E44 G23 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2026-015 |
| By: | Angelos Athanasopoulos (Central Bank of Ireland); Nicolo Fraccaroli (World Bank and Brown University); Andreas Kern (Georgetown University); Davide Romelli (Department of Economics, Trinity College Dublin) |
| Abstract: | We study how reforms that tighten statutory limits on central‐bank lending to government affect sovereign borrowing in 155 countries over 1972‐2023. Using instrumental‐variable local projections, we estimate their effects on public debt and real effective implicit interest rates. We find that in developing economies tighter constraints raise debt‐to‐GDP while reducing real borrowing costs. A median‐sized reform temporarily increases debt‐to‐GDP by about 12 percentage points at its two‐year peak, and lowers the real effective implicit interest rate by roughly 6 percentage points after five years, an effect that persists over the ten‐year horizon. Foreign‐held external public debt also rises persistently. Advanced economies show a smaller debt response of the opposite sign and no decline in borrowing costs. The real‐rate decline persists under alternative debt denominators and relative to the United States. State‐dependent estimates show that lower borrowing costs are strongest in high‐inflation developing economies, consistent with statutory lending constraints improving sovereign borrowing conditions where credibility gains are greatest. |
| Keywords: | central bank independence; government debt; interest rate; sovereign lending; central bank governance |
| JEL: | E58 G28 N20 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep2226 |
| By: | Aleksandar Andonov; Kristy A. E. Jansen; Joshua Rauh |
| Abstract: | Pension funds are long-horizon investors with predictable liability structures. As such, they are often perceived as investors who can provide liquidity and stabilize markets. However, pension funds increasingly face negative operating cash flows as benefit payments exceed contributions. Using aggregate data on U.S. public pension funds combined with granular holdings obtained through public records requests, we document three findings that challenge the conventional view of pension funds as stabilizing investors. First, pension funds with more negative cash flows do not adjust their target asset allocations and maintain low allocations to safe and liquid assets. Second, because of these limited safe asset buffers, pension funds meet cash flow shocks primarily by selling equities, absorbing $0.67 per dollar of shock through equity sales. At the security level, pension funds sell across equities rather than following a safe and liquid-assets-first approach. Third, pension funds sell equities even when equity returns are negative, indicating that these trades reflect liquidity needs rather than portfolio rebalancing. Together, these findings show that pension funds have become regular sellers in equity markets rather than contrarian, stabilizing investors. |
| JEL: | G11 G23 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35896 |
| By: | Louphou Coulibaly; Charles Engel |
| Abstract: | We examine optimal non-cooperative monetary policy in a two-country New Keynesian setting with complete financial markets and pricing to market for goods. In contrast to the case in which the law of one price holds for goods, currency misalignments are an important consideration even for self-oriented policymakers. Financial markets are critical in the analysis. Under “full” commitment, the optimal policy considers the effects on asset values and hence wealth distribution across countries. Optimal policy under full commitment differs from the “partial” commitment case in which the policy commitment is not made until after asset markets clear. Surprisingly, the optimal targeting rule under strategic policy with full commitment is the same as under cooperative policy. In this setting, changes in state-contingent claim prices offset the wealth a self-oriented policymaker might seek through terms-of-trade manipulation, and we show that there are no gains from cooperation. Although a policy chosen under partial commitment may be desirable from a country’s perspective, the resulting Nash equilibrium yields lower welfare. |
| JEL: | E44 E52 F31 F41 F42 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35928 |
| By: | Christopher Clayton; Matteo Maggiori; Jesse Schreger |
| Abstract: | We build a model of two hegemons that have valuable trading relationships with each other and at the same time compete in exerting geoeconomic power over countries in the rest of the world. When the hegemons trade with each other, their optimal policy is shaped both by classic economic considerations - the profitability of that specific trade - and by geoeconomic competition - how the trade affects the power of each hegemon vis-a-vis the rest of the world. We show that containment, a policy mix in which a hegemon limits sales of its inputs to the rival hegemon and uses its power to demand that the rest of the world shift away from sourcing from the rival, arises when the two hegemons offer relatively substitutable exports, are less interdependent with each other, and have more direct geopolitical rivalry. Countries in the rest of the world benefit, all else equal, from hegemons containing each other since they partially squander their power with offsetting demands. However, containment policy can also worsen the efficiency of global production, leaving the rest of the world worse off. |
| JEL: | E0 F0 L0 N0 P0 F10 F30 F40 F50 N40 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35952 |