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on International Finance |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | We propose a framework for studying financial and macroeconomic dynamics in an environment where liquid assets have a productive use but their supply is limited (i.e., the economy is starved for liquidity). The private demand for financial assets arises from the need to hold them for production. The private supply of financial assets is limited and unstable because of borrowing constraints and default risk. We discuss open-economy applications that analyze the accumulation of foreign reserves by emerging economies, the increase in public debt issued by advanced economies, the rapid growth of emerging economies, structural changes in financial markets, and financial globalization. A key result is that most of these developments led to a decline in interest rates and an increase in global macroeconomic volatility, driven by riskier borrower portfolios. |
| JEL: | F40 F41 G15 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34688 |
| By: | Sinem Hacioglu Hoke; Daniel A. Ostry; Hélène Rey; Adrien Rousset Planat; Vania Stavrakeva; Jenny Tang |
| Abstract: | Drawing on 100 million transactions, we show how speculators, hedgers, and market makers interact in the world’s largest FX derivatives market, and that derivatives trading can affect exchange rates. Firms in the largest client sectors—pension and investment funds, insurers, and nonfinancials—use FX derivatives primarily to hedge currency risk, with dealer banks providing the liquidity. Hedge funds, with comparatively smaller net exposures, trade speculatively, whereas dealer banks insulate themselves from changes in speculative demand by taking offsetting positions with hedgers, especially nonfinancials. Non-bank market makers, instead, take residual exchange-rate exposures “on the margin”. Hedge funds’ speculative flows help transmit monetary policy shocks to exchange rates, while investment funds' unwinding of hedges contribute to dollar appreciations when credit risk rises. Our results highlight that exchange rates depend on the composition of trading activities in FX derivatives markets. |
| JEL: | F30 F31 G15 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34588 |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | We study how the increased cross-country ownership of financial assets between advanced and emerging economies impacted their financial and macroeconomic volatility. While cross-country ownership improved risk-sharing and reduced volatility associated with financial crises, it also increased the exposure of countries to foreign crises, leading to higher international co-movement. Through quantitative applications of a two-region model representative of advanced and emerging economies, we find that financial globalization reduced volatility worldwide, but significantly more in emerging economies. |
| JEL: | F40 F41 G01 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34689 |
| By: | María Alejandra Amado (BANCO DE ESPAÑA) |
| Abstract: | Macroprudential FX regulations aim to reduce systemic currency-mismatch risks, yet their distributional effects on firms’ access to credit remain poorly understood. This paper studies Peru’s 2014 dedollarization policy, which sharply increased reserve requirements on banks’ foreign-currency liabilities in proportion to their dollar lending to nontradable firms. Exploiting cross-sectional variation in banks’ exposure and using administrative loan-level data covering the universe of firms, I find that moving from the median to the 75th percentile of exposure reduces growth in total new loans by roughly 10 percentage points for micro and small firms, with no significant effects for medium or large firms. Larger firms absorb the shock by reallocating borrowing across banks and into local currency credit, whereas micro firms experience sharp declines in both dollar and total credit, higher borrowing costs, and modest employment losses. The results highlight a trade-off between macroprudential objectives and credit access for small firms. |
| Keywords: | macroprudential FX regulations, currency mismatch, small firms, emerging markets, borrowing constraints, bank lending channel |
| JEL: | E43 E58 F31 F38 F41 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2604 |
| By: | Ana Aguilar; Rafael Guerra; Carola Müller; Alexandre Tombini |
| Abstract: | This paper investigates the impact of domestic economic policy uncertainty (EPU) on macroeconomic and financial variables in emerging market economies, focusing on Latin America. Using a panel dataset for Brazil, Chile, Colombia and Mexico from 2005 to early 2025, we find that domestic EPU shocks cause significant macroeconomic disruptions, leading to a contraction in output and a rise in inflation, akin to a supply shock. These effects are transmitted through a financial channel in the short term, via higher risk premia, increased equity market volatility and exchange rate depreciations, and through a real channel in the medium term, via declines in growth expectations and consumer and business confidence. Our analysis further reveals that EPU shocks are most damaging when the economy is weak or financial conditions are tight, while stronger economies are better able to absorb such shocks. |
| Keywords: | macroeconomy, uncertainty, economic policy uncertainty, Latin America |
| JEL: | C33 D80 E23 E31 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1324 |
| By: | Adarov, Amat; Kose, Ayhan; Vorisek, Dana |
| Abstract: | The world faces a pressing challenge to meet key development objectives amid slowing growth and rising macroeconomic and geopolitical risks. With the number of job seekers rising rapidly, infrastructure shortfalls continuing to be large, and climate costs mounting, the case for a significant investment push has never been stronger. Yet the capacity to respond in many emerging markets and developing economies has eroded. Since the global financial crisis, investment growth has slowed to about half its pace in the 2000s, with both public and private investment weakening. Foreign direct investment inflows—a critical source of capital, technology, and managerial know-how—have also fallen sharply and become increasingly concentrated, leaving low-income countries with only a marginal share. The risks of further retrenchment are significant, as trade tensions, policy uncertainty, and elevated debt levels continue to weigh on investment. Reigniting momentum will require ambitious domestic reforms to strengthen institutions, rebuild macro-fiscal stability, and deepen trade and investment integration—the foundations of a supportive business climate. At the same time, international cooperation is indispensable. A renewed commitment to a predictable system of cross-border trade and investment flows, combined with scaled-up financial support and sustained technical assistance, is essential to help emerging markets and developing economies—especially low-income countries and economies in fragile and conflict situations—bridge financing gaps and implement the domestic reforms needed to restore investment as an engine of growth, jobs, and development. |
| Date: | 2026–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11282 |
| By: | António Afonso; Eduardo Rodrigues |
| Abstract: | Savings play a critical role in both individual financial well-being and economic development. This article examines the impact of financial literacy, income, educational level, and age on saving decisions across 136 countries, using data from the Global Financial Inclusion Database (2021) and employing Generalized Structural Equation Modelling (GSEM). Financial literacy is conceptualized as a latent variable, based on five indicators related to financial knowledge, financial behavior, and financial attitudes, aligned with the Organization for Economic Co-operation and Development (OECD) pillars. The analysis demonstrates that financial literacy is a fundamental driver for saving in the short and long term. Education level and income are consistent predictors of savings, while age exhibits distinct effects depending on the savings objective. Regional differences emerge, with Latin American countries showing the strongest link between financial literacy and savings, whereas in high-income economies, its influence is less pronounced. These findings underscore the multifaceted role of financial literacy in shaping saving decisions and highlight its implications for tailored public policies. |
| Keywords: | financial literacy; savings; Generalized Structural Equation Modelling; behavioral economics; global survey. |
| JEL: | D14 G53 I22 C38 O16 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp04032026 |
| By: | Minhaj Mahmud (Asian Development Bank); Yujie Zhang (University of Pennsylvania) |
| Abstract: | This study examines the interplay between extreme temperatures and air pollution risks, the geographic and temporal distribution, as well as the population burden of climate shocks in Bangladesh, Indonesia, Pakistan, Thailand, and Viet Nam—countries severely impacted by climate change. Using ERA5-HEAT temperature data and PM2.5 pollution data, we first identify “hotspots” within and across the countries by analyzing district level trends in heat stress and pollution exposure. We further explore the correlation between temperature and pollution shocks. Finally, jointly considering the spatial distribution of populations and key climate and pollution hazards, we highlight the most vulnerable groups with population weighted exposure measures. Our findings reveal distinct country-specific patterns in both the correlation between heat stress and air pollution risk, and the population exposure to the hazards across demographic profiles. These results emphasize targeted policies to mitigate the compounded effects of climate and air pollution hazards on vulnerable populations across Asia. |
| Keywords: | heat;air pollution;climate change;Asia;population exposure |
| JEL: | J10 Q53 Q54 Q56 |
| Date: | 2026–01–27 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:022144 |
| By: | Anthony M. Diercks; Jared Dean Katz; Jonathan H. Wright |
| Abstract: | Prediction markets offer a new market-based approach to measuring macroeconomic expectations in real-time. We evaluate the accuracy of prediction market-implied forecasts from Kalshi, the largest federally regulated prediction market overseen by the CFTC. We compare Kalshi with more traditional survey and market-implied forecasts, examine how expectations respond to macroeconomic and financial news, and how policy signals are interpreted by market participants. Our results suggest that Kalshi markets provide a high-frequency, continuously updated, distributionally rich benchmark that is valuable to both researchers and policymakers. |
| JEL: | C5 E3 G1 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34702 |
| By: | Hirschbuehl Dominik (European Commission - JRC); Ceglar Andrej; Cojoianu Theodor; Emambakhsh Tina; Qi Yifan; Rho Caterina (European Commission - JRC); Hu Elsie; Petracco Marco (European Commission - JRC); Biganzoli Fabrizio; De Jager Alfred (European Commission - JRC); Garcia Herrero Laura (European Commission - JRC); Mandrici Andrea; Pasqua Carlo |
| Abstract: | This study examines how euro area banks factor pollution-induced biodiversity risks into lending decisions, using data from 832 banks and 5, 000 major polluters. Our results show that banks are increasingly pricing these risks by adjusting loan-to-value ratios and interest rates. Banks adjust lending conditions in line with EU pollution and biodiversity protection legislation, particularly for companies with large pollution footprints near biodiversity-protected areas or those contributing to Environmental Quality Standards failures of downstream surface waters. The former is driven primarily by banks' adoption of biodiversity policies and public commitments to the Equator Principles, while the latter is a result of regulatory risks. Our findings inform financial supervisors on how banks manage risks associated with the EU's zero pollution ambition, shed light on the interplay between biodiversity protection legislation and banks' lending decisions, and offer actionable guidance on leveraging existing regulatory frameworks to address the climate-biodiversity-pollution nexus. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:jrs:wpaper:202510 |