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on International Finance |
| By: | Husnu C. Dalgic |
| Abstract: | Following U.S. monetary policy shocks, exchange rates exhibit two puzzling patterns: they initially depreciate sluggishly (delayed overshooting) before overshooting excessively. I show that incorporating FX speculators with subjective expectations resolves both puzzles by generating short-term momentum and excess volatility in exchange rates. When investors’ expectations are sticky and backward-looking, their trading amplifies the initial sluggishness and subsequent overshooting. In contrast, the participation of investors with rational expectations helps to dampen such volatility. This distinction yields sharp policy implications: limiting the market participation of speculators with subjective expectations significantly lowers exchange rate volatility , while their presence also makes FX interventions and local monetary policy more effective by endogenously reinforcing central bank actions. |
| Keywords: | foreign financiers, capital controls, subjective expectations |
| JEL: | E44 F32 F41 G15 D84 E71 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_723 |
| By: | Luis Rodrigo Arnabal; Santiago Camara; Cecilia Dassatti |
| Abstract: | This paper studies how shocks to global banks' net worth transmit to Emerging Market Economies. Using the identification strategy of Ottonello and Song (2022), which isolates high-frequency surprises to banks' credit supply capacity, we show that positive shocks appreciate local currencies, lower external borrowing costs, increase capital flows to domestic banking sectors, and raise investment, credit, and real activity across EMEs. These effects are highly robust across specifications and samples. Using administrative credit-registry data from Uruguay, we find that better capitalized banks transmit global credit easing more strongly. At the firm level, responses are weaker for more leveraged firms, especially those with foreign-currency debt, short maturities, or collateral not priced to market. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.01132 |
| By: | Cormier, Ben; Naqvi, Natalya |
| Abstract: | Inclusion in bond indexes improves Emerging Market (EM) government access to capital. Under what conditions do EMs enter indexes and gain the market access benefits? We find borrower features affect index inclusion differently in domestic currency versus foreign currency bond contexts. In the higher-risk domestic currency bond context, indexes are designed to include only a small low-risk subset of bonds, leading borrower political, institutional, and policy characteristics to significantly affect inclusion probability. In the lower-risk foreign currency bond context, indexes are designed to depict more of the market, so these same borrower features do not significantly affect inclusion probability. The study shows why EM entry into indexes and the corresponding access to capital varies across domestic currency and foreign currency bond markets, providing a nuanced picture of how contemporary sovereign debt markets operate. We provide historical index inclusion data for future research. |
| JEL: | J1 |
| Date: | 2025–12–04 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130491 |
| By: | Viktoria Alaverdyan (Central Bank of Armenia); Gevorg Minasyan (Central Bank of Armenia); Aleksandr Shirkhanyan (Central Bank of Armenia) |
| Abstract: | This paper examines whether macroprudential foreign exchange (FX) regulations unintentionally shift currency risk to sectors not directly targeted by such measures. Using a difference-indifferences framework and a highly granular dataset combining loan-level credit registry data with bank-level balance sheet information, we analyse how Armenian banks adjusted their portfolios following the introduction of a differentiated loan-to-value (LTV) regulation that imposed stricter limits on FX-denominated mortgages. The results show that the differentiated LTV, while tightening borrowing conditions for FX-denominated mortgages, also led to an increase in the dollarization of business loans and a higher share of foreign-currency bonds in banks' portfolios. These shifts imply that FX-related macroprudential policies can reallocate rather than reduce currency risk, emphasizing the need for system-wide oversight to prevent its build-up in unregulated segments of the financial system. |
| Keywords: | Macroprudential policy; Foreign exchange regulation; Loan-to-value limits; Dollarization; Bank portfolio reallocation |
| JEL: | E58 G21 G28 F31 E44 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ara:wpaper:wp-2025-04 |
| By: | Fernando Broner; Alberto Martin; Josefin Meyer; Christoph Trebesch |
| Abstract: | How do shifts in the global balance of power shape the world economy? We propose a theory of alignment-based “hegemonic globalization, ” built on two central premises: countries differ in their preferences over policies (such as the rule of law or regulatory frameworks) and trade between any two countries increases with the degree of alignment in these policies. Hegemons promote policy alignment and thereby facilitate deeper trade integration. A unipolar world, dominated by a single hegemon, tends to support globalization. However, the transition to a multipolar world can trigger fragmentation, which is particularly costly for the declining hegemon and its closest allies. To test the theory, we use international treaties as a proxy for alignment and compile a novel “Global Treaties Database, ” covering 77, 000 agreements signed between 1800 and 2020. Consistent with the theory, we find that hegemons account for a disproportionate share of global treaty activity and that treaty-signing is a leading indicator of increasing bilateral trade. |
| Keywords: | Hegemon, globalization, trade integration, international coercion, international treaties, cooperation, multipolar world |
| JEL: | F02 F15 F50 F51 F55 F60 P45 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2149 |
| By: | Martin Ertl; Adrian Wende |
| Abstract: | Abstract:This policy brief examines the extent to which Austrian exports are exposed to exchange rate risk and how exchange rate fluctuations affect exports to countries outside the euro area. As exchange rates are largely disconnected from macroeconomic fundamentals, they are likely driven to some extent by financial shocks, resulting in significant volatility and exchange rate risk. Nevertheless, Austria’s overall exposure to such risk is relatively limited. Most exports go to countries with comparatively stable currencies, while highly volatile currencies account for only a small share of both total exports and exporting firms. Survey evidence indicates that many Austrian exporters manage exchange rate risk by invoicing in euros, which substantially reduces short-term risk, especially for small and medium-sized firms. In addition, a considerable number of firms use trade insurance. Empirical studies show that Austrian exports react only moderately to exchange rate movements, although the degree of sensitivity varies significantly across sectors and products. |
| Keywords: | International Competitiveness, Austria, export performance, Currency volatility, Euro invoicing, Exchange rate risk |
| JEL: | F31 F14 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:wsr:pbrief:y:2025:m:12:i:71 |
| By: | Duarte, João B.; Pires, Mariana N. |
| Abstract: | We study how financial integration shapes the transmission of monetary policy to consumer prices and output in the euro area. Using local projections, we document that the effect of financial integration is continuous: greater integration systematically strengthens the pass-through of monetary policy. When integration falls to low levels—around the first quartile of its historical distribution— transmission to both prices and output becomes statistically and economically insignificant. The amplification pattern is pervasive across member states and more pronounced in peripheral economies. These results show that financial integration is a key determinant of monetary policy effectiveness within the euro area. JEL Classification: E44, E52, F36, F45 |
| Keywords: | financial integration, local projections, monetary policy, monetary union |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253165 |
| By: | Tao Liu (Central University of Finance and Economics); Dong Lu (Renmin University of China); Liang Wang (University of Hawaii) |
| Abstract: | There have been two competing views on the structure of the international monetary system: one sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that a multipolar system has been the rule, not the exception. We propose a unified theoretical framework to reconcile these two views. In a micro-founded monetary model, we examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other, and agents have the incentive to diversify their portfolio, giving rise to a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. A calibrated model shows that, all else equal, USD could lose its dominance if the US fiscal capacity deteriorates by 34\% or the US economy size shrinks by 32%. |
| Keywords: | International Currency, Money, Multipolar, Safe Assets, Unipolar |
| JEL: | E42 E52 F33 F40 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hai:wpaper:202504 |
| By: | Bouveret, Antoine; Darpeix, Pierre-Emmanuel; Ferrari, Massimo; Grill, Michael; Molestina Vivar, Luis; Schmidt, Daniel Jonas; Weistroffer, Christian; Okseniuk, Dorota; Raillon, Franck; Schäfer, Annegret |
| Abstract: | This paper proposes a framework for monitoring risks arising from the build-up of leverage in EU-domiciled alternative investment funds (AIFs) and examines policy tools that could be effective in mitigating these risks in line with international recommendations. We develop a novel framework that combines confidential fund-level and transaction-level data on derivatives and repurchase agreements to present a comprehensive overview of the sources of leverage in highly leveraged AIFs. Using a range of risk metrics, our analysis identifies hedge funds and funds pursuing liability-driven investment (LDI) strategies as the most vulnerable to leverage-related risks. If interest rates rise, LDI funds may face significant mark-to-market losses and liquidity needs due to margin and collateral calls. Hedge funds appear to be more resilient against this type of shock but are sensitive to credit risk, especially hedge funds with relative value strategies. To mitigate these risks, we evaluate the impact of a range of policy tools such as leverage limits and minimum haircuts on collateral used for repo. Our analysis shows that the impact of the tools depends on the types of funds considered. Imposing a direct limit on net leverage of ten times the net asset value would lead to a sizeable reduction in the net exposures of hedge funds, but would barely affect other leveraged AIFs. Minimum haircuts on collateral would most likely affect only hedge funds with relative value strategies, as LDI funds, which already operate under a leverage limit, appear to have enough unencumbered assets to meet any additional collateral requirements. Overall, our findings suggest a need for tailored policy designs and highlight the complex interplay between different regulatory measures. JEL Classification: G15, G23, G28 |
| Keywords: | AIFMD, alternative investment funds, derivatives, EMIR, haircut, initial margin, leverage, leverage limit, repo, SFTR, synthetic, yield buffer |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:srk:srkops:202528 |
| By: | Souleymane Faye; Sarah Godar; Carolina Moura; Gabriel Zucman |
| Abstract: | This paper constructs homogeneous time series of global household offshore wealth covering the 2001–2023 period, during which major international efforts were implemented to curb offshore tax evasion. We find that: (i) global offshore wealth remained broadly stable as a fraction of global GDP since 2001, following a sharp increase in the 1980s and 1990s; (ii) the location of offshore wealth changed markedly, with a decline in the share held in Switzerland and a rise of Asian financial centers, the United Kingdom, and the United States; and (iii) a growing fraction comes from developing countries. |
| Keywords: | Tax havens, Tax evasion, Wealth, International investment positions |
| JEL: | H26 H87 E21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2150 |