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on Open Economy Macroeconomics |
| By: | Swapan-Kumar Pradhan; Elod Takats; Judit Temesvary |
| Abstract: | We use a rarely accessed BIS database on bilateral cross-border bank claims by bank nationality to examine the interaction of monetary and fiscal policies. We find significant interactions: the transmission of the monetary policies of major currency issuers is significantly influenced by the fiscal stance of source (home) lending banking systems. Fiscal consolidation in a source country amplifies the effect of currency issuers' monetary policy on lending. For instance, a reduction in the German debt-to-GDP ratio amplifies the negative impact of US monetary policy tightening on USD-denominated cross-border bank lending. |
| Keywords: | monetary policy, government debt, cross-border claims, difference-in-differences |
| JEL: | E63 F34 F42 G21 G38 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1226 |
| By: | Marina Azzimonti-Renzo; Nirvana Mitra |
| Abstract: | We examine how the post-pandemic trajectory of risk-free rates—from historically low levels in 2020 to a steep rise in 2022—affects sovereign debt management and default risk in emerging markets (EMs). Using a dynamic political economy model, we show that weak institutional environments with political incentives to engage in corruption spending lead to over-borrowing and increased default risk, especially during low-rate periods. As rates rise, EMs face high risks of default or the need for austerity programs, depending on the severity of productivity shocks. While International Financial Institution (IFI) lending provides short-term relief, it can fuel moral hazard and corruption. Making IFI loans contingent on anti-corruption efforts reduces default risk. However, even full monitoring cannot eliminate the incentives for fiscal mismanagement, as governments may still over-borrow during favorable periods without addressing sustainability. We also find that Quantitative Performance Criteria (QPC), such as a debt-ceiling rule, are less effective as they leave room for corruption that creates default risk and can generate welfare losses relative to a scenario without IFI debt. |
| Keywords: | Sovereign Debt Crises; Institutions; Corruption; Sovereign Default; IFI loans; Emerging Markets |
| JEL: | D72 E43 F34 E62 F41 |
| Date: | 2024–10–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99074 |
| By: | Kerstin Bernoth; Helmut Herwartz; Lasse Trienens |
| Abstract: | Using a data-driven approach to identify structural vector autoregressive models, we examine key factors influencing the US dollar exchange rate across eight advanced economies from 1980 to 2022. We find that shocks to inflation expectations, which are closely tied to unfunded government transfer payments, have a pronounced effect on the US dollar’s value. This underscores the fiscal dimension of exchange rates. External shocks, related to the convenience yield investors forgo to hold US dollar assets, have emerged over time as the most powerful driver of US dollar exchange rate fluctuations. These findings provide new insights into the complex interplay of monetary policy, fiscal dynamics, and global market forces in shaping US dollar exchange rates. |
| Keywords: | Exchange rates, convenience yield, inflation expectations, monetary policy, fiscal policy, unfunded government transfer payment, monetary-fiscal policy mix |
| JEL: | E52 C32 E43 F31 G15 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2100 |
| By: | Karau, Sören |
| Abstract: | I show that the majority of short-term nominal exchange rate fluctuations among large economies can be explained by changes in the relative stance of their monetary policies. Adapting recently developed instrumental variable techniques for shock identification, I find that monetary policy shocks of the US relative to the euro area account for 76 percent of the short-term fluctuations of the USD-EUR exchange rate over a one-month horizon - substantially more than previously documented. Similar results are obtained for exchange rates involving the British pound and Japanese yen. Relative monetary policy shocks explain a larger fraction of variability of the exchange rate than of interest rate differentials throughout the yield curve, and small changes in risk-free rates are associated with sizable jumps in the exchange rate. Identifying US and euro area shocks separately reveals that both are important for the USD-EUR rate. Taken together, these findings speak to the significance of (not only US) monetary policy in driving frictions in interest parity relations that have recently been found to be crucial for understanding exchange rate behavior from a theoretical perspective. |
| Keywords: | Monetary Policy, Exchange Rates, Proxy VAR |
| JEL: | E44 E52 F31 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:305278 |