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on International Finance |
| By: | Kieran Walsh (Yale ) |
| Abstract: | What are the determinants and economic consequences of cross-border asset positions? I develop a new quantitative portfolio choice model and apply it to emerging market international finance. The model allows for partial default and accommodates trade in a rich set of assets. The latter means I am able to draw distinctions both between debt and equity finance and between gross and net debt. The main contribution is in developing portfolio choice techniques to analyze capital flows and default in an international finance context. I calibrate the pricing kernel of the model to match properties of U.S. stock returns and yield curves. I then analyze optimal emerging market portfolio and default behavior in response to realistic international financial fluctuations. My calibrated model jointly captures four empirical regularities that have been difficult to produce in the quantitative international finance literature: (1) Gross capital inflow and outflow are pro-cyclical. My model generates this as well as pro-cyclicality in equity liabilities and short-term debt. This is important because recent empirical work emphasizes that the level and composition of gross capital flows are at least as important as current accounts in understanding risk and predicting crises. (2) Most external defaults are partial. (3) Levels of gross external debt in excess of 50% of GNI are common. (4) Usually, borrowers default in bad economic times. Additionally, I provide novel characterizations for stochastic, infinite horizon portfolio problems with partial default. These results allow me to rapidly compute the consumption/portfolio problem solution, even with many assets and default, and they yield two key propositions: (i) for any degree of growth persistence, default increases as market conditions deteriorate, consistent with Regularity (4), and (ii) debt increases with the maturity length of bonds. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:789&r=ifn |
| By: | Robert N McCauley ; Patrick McGuire ; Vladyslav Sushko |
| Abstract: | Banks and bond investors have extended $9 trillion of US dollar credit to non-bank borrowers outside the United States. This has relevance for the discussion of global liquidity and global monetary policy transmission. This paper contributes to this policy discussion by analysing the links between US monetary policy, including unconventional monetary policy, leverage and flows into bond funds, on the one hand, and dollar credit extended to non-US borrowers, on the other. We find that prior to the crisis, banks drew on low funding rates and low-cost leverage to extend dollar credit to non-US orrowers. After the Federal Reserve announced its large-scale bond purchases in 2008, however, bond investors responded to compressed long-term rates by buying dollar bonds from non-US borrowers. The balance of dollar credit transmission has shifted from global banks to global bond investors. |
| Keywords: | US dollar, offshore credit, interest rate differentials, leverage, bond fund flows, policy rates, term premium, unconventional monetary policy |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:483&r=ifn |
| By: | Mauricio Villamizar-Villegas ; David Perez-Reyna |
| Abstract: | In this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions. We identify three main strands of literature: 1) that which advocates the use of sterilized interventions; 2) that which deems sterilized interventions futile; and 3) that which requires some market friction in order for sterilized interventions to be effective. We contribute to the literature in three important ways. First, by reviewing new theoretical models that have surfaced within the last decade. Second, by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct. And third, by only focusing on sterilized operations, which allows us to sidestep the effects induced by changes in the stock of money supply. Additionally, the models that we present comprise both a macro and micro-structure approach so as to provide a comprehensive view of the theory behind exchange rate intervention. Classification JEL: E52, E58, F31. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:862&r=ifn |