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on International Finance |
| By: | Ryan Banerjee; Michael B. Devereux; Giovanni Lombardo |
| Abstract: | This paper explores the nature of macroeconomic spillovers from advanced economies to emerging market economies (EMEs) and the consequences for independent use of monetary policy in EMEs. We first empirically document the effects of US monetary policy shocks on a sample group of EMEs. A contractionary monetary shock leads a retrenchment in EME capital flows, a fall in EME GDP, and an exchange rate depreciation. We construct a the- oretical model which can help to account for these findings. In the model, macroeconomic spillovers are exacerbated by financial frictions. We assess the extent to which domestic monetary policy can mitigate the negative spillovers from foreign shocks. Absent financial frictions, international spillovers are minor, and an inflation targeting rule represents an ef- fective policy for the EME. With frictions in financial intermediation, however, spillovers are substantially magnified, and an inflation targeting rule has little advantage over an exchange rate peg. However, an optimal monetary policy markedly improves on the performance of naive inflation targeting or an exchange rate peg. Furthermore, optimal policies don’t need to be coordinated across countries. Under the specific set of assumptions maintained in our model, a non-cooperative, self-oriented optimal policy gives results very similar to those of a global cooperative optimal policy. |
| JEL: | E3 E5 F3 F5 G1 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21737&r=ifn |
| By: | Silvia Miranda-Agrippino; Hélène Rey |
| Abstract: | We find that one global factor explains an important part of the variance of a large cross section of returns of risky assets around the world. Using a model with heterogeneous investors, we interpret the global factor as reflecting aggregate realised variance and the time-varying degree of market-wide risk aversion. A medium-scale Bayesian VAR allows us to analyse the workings of the “Global Financial Cycle”, i.e. the interaction between US monetary policy, real activity and global financial variables such as credit spreads, cross-border credit flows, bank leverage and the global factor in asset prices. We find evidence of large monetary policy spillovers from the US to the rest of the world. |
| JEL: | E44 E58 F33 F42 G15 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21722&r=ifn |
| By: | Adrian, Tobias (Federal Reserve Bank of New York); Etula, Erkko (Harvard University); Shin, Hyun Song (Bank for International Settlements) |
| Abstract: | We present evidence that the growth of U.S.-dollar-denominated banking sector liabilities forecasts appreciations of the U.S. dollar, both in-sample and out-of-sample, against a large set of foreign currencies. We provide a theoretical foundation for a funding liquidity channel in a global banking model where exchange rates fluctuate as a function of banks’ balance sheet capacity. We estimate prices of risk using a cross-sectional asset pricing approach and show that the U.S. dollar funding liquidity forecasts exchange rates because of its association with time-varying risk premia. Our empirical evidence shows that this channel is separate from the more familiar “carry trade” channel. Although the financial crisis of 2007-09 induced a structural shift in our forecasting variables, when we control for this shift, the forecasting relationship is preserved. |
| Keywords: | asset pricing; financial intermediaries; exchange rates |
| JEL: | F30 F31 G12 G24 |
| Date: | 2015–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:750&r=ifn |
| By: | Joshua Aizenman |
| Abstract: | This paper highlights the rare conditions leading to international cooperation, and the reasons why eliciting this cooperation may be beneficial in preventing adverse tail shocks from spiraling into global depressions. In normal times, deeper macro cooperation among countries is associated with welfare gains akin to Harberger’s second-order magnitude triangle, making the odds of cooperation low. When bad tail events induce imminent and correlated threats of destabilizing financial markets, the perceived losses have a first-order magnitude of terminating the total Marshalian surpluses. The apprehension of these losses in times of peril may elicit rare and beneficial macro cooperation. We close the paper by overviewing the obstacles preventing cooperation, and the proliferation of precautionary policies of emerging market economies as a second-best outcome of limited cooperation. |
| JEL: | F36 F41 F42 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21793&r=ifn |
| By: | Ralph S.J. Koijen; Motohiro Yogo |
| Abstract: | We develop an asset pricing model with rich heterogeneity in asset demand across investors, designed to match institutional holdings. The equilibrium price vector is uniquely determined by market clearing for each asset. We relate our model to traditional frameworks including Euler equations, mean-variance portfolio choice, factor models, and Fama-MacBeth regressions. Because the asset demand system cannot be estimated consistently by least squares in the presence of price impact, we propose two identification strategies, based on a coefficient restriction or instrumental variables. We apply our model to understand the role of institutions in stock market movements, liquidity, volatility, and predictability. |
| JEL: | G12 G23 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21749&r=ifn |
| By: | Jeffrey Frankel |
| Abstract: | The paper reviews an event of 30 years ago from the perspective of today: a successful G-5 initiative to reverse what had been an overvalued dollar. The “Plaza Accord” is best viewed not as the precise product of the meeting on September 22, 1985, but as shorthand for a historic change in US policy that began when James Baker became Treasury Secretary in January of that year. The change had the desired effect, bringing down the dollar and reducing the trade deficit. In recent years concerted foreign exchange intervention, of the sort undertaken by the G-7 in 1985 and periodically over the subsequent decade, has died out. Indeed the G-7 in 2013, fearing “currency manipulation,” specifically agreed to refrain from intervention in a sort of “anti-Plaza accord.” But some day coordinated foreign exchange intervention will return. |
| JEL: | F33 F42 N1 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21813&r=ifn |