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on International Finance |
| By: | Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University) |
| Abstract: | When do flexible exchange rates prevent monetary and financial conditions from spilling over across currencies? We examine a model in which international investors strategically supply capital to a small inflation‐targeting economy with flexible exchange rates. For some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by reversals where capital outflows go hand‐in‐hand with currency depreciation, a rise in domestic interest rates, and inflationary pressure. Arbitrarily small shocks to global financial conditions suffice to trigger these dynamics. |
| Keywords: | Currency appreciation; Capital flows; Global games |
| JEL: | C7 E5 F4 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/425hdq96dn97t84knejpafl2p7&r=ifn |
| By: | Falk Bräuning; Victoria Ivashina |
| Abstract: | Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated predominantly in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, followed by a fast credit contraction of a similar magnitude upon reversal of the U.S. monetary policy stance. This result is robust across different geographies and industries, and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. EME local lenders do not offset the foreign bank capital flows, and U.S. monetary policy affects credit conditions for EME firms, both at the extensive and intensive margin. Consistent with a risk-driven credit-supply adjustment, we show that the spillover is stronger for riskier EMEs, and, within countries, for higher-risk firms. |
| JEL: | E52 F34 F44 G21 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25185&r=ifn |