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on International Finance |
| By: | Leonardo Gambacorta (Bank for International Settlements); Sergio Mayordomo (Banco de España); José María Serena (Bank for International Settlements) |
| Abstract: | We explore the link between firms’ dollar bond borrowing and their FX-hedged funding opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). Consistent with previous research, we first document that firms substitute domestic for dollar borrowing when they have higher dollar revenues or long-term assets and when the corporate basis widens. Importantly, our novel firm-level dataset enables to show that when these funding opportunities appear, the currency substitution is stronger for very high-grade firms, as they can offer to investors close substitutes for safe dollar assets. However, firms with higher dollar revenues or long-term assets do not react to changes in the corporate basis. Altogether, the composition of dollar borrowers shifts when the basis widens, as high-grade firms gain importance, relative to firms with operational needs. |
| Keywords: | covered interest rate parity, credit spread, debt issuance, dollar convenience yield, foreign exchange rate hedge, limits of arbitrage |
| JEL: | E44 F3 F55 G12 G15 G23 G28 G32 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2005&r=all |
| By: | Banerjee, Ryan; Hofmann, Boris; Mehrotra, Aaron |
| Abstract: | Using firm-level data for 18 major global economies, we find that the exchange rate affects corporate investment through a financial channel: exchange rate depreciation dampens corporate investment through firm leverage and FX debt. These findings are consistent with the predictions of a stylised model of credit risk in which exchange rates can affect investment through FX debt or borrowing in local currency from foreign lenders. Empirically, the channel is more pronounced in emerging market economies (EMEs), reflecting their greater dependence on foreign funding and their less developed financial systems. Moreover, we find that exchange rate depreciation induces highly leveraged firms to increase their cash holdings, supporting from a different angle the notion of a financial channel of the exchange rate. Overall, these findings suggest that the large depreciation of EME currencies since 2011 was probably a significant amplifying factor in the recent investment slowdown in these economies. |
| JEL: | E22 F31 F41 O16 |
| Date: | 2020–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2020_006&r=all |
| By: | Agarwal, Isha (University of British Columbia); Gu, Grace Weishi (University of California, Santa Cruz); Prasad, Eswar (Cornell University) |
| Abstract: | We analyze shifts in the structure of China's capital outflows over the past decade. The composition of gross outflows has shifted from accumulation of foreign exchange reserves by the central bank to nonofficial outflows. Unlocking the enormous pool of domestic savings could have a significant impact on global financial markets as China continues to open up its capital account and as domestic investors look abroad for returns and diversification. We analyze in detail the allocation patterns of Chinese institutional investors (IIs), which constitute the main channel for foreign portfolio investment outflows. We find that, relative to benchmarks based on market capitalization, Chinese IIs underweight developed countries and high-tech sectors in their international portfolio allocations but overinvest in high-tech stocks in developed countries. To further examine Chinese IIs' joint decisions on destination country-sector pairs, we construct continuous measures of revealed relative comparative advantage and disadvantage in a sector for a country based on trade patterns. We find that, in their foreign portfolio allocations, Chinese IIs overweight sectors in which China has a comparative disadvantage. Moreover, Chinese IIs concentrate such investments in countries that have higher relative comparative advantage in those sectors. Diversification and information advantages related to foreign imports to China seem to influence patterns of foreign portfolio allocations, while yield-seeking and learning motives do not. |
| Keywords: | capital account liberalization, international investment position, portfolio flows, institutional investors, revealed comparative (dis)advantage |
| JEL: | F2 F3 F4 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13001&r=all |
| By: | Silvia Miranda-Agrippino (Bank of England; CEPR; Centre for Macroeconomics (CFM)); Tsvetelina Nenova (London Business School); Helene Rey (London Business School; CEPR; NBER) |
| Abstract: | We study the international transmission of the monetary policy of the two world's giants: China and the US. From East to West, the channels of global transmission differ markedly. US monetary policy shocks affect the global economy primarily through their effects on integrated financial markets, global asset prices, and capital ows. EMEs in particular see both a reduction in in ows and a surge in out ows when the market tide turns as a result of a US monetary contraction. Conversely, international trade, commodity prices and global value chains are the main channels through which Chinese monetary policy transmits worldwide. AEs with a strong manufacturing sector are particularly sensitive to these disturbances. |
| Keywords: | Monetary policy, Global financial cycle, International pillovers, US, China |
| JEL: | E44 E52 F33 F42 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2004&r=all |