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on International Finance |
| By: | Mert Onen; Hyun Song Shin; Goetz von Peter |
| Abstract: | This paper introduces a new dataset on emerging market sovereign bonds, distinguishing between the currency of denomination and the residence of investors. Our dataset is on long-term government bonds and provides a more complete coverage of bonds issued in domestic markets. We document several salient trends. While a preponderance of foreign currency bonds is associated with greater holdings by foreign investors, the correlation is weak at best. Over time, emerging market governments have enhanced their ability to borrow abroad in their own currency, reducing their reliance on foreign currency debt. In this sense, EME sovereigns have made progress toward overcoming original sin. Nevertheless, the greater role of market and duration risk and the activity of foreign non-bank financial intermediaries (NBFIs) mean that emerging markets remain subject to fluctuations in global financial conditions. |
| Keywords: | emerging market economies, sovereign bonds, international lending, international financial markets, foreign investors, original sin |
| JEL: | F34 G15 H63 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1075&r=ifn |
| By: | Antonio Coppola; Arvind Krishnamurthy; Chenzi Xu |
| Abstract: | We provide a liquidity-based theory for the dominant use of the US dollar as the unit of denomination in global debt contracts. Firms need to trade their revenue streams for the assets required to extinguish their debt obligations. When asset markets are illiquid, as modeled via endogenous search frictions, firms optimally choose to denominate their debt in the unit of the asset that is easiest to obtain. This gives central importance to the denomination of government-backed assets with the largest safe, liquid, short-term float and to financial market institutions that facilitate safe asset creation. Equilibria with a single dominant currency emerge from a positive feedback cycle whereby issuing in the more liquid denomination endogenously raises its liquidity, incentivizing more issuance. We rationalize features of the current dollar-dominant international financial architecture and relate our theory to historical experiences, such as the prominence of the Dutch florin and pound sterling, the transition to the dollar, and the ongoing debate about the potential rise of the Chinese renminbi. |
| JEL: | E40 F33 G15 N20 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30984&r=ifn |
| By: | Barry Eichengreen (University of California, Berkeley); Poonam Gupta (National Council of Applied Economic Research) |
| Abstract: | Emerging markets and developing economies are currently facing major challenges from global shocks including: a slowdown in global growth; food and energy price increases; decline in risk appetite of international investors; unsustainable debts in low-income countries; and ongoing climate risks. National policies have not sufficed to meet these challenges. Efforts at the national level must be complemented by changes in the global economic and financial architecture designed to make the world a safer place. In this paper, we focus on the financial aspects of such reforms. The financial agenda as we see it has seven key elements: (i) reform of central bank swap lines; (ii) reform of IMF contingent credit lines; (iii) SDR reallocation; (iv) reform of credit rating agencies; (v) creation of currency hedging instruments; (vi) inclusion of climate-resilient debt clauses in new debt instruments; and (vii) steps to streamline the debt restructuring process. We detail this agenda, and urge the G20 members to implement the recommended measures. |
| Keywords: | G20 countries, Emerging markets, Developing economies, External debt, Financial reforms, Central bank swap lines, IMF contingent credit lines |
| JEL: | E44 E58 E61 F34 F36 F38 |
| Date: | 2023–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:nca:ncaerw:145&r=ifn |
| By: | Mr. Irineu E de Carvalho Filho; DingXuan Ng |
| Abstract: | This paper examines how countries use Macroprudential Policies (MaPs) to respond to external shocks such as US monetary policy surprises or fluctuations in capital flows. Constructing a model of a small open economy with financial frictions and a MaP authority that adjusts loan to value (LTV) ratio limits on borrowers and capital adequacy ratio (CAR) limits on banks, we show that using MaPs where stochastic external financial shocks are present entails a trade-off between macro-financial volatility and GDP growth. The terms of the trade-off are a function of a few country characteristics that amplify financial channels of external monetary shocks. Estimating MaP reaction functions for a panel of 41 countries in the period 2000–2017, we find that countercyclical macroprudential policy in response to surprise US monetary tightening is more likely for countries with net short currency mismatches (that is, foreign currency denominated liabilities larger than foreign currency denominated assets), consistent with the model’s predictions. The paper also finds that domestic credit and interest rates are more insulated from US monetary tightening for countries that employ MaPs countercyclically. |
| Keywords: | Macroprudential policy; external shocks; loan to value; figures entry; map authority; Model simulation; foreign currency; interest rate shock; bank profit; Credit; Real exchange rates; Financial statements; Bank credit; Self-employment; Global |
| Date: | 2023–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/012&r=ifn |
| By: | Chadha, Jagjit S.; Lennard, Jason; Solomou, Solomos; Thomas, Ryland |
| Abstract: | This paper investigates the degree of pass-through from import prices and tariffs to wholesale prices in interwar Britain using a new high-frequency micro data set. The main results are: (i) Pass-through from import prices and tariffs to wholesale prices was economically and statistically significant. (ii) Despite devaluation, import prices exacerbated deflation in the early 1930s because of the global slump in export prices. (iii) Rising protection, however, was a mild stimulus to prices during the shift to inflation. |
| Keywords: | exchange rates; interwar; pass-through; prices; tariffs; United Kingdom |
| JEL: | E31 F13 N14 |
| Date: | 2023–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:wpaper:118237&r=ifn |