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on International Finance |
| By: | Ostry, D. A. |
| Abstract: | I build a model in which speculators unwind carry trades and hedgers fly to relatively liquid U.S. Treasuries during global financial disasters. The net effect of these flows produces an amplified U.S. dollar appreciation against high-yield currencies in disasters and a dampened depreciation, or even an appreciation, against low-yield ones. I verify this prediction by examining deviations from uncovered interest parity (UIP) within a novel quantile-regression framework. In the tail quantiles, I show that interest differentials predict high-yield currencies to suffer depreciations ten times as large as suggested by UIP, while spikes in Treasury liquidity premia meaningfully appreciate the dollar regardless of the U.S. relative interest rate. A complementary analysis of speculators’ and hedgers’ currency futures positions substantiates my model’s mechanism and highlights that hedging agents imbue the U.S. dollar with its unique safe-haven status. |
| Keywords: | Disaster Risk, Exchange Rates, Liquidity Yields, Quantile regression, U.S. Safety |
| JEL: | C22 F31 G15 |
| Date: | 2023–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2343&r=ifn |
| By: | Sai Ma; Tim Schmidt-Eisenlohr |
| Abstract: | This paper provides evidence that the U.S. dollar affects countries’ exports through the financial channel of the exchange rate (Bruno and Shin (2015)). Using global data on trade between countries whose currency is not the U.S. dollar, it documents a positive relationship between the dollar and import prices. Importantly, this effect is stronger when the dollar share of the exporter’s foreign borrowing is larger. Results strengthen substantially when instrumenting the dollar by U.S. domestic housing activity. Then, a dollar appreciation increases import prices and decreases import quantities, with effects being proportional to the source country’s foreign dollar borrowing share. |
| Keywords: | dollar, dominant currency, financial channel, international trade |
| JEL: | F14 F31 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10495&r=ifn |
| By: | Ryan Niladri Banerjee; Valerie Boctor; Aaron Mehotra; Fabrizio Zampolli |
| Abstract: | We examine how changes in fiscal deficits affect near-term future inflation in a panel of emerging market and developing economies (EMDEs). Using a novel method for quantile panel regressions with fixed effects, we find that an increase in the fiscal deficit has highly non-linear effects on inflation - that is, a larger impact on upside tail risks than on average inflation. These effects are substantially larger in EMDEs than in advanced economies. We then show that an increase in the fiscal deficit raises the risk of future currency depreciation which magnifies the initial inflation response. This external channel is closely related to sovereign risk, being greater when the share of sovereign debt in foreign currency is large or when a sizeable share of sovereign debt is held by foreign residents. Finally, we find that the effects of fiscal deficits on future inflation are strongly attenuated in inflation targeting regimes and also influenced by constraints on monetary policy. |
| Keywords: | fiscal deficit, inflation, exchange rate depreciation, sovereign risk, emerging market and developing economies, original sin, inflation targeting |
| JEL: | E31 E52 E62 E63 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1110&r=ifn |
| By: | Fernando Broner (CREI and Universitat Pompeu Fabra Ramon Trias Fargas); Tatiana Didier (World Bank Group); Sergio L. Schmukler (Economics Research World Bank Group); Goetz von Peter (Bank for International Settlements (BIS)) |
| Abstract: | This paper presents novel stylized facts about the rise of the South in global finance using country-tocountry data. To do so, the paper assembles comprehensive bilateral data on cross-border bank loans and deposits, portfolio investment, foreign direct investment, and international reserves from 2001 to 2018. The main findings are that investments involving the South, and especially within the South, have grown faster than those within the North. By 2018, South-to-South investments accounted for 8% of total international investments, while investments between the South and the North accounted for an additional 26%. The fastest growth occurred in portfolio investment and international reserves, whereas the slowest growth was in banking. These trends are not driven by China, any particular South region, or offshore financial centers. South-to-South investments grew the fastest even after controlling for regional GDP growth. The extensive margin played a significant role in the growth of investments within the South. |
| Keywords: | emerging economies; foreign direct investment; international banking; international capital flows; international financial integration; portfolio investment. |
| JEL: | F21 F36 G15 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:181&r=ifn |