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on International Finance |
| By: | Ṣebnem Kalemli-Özcan; Filiz D. Unsal |
| Abstract: | Contrary to historical episodes, the 2022–2023 tightening of US monetary policy has not yet triggered financial crisis in emerging markets. Why is this time different? To answer this question, we analyze the current situation through the lens of historical evidence. In emerging markets, the financial channel–based transmission of US policy historically led to more adverse outcomes compared to advanced economies, where the trade channel fails to smooth out these negative effects. When the Federal Reserve increases interest rates, global investors tend to shed risky assets in response to the tightening global financial conditions, affecting emerging markets more severely due to their lower credit ratings and higher risk profiles. This time around, the escape from emerging market assets and the increase in risk spreads have been limited. We document that the historical experience of higher risk spreads and capital outflows can be largely explained by the lack of credible monetary policies and dollar-denominated debt. The improvement in monetary policy frameworks combined with reduced levels of dollar-denominated debt have helped emerging markets weather the recent Federal Reserve hikes. |
| JEL: | F30 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32329&r=ifn |
| By: | Valentina Bruno; Michele H. Dathan; Yuriy Kitsul |
| Abstract: | We use a merged global data set of security-level corporate bond issuance and firm-level financial statement data to show that, in contrast to earlier periods of financial stress, during the COVID pandemic nonfinancial firms around the world were more likely to issue bonds, driven by a boom in local-currency-denominated issuance. We observe a distinct cross-regional difference in the characteristics of issuing firms, finding that in advanced economies issuance during COVID was driven by less risky firms, as predicted by existing theories; in emerging markets, only issuance of U.S. dollar denominated bonds came from larger or less risky firms. |
| Keywords: | Corporate bonds; Issuance; COVID; Crises |
| JEL: | F30 G15 G30 |
| Date: | 2024–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1390&r=ifn |
| By: | Menzie D. Chinn; Jeffrey A. Frankel; Hiro Ito |
| Abstract: | We begin by examining determinants of aggregate foreign exchange reserve holdings by central banks (size of issuing country’s economy and financial markets, ability of the currency to hold value, and inertia). But understanding the determination of reserve holdings probably requires going beyond the aggregate numbers, instead observing individual central bank behavior, including characteristics of the holding country (bilateral trade with the issuing country, bilateral currency peg, and proxies for bilateral exposure to sanctions), in addition to the characteristics of the reserve currency issuer. On a currency-by-currency basis, US dollar holdings are somewhat well explained by several issuer characteristics; but the other currencies are less successfully explained. It may be that the results from currency-by-currency estimation are impaired by insufficient sample size. This consideration offers a motivation for pooling the data across the major currencies and imposing the constraints that reserve holdings are determined in the same way for each currency. In this setting, most economic determinants enter with significance: economic size as measured by GDP, size of financial markets as measured by foreign exchange turnover, bilateral currency peg, and bilateral trade share. However, geopolitical variables (bilateral alliance, bilateral sanctions) usually do not enter with significance. |
| JEL: | F33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32387&r=ifn |
| By: | Carlos Cantú; Rocío Gondo; Berenice Martinez |
| Abstract: | We quantify the trade-offs of using reserve requirements (RR) as a financial stability tool. A tightening in RR reduces the amplitude of the credit cycle. This lowers the frequency and strength of financial stress episodes but at a cost of lower growth in credit and economic activity. We find that the gains from a lower probability and magnitude of financial stress episodes are greater than the costs from the initial reduction in economic activity. In addition, we find that RR have a stronger effect on emerging market economies than in advanced economies, both in terms of costs and benefits. Finally, we find that uniform RR have a stronger effect than RR that differenciate by maturity or currency. |
| Keywords: | reserve requirements, macroprudential policy, financial stress episodes, early-warning system, financial cycle |
| JEL: | E44 E58 F41 G01 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1182&r=ifn |
| By: | Rohan Kekre; Moritz Lenel; Federico Mainardi |
| Abstract: | We develop a segmented markets model which rationalizes the effects of monetary policy on the term structure of interest rates. When arbitrageurs’ portfolio features positive duration, an unexpected rise in the short rate lowers their wealth and raises term premia. A calibration to the U.S. economy accounts for the transmission of monetary shocks to long rates. We discuss the additional implications of our framework for state-dependence in policy transmission, the volatility and slope of the yield curve, and trends in term premia accompanying trends in the natural rate. |
| JEL: | E44 E63 G12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32324&r=ifn |
| By: | Joana Garcia; João Amador |
| Abstract: | We analyze how firms choose the currency in which they price their transactions in services trade and explore to what extent the U.S. dollar has a dominant role in those transactions, as documented by earlier literature for goods trade. Using a new granular dataset detailing the currency used by Portuguese firms in extra and intra-EU trade, we show that currency choices in services trade are active firm-level decisions. Services exporters that are larger and that rely more on inputs priced in foreign currencies are less likely to use the domestic currency in their services exports. Moreover, we document that the U.S. dollar has a dominant role as a vehicle currency in services trade, but it is less prevalent than in goods trade. Our results are consistent with this difference arising from a lower openness of services markets and from a stronger reliance of services in domestic inputs. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202316&r=ifn |
| By: | Anoop Kumar; Suresh Dodda; Navin Kamuni; Rajeev Kumar Arora |
| Abstract: | This study examines the effects of macroeconomic policies on financial markets using a novel approach that combines Machine Learning (ML) techniques and causal inference. It focuses on the effect of interest rate changes made by the US Federal Reserve System (FRS) on the returns of fixed income and equity funds between January 1986 and December 2021. The analysis makes a distinction between actively and passively managed funds, hypothesizing that the latter are less susceptible to changes in interest rates. The study contrasts gradient boosting and linear regression models using the Double Machine Learning (DML) framework, which supports a variety of statistical learning techniques. Results indicate that gradient boosting is a useful tool for predicting fund returns; for example, a 1% increase in interest rates causes an actively managed fund's return to decrease by -11.97%. This understanding of the relationship between interest rates and fund performance provides opportunities for additional research and insightful, data-driven advice for fund managers and investors |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.07225&r=ifn |
| By: | Salzer, Tim |
| Abstract: | This chapter offers a concise overview of China's endeavors towards establishing a state-backed digital currency from the early 2000s to the present, culminating in the digital yuan. Drawing on the social scientific literature concerned with large technical systems, we assert two main arguments. First of all, while many commentators have considered that the new payment infrastructure could overhaul the existing institutional arrangements in the realm of payments and in particular weaken private financial entities, its evolution actually follows a much more incremental logic and relies on both private and public institutions. Secondly, many foreign observers have assumed that the digital yuan represents a long-planned attempt at challenging the international currency hierarchy and American international hegemony. Contrary to this line of thinking, we argue that initially, currency digitalization in the PRC was first and foremost motivated by domestic factors. The project assumed an openly international dimension only after other foreign countries began to initiate their own attempts at currency digitalization under the new slogan of developing "Central Bank Digital Currencies". |
| Date: | 2024–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:5yq4r&r=ifn |
| By: | Jakree Koosakul; Alexei Miksjuk |
| Abstract: | The expansion of bilateral swap arrangements (BSAs) since the Global Financial Crisis has led to a substantial reconfiguration of the Global Financial Safety Net (GFSN). This paper examines the drivers of BSA supply using a novel dataset on all publicly documented BSAs. It finds that countries with well-developed financial markets and institutions and high trade openness are more likely to backstop other economies by establishing BSAs. In addition, their choice of BSA counterparts is driven by strong investment and trade exposures to these countries, with variation in the relative importance of these factors across major BSA providers. The paper shows that geopolitical considerations often affect such decisions, as BSAs are less likely to be established between geopolitically distant countries and more likely between countries in the same regional economic bloc. |
| Keywords: | Bilateral swap arrangements; geoeconomic fragmentation; global financial safety net; liquidity provision |
| Date: | 2024–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/088&r=ifn |
| By: | Laura DeMane; Nyssa Kim; Emily Liu; Andrew Loucky; Andrew H. McCallum |
| Abstract: | The most comprehensive data on cross-border capital holdings for the United States come from the Treasury International Capital (TIC) System. These data inform the official U.S. balance of payments statistics and are crucial for understanding U.S. capital flows, their causes, and their effects on the U.S. economy. |
| Date: | 2024–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-04-18&r=ifn |
| By: | Amor Aniss Benmoussa; Raheeb Dastagir; Eshini Ekanayake; Justin-Damien Guénette; Helen Lao; Jenna Rolland-Mills; Aidan Spencer; Lin Xiang |
| Abstract: | This note presents the annual update of Bank of Canada staff estimates for growth in global potential output. These estimates serve as key inputs to the analysis supporting the April 2024 Monetary Policy Report. |
| Keywords: | Potential output; Productivity |
| JEL: | E1 E2 F0 O4 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:24-10&r=ifn |