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on International Finance |
| By: | Christoph Boehm; T. Niklas Kroner |
| Abstract: | Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major currencies. The non-yield shock is essentially uncorrelated with previous monetary policy shocks and its effects are large in comparison. Its strong effects on the VIX and other risk-related measures point towards a dominant risk premium channel. We show that the non-yield shock can be related to Fed communications and that its existence has implications for the identification of structural monetary policy shocks. |
| JEL: | E43 E44 E52 E58 F31 G10 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32636 |
| By: | Lara Coulier; Cosimo Pancaro; Alessio Reghezza (-) |
| Abstract: | We match granular supervisory and credit register data to assess the implications of banks’ exposure to interest rate risk on the monetary policy transmission to bank lending supply in the euro area. We exploit the largest and swiftest increase in interest rates since the creation of the euro and find that banks with a higher exposure to interest rate risk, i.e., with a larger duration gap after accounting for hedging, curtailed corporate lending more than their peers. Ceteris paribus, greater interest rate risk entails closer supervisory scrutiny and potential capital surcharges in the short term, and lower expected profitability and capital accumulation in the medium to long term. We then proceed to dissect banks’ credit allocation and find that banks with higher net duration reshuffled their loan portfolio away from long-term loans in an attempt to limit the increase in interest rate risk and targeted their lending contraction to small and micro firms. Firms exposed to banks with a larger exposure to interest rate risk were unable to fully rebalance their borrowing needs with other lenders, thus experiencing a relatively larger decrease in total borrowing during the monetary tightening episode. |
| Keywords: | Interest rate risk, Duration gap, Bank lending channel, Financial Stability |
| JEL: | E51 E52 G21 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1091 |
| By: | Shangshang Li |
| Abstract: | This paper evaluates gains from international monetary policy cooperation between the financial center and periphery countries in a two-country open economy model consistent with global financial cycles. Compared to the non-cooperative Nash equilibrium, the optimal cooperative equilibrium robustly fails to benefit both countries simultaneously. The financial periphery is more likely to gain from cooperation if it raises less foreign currency debt or is relatively small. These results also hold when considering the transitional gains and losses of moving from non-cooperation to cooperation. The uneven distribution of gains from cooperation persists when both countries adopt implementable policy rules with and without cooperation. Nevertheless, both countries gain when transitioning from the Nash to the cooperative implementable rules. Regardless of the financial center's policy, rules responding to the exchange rate dominate over purely inward-looking rules for the financial periphery. |
| Keywords: | policy cooperation, global financial cycle, currency mismatch |
| JEL: | F34 E52 F42 E44 E58 E61 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:wsr:wpaper:y:2024:m:07:i:199 |
| By: | Assaf Razin; Andrzej Cieslik |
| Abstract: | This essay highlights the effects of radical transformations in the liberal characteristics of the regimes on foreign direct investors. To focus on the common patterns in the effects on foreign direct investment, of liberal vs. illiberal regime change, the essay spotlights the tale of two countries: Poland and Israel. The liberalization of the Polish economy and market reforms in the late 1980s and early 1990s boosted Poland's attractiveness to international companies. However, decades-long of illiberal policies under the PiS regime has reduced Poland's appeal to foreign investors. Similarly, Israel's GNP especially the high-tech sector saw significant growth from the 1990s to the 2010s, driven by the liberalization of capital and finance surges, and the global IT boom immigration. As a more-or-less a laboratory experiment for the real-economy impact of an abrupt transition to an illiberal regime, early steps of a comprehensive judicial overhaul have disrupted Israel's growth, causing a sharp decline in foreign direct investment. |
| JEL: | F21 F40 P00 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32614 |
| By: | Wojciech Wisniewski; Yuri Kalnishkan; David Lindsay; Si\^an Lindsay |
| Abstract: | Financial organisations such as brokers face a significant challenge in servicing the investment needs of thousands of their traders worldwide. This task is further compounded since individual traders will have their own risk appetite and investment goals. Traders may look to capture short-term trends in the market which last only seconds to minutes, or they may have longer-term views which last several days to months. To reduce the complexity of this task, client trades can be clustered. By examining such clusters, we would likely observe many traders following common patterns of investment, but how do these patterns vary through time? Knowledge regarding the temporal distributions of such clusters may help financial institutions manage the overall portfolio of risk that accumulates from underlying trader positions. This study contributes to the field by demonstrating that the distribution of clusters derived from the real-world trades of 20k Foreign Exchange (FX) traders (from 2015 to 2017) is described in accordance with Ewens' Sampling Distribution. Further, we show that the Aggregating Algorithm (AA), an on-line prediction with expert advice algorithm, can be applied to the aforementioned real-world data in order to improve the returns of portfolios of trader risk. However we found that the AA 'struggles' when presented with too many trader ``experts'', especially when there are many trades with similar overall patterns. To help overcome this challenge, we have applied and compared the use of Statistically Validated Networks (SVN) with a hierarchical clustering approach on a subset of the data, demonstrating that both approaches can be used to significantly improve results of the AA in terms of profitability and smoothness of returns. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.19403 |
| By: | Alberto Cavallo; Oleksiy Kryvtsov |
| Abstract: | We study how within-store price variation changes with inflation, and whether households exploit it to attenuate the inflation burden. We use micro price data for food products sold by 91 large multi-channel retailers in ten countries between 2018 and 2024. Measuring unit prices within narrowly defined product categories, we analyze two key sources of variation in prices within a store: temporary price discounts and differences across similar products. Price changes associated with discounts grew at a much lower average rate than regular prices, helping to mitigate the inflation burden. By contrast, cheapflation—a faster rise in prices of cheaper goods relative to prices of more expensive varieties of the same good—exacerbated it. Using Canadian Homescan Panel Data, we estimate that spending on discounts reduced the change in the average unit price by 4.1 percentage points, but expenditure switching to cheaper brands raised it by 2.8 percentage points. |
| JEL: | E21 E30 E31 L81 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32626 |
| By: | Girstmair, Stefan |
| Abstract: | This paper examines determinacy properties in a multi-country open economy framework, focusing on the impacts of dominant currency pricing (DCP), producer currency pricing (PCP), and local currency pricing (LCP) on monetary policy effectiveness. Utilizing a New Keynesian model with three symmetric economies, each guided by Taylor rules, the study extends the framework of Gopinath et al. (2020) to analyze how these pricing paradigms interact with central bank policies to achieve economic stability. The investigation highlights that higher economic openness amplifies interactions among central banks’ policies, complicating the attainment of determinacy. DCP significantly constrains policy parameters ensuring determinacy, particularly in open economies. Conversely, PCP and LCP offer relatively larger determinacy regions, allowing for greater domestic policy control. The findings emphasize the critical role of pricing paradigms and economic openness in formulating effective monetary policies. This study provides essential insights for central banks and policymakers in enhancing global economic stability through tailored policy recommendations based on the chosen pricing paradigm. |
| Keywords: | Determinacy; Taylor rule; Three-country new Keynesian model; Pricing paradigms; Openness |
| JEL: | E31 E52 E58 F33 F4 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:082 |
| By: | Domenico Delli Gatti; Tommaso Ferraresi; Filippo Gusella; Lilit Popoyan; Giorgio Ricchiuti; Andrea Roventini |
| Abstract: | We present a multi-country, multi-sector agent-based model that extends Dosi et al. (2019) and incorporates the exchange market and its interaction with the real economy. The exchange rate is influenced not only by trade flows but also by the heterogeneous demand for foreign currencies from financial traders. In this respect, the dual nature of the exchange rate is highlighted, acting both as a transmission channel of endogenous shocks and as a source of shocks. Indeed, differing beliefs bring about real-financial non-linear patterns with feedback mechanisms. Simulations show that the introduction of speculative sentiment behaviour reflects important stylised facts of bilateral exchange rate series. Furthermore, the findings indicate that trend-following behaviour substantially increases financial turbulence and contributes to real economic fluctuations. Finally, we highlight the power and limitations of the central bank as an actor in the exchange rate market, showing that while the central bank's interventions can effectively curb boom-bust cycles, their outcomes differ substantially. |
| Keywords: | agent-based model, exchange rate dynamics, endogenous cycles, heterogeneous traders, central bank interventions. |
| JEL: | E3 F41 O4 O41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_10.rdf |
| By: | David Hummels; Kan Yue |
| Abstract: | Recent work documents declining business dynamism in the United States, with concerning implications for markups, innovation and productivity. Using import data for 146 countries over three decades we document a set of new stylized facts describing market dynamism world-wide. Market entry rates and the reallocation of market shares fall significantly over time. Young exporters experience rising prices, falling market shares, and increased exit probabilities relative to longer-tenured incumbents. While the variance of price shocks hitting markets is rising, long-tenured incumbents exhibit lower volatility in prices and the response of prices and quantities to tariff shocks are falling over time. These patterns hold for over 90 percent of countries and products suggesting the inadequacy of explanations that point to the macroeconomic or regulatory environment of particular countries or the unique industrial organization of particular products. |
| JEL: | D22 F14 L23 O40 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32637 |
| By: | Saussay, Aurelien; Sato, Misato |
| Abstract: | This study examines the influence of relative energy prices on the geographical distribution of industrial investments across 41 countries. Employing a gravity model framework to analyse firms’ investment location decisions, we estimate the model using global bilateral investment flows derived from firm-level M&A data. Our findings reveal that a 10% increase in the energy price differential between two countries results in a 3.2% rise in cross-border acquisitions. This effect is most pronounced in energy-intensive industries and transactions targeting emerging economies. Furthermore, policy simulations suggest that the impact of unilateral carbon pricing on cross-border investments is modest. |
| Keywords: | FDI; mergers and aquistions; energy prices; firm location; competitiveness impacts; carbon leakage; Elsevier deal |
| JEL: | F21 H23 Q52 |
| Date: | 2024–04–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123034 |