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on International Finance |
| By: | Saleem Bahaj (University College London); Marie Fuchs (London School of Economics (LSE)); Ricardo Reis (London School of Economics (LSE)) |
| Abstract: | At the end of 2023, there were 175 cross-border connections between central banks in a global network of liquidity lines that gave access to foreign currency for countries accounting for 79% of world GDP. This paper presents a comprehensive dataset of this network and its characteristics between 2000 and 2023. While the Federal Reserve drove growth in 2007-09, the network expanded as much between 2010 and 2015 through bilateral arrangements involving the ECB and the People’s Bank of China. The network structure means that banks without direct access to a source central bank can still have indirect access to its currency. The central intermediaries in the network for all major currencies are the PBoC and the ECB. We find support using cross-country data that the lines reduce CIP deviations at the tails. Liquidity lines are often signed to substitute for a bleeding of FX reserves, but once in place they complement reserves. |
| Keywords: | swap lines, capital flows, financial crises, IMF, cross-currency basis |
| JEL: | E44 F33 G15 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2423 |
| By: | Leo Michelis (Department of Economics, Toronto Metropolitan University, Toronto, Canada); Cathy Ning (Department of Economics, Toronto Metropolitan University, Toronto, Canada); Jeremey Ponrajah |
| Abstract: | This paper presents a unique approach to investigating the safe haven properties of five major currencies: the US dollar, the Japanese yen, the Swiss franc, the euro, and the British pound. Unlike other studies, we employ a flexible dependence-switching copula model to examine the joint tail dependence between these currencies and global market risk. This innovative method allows us to measure the strength of safe haven currencies directly. Using daily data from January 1999 to June 2024, our empirical findings reveal the US dollar’s continued status as a safe haven currency during periods of heightened global risk aversion. The yen also maintains its safe haven attributes, even in the presence of the US dollar’s safe haven behaviour. The Swiss franc exhibits safe haven characteristics, albeit less pronounced than the US dollar. In contrast, the euro and the pound demonstrate the weakest safe haven characteristics among the five currencies. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rye:wpaper:wp091 |
| By: | Hiroya Tanaka (Kyoto University); Keiichi Hori (Kwansei Gakuin University); Akihisa Shibata (Kyoto University) |
| Abstract: | This study analyzes the impact of investors' search-for-yield behavior on home bias in the bond market. We conduct a regression analysis using data from 27 countries, including both developed and emerging economies, for 2001–2021. We use two types of home bias indicators as dependent variables and the yield on 5-year government bonds denominated in the local currency as independent variables to analyze search-for-yield behavior. Considering that central banks in many countries, including major advanced economies, have made substantial domestic bond purchases over the past 20 years, we examine the effect of excluding central banks' domestic bond holdings from the home bias calculation. The results show that, with a few exceptions, both domestic and foreign investors in advanced and emerging economies tend to increase their demand for higher-yield bonds, which is consistent with the search-for-yield behavior. This trend is further reinforced when the central banks' domestic bond holdings are excluded. Specifically, we found that the significance of bond yields for foreign investors’ home bias in emerging economies increased after the global financial crisis. This indicates that emerging economies became more attractive to yield-seeking investors in a post-crisis low-interest-rate environment. In addition, by excluding the domestic bond holdings of central banks from the home bias calculation, we observed a higher coefficient of bond yields for the home bias of domestic investors in advanced economies. This suggests that when excluded, central banks' substantial domestic bond holdings in developed countries allow investors' decisions to be better reflected in the country's overall asset composition. |
| Keywords: | search for yield, monetary policy, home bias, foreign bond investment, portfolio selection |
| JEL: | E52 G11 G15 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1106 |
| By: | Joshua Aizenman; William Eldén; Yothin Jinjarak; Gazi Salah Uddin; Frida Widholm |
| Abstract: | Expansionary fiscal policies have increased significantly following the subprime crisis in 2007 and the COVID-19 crisis, leading to fiscal dominance concerns, where a growing share of monetary authorities may be forced to deviate from policy targets to accommodate fiscal policies. Meanwhile, peripheral economies are constantly influenced by monetary and fiscal conditions in center economies, with the United States (U.S.) as the predominant force. In light of these developments, we examine the potential international spillovers from U.S. inflationary spells and growing fiscal concerns to the policy interest rates in Emerging Market Economies (EMEs) and Developed Economies (DEs). We introduce a new index of fiscal dominance concerns using Principal Components Analysis, and extend the concept to an international perspective, as opposed to previous literature examining fiscal dominance in a domestic environment. The results are confirmed by robustness analysis and show that greater U.S. fiscal challenges affect negatively the policy rates in both EMEs and DEs, with a greater impact observed in EMEs. Moreover, a low degree of financial repression is associated with more significant spillover effects from greater U.S. fiscal challenges. |
| JEL: | E31 E62 F33 F42 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32868 |
| By: | Pierfederico Asdrubali; Soyoung Kim; Haerang Park |
| Abstract: | International risk sharing in OECD countries weakens during domestic recessions, when its role is most needed. Instead, no significant changes emerge during boom periods or in relation to the global business cycle. The asymmetry in the risk sharing response to cyclical fluctuations is driven mainly by dissmoothing effects in the capital market channel and the credit market channel. Specifically, interest payments to abroad and credit constraints of households increase during domestic recessions, limiting the smoothing role of risk sharing channels. However, countries with more internationally integrated financial markets and corporate disclosure can mitigate the dis-smoothing effects of these two channels and thus the asymmetry in international risk sharing. These findings contribute to rationalise heterogeneous results in the literature on the impact of globalisation and of financial frictions on international risk sharing. From an analytical viewpoint, they caution against assessments of international risk sharing over time which do not take the business cycle into account. From a policy perspective, they establish that, contrary to part of the literature on financial frictions, financial integration and corporate disclosure do affect international risk sharing during recessions. Since our results carry over to EU countries, they support the pursuit of the Capital Markets Union and further elimination of financial barriers to the completion of the Single Market. They also call for a more active role of counter-cyclical fiscal policy: during a recession, when a negative (positive) output shock hits, net government savings should fall (rise) along with net private savings, in order to preserve consumption stability. |
| JEL: | E00 E21 F15 G15 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:euf:dispap:205 |
| By: | Yang Zhou (Institute of Developing Economies, Japan External Trade Organization and Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN) |
| Abstract: | We provide cross-country evidence that variations in capital flow management measures (CFMs) result in differences in wealth inequality and distribution by using counterfactual estimators for causal inference. The imposition of aggregate CFMs increases wealth inequality in advanced economies, and the imposition of aggregate CFMs on outflows increases wealth inequality in emerging economies significantly. Diverging from previous studies, we analyze the impacts of ten distinct asset-specific CFMs. In particular, the imposition of the related CFMs to money market and derivatives reduces wealth inequality significantly. The decrease in wealth inequality is due to a decrease in the wealth shares of the top 1% and 10% groups along with an increase in the wealth shares of the middle 40% and bottom 50%. Overall, the effects of CFMs on wealth inequality and distribution are quite heterogeneous; they depend on income levels, capital flow directions, and asset categories. |
| Keywords: | Capital flow management measures (CFMs); Wealth inequality; Gini coefficient; Wealth distribution; Counterfactual estimator |
| JEL: | D63 E21 F38 G15 G28 O16 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2024-30 |
| By: | Tobias Berg; Jan Keil; Felix Martini; Manju Puri |
| Abstract: | We analyze the effect of a major central bank digital currency (CBDC) – the digital euro – on the payment industry to find remarkably heterogeneous effects. Stock prices of U.S. payment firms decrease, while stock prices of European payment firms increase in response to positive announcements on the digital euro. Bank stocks do not react. We estimate a loss in market capitalization of USD 127 billion for U.S. payment firms, vis-à-vis a gain of USD 23 billion for European payment firms. Our results emphasize the medium-of-exchange function of CBDCs and point to a novel geopolitical dimension of CBDCs: enhanced autonomy in payments. |
| JEL: | G1 G20 G21 G22 G23 G24 G28 G29 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32857 |
| By: | Jan Klacso (National Bank of Slovakia) |
| Abstract: | The debt service-to-income ratio represents a critical indicator of retail credit risk. While the calculation of this ratio is straightforward for individual retail clients, obtaining it at the country level presents a more significant challenge. Nevertheless, such a measure can provide early warning signals and can help explaining household consumption throughout the credit cycle. Furthermore, the macro DSTI enables a comparison of debt burden across countries. In this paper we estimate the annual and quarterly ratio of debt service-to-income, or Macro DSTI, for selected EU countries. We make several adjustments to currently available comparable indices, like the Debt Service Ratio calculated by the BIS. The estimation of the index solely for indebted households, with the inclusion of their net income, enables a more accurate reflection of the actual debt service burden at the country level. While the majority of countries observed a decline or stagnation in macro DSTI following the Great Financial Crisis, Slovakia exhibited a notable increase, with a decline starting in 2018 resulting from a reduction in consumer loans. |
| JEL: | C8 E44 E50 G21 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1106 |
| By: | Jan Zalman (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | Aid diversion poses a significant challenge to aid-recipient countries by depleting vital resources and hindering sustainable development. In many developing nations, high levels of corruption raise concerns about whether aid funds reach their intended destination. This paper studies the impact of financial transparency on aid diversion by focusing on global efforts to reduce secrecy in tax havens since 2009. We explore how the global push to end bank secrecy has affected aid capture, finding a significant reduction in aid diversion, particularly after 2008. This reduction aligns with the initial release of customer information from tax havens, highlighting the effectiveness of the transparency measures. Our results have important implications for foreign aid allocation strategies, especially in countries involved in offshore leaks and with high corruption levels, highlighting the need for continued efforts to enhance financial transparency. |
| Keywords: | aid capture, offshore bank deposits, foreign aid, financial transparency, tax |
| JEL: | F35 O19 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_29 |
| By: | Lampe, Florian |
| Abstract: | The West African Economic and Monetary Union (WAEMU) is a currency and customs union that is made up of the eight low-income countries Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. Except for Guinea-Bissau, all member countries of the WAEMU have a shared history as former French colonies. The WAEMU's common currency, the CFA franc, is today pegged to the euro at a fixed exchange rate that is guaranteed by the French treasury. France's influence on monetary policy issues of the WAEMU is still highly present and increasingly contested by political economists, and part of the member countries' civil society. These critics denounce the bilateral exchange rate arrangements as monetary colonialism that outlasted the political independence process from 1954 till 1960 and prevents the West African countries from implementing growth-oriented macroeconomic policies. The proponents of the fixed exchange-rate regime emphasize monetary stability in the form of relatively low inflation rates and a stable external value of the domestic currency. Indeed, the WAEMU zone has shown a remarkably long period of exchange rate stability for the past 30 years. This distinguishes it from Developing and Emerging Economies (DEE) in Latin American or Asian countries in the 1990s and early 2000s, which reacted to balance of payments crises with the introduction of floating exchange rate regimes. The present paper connects to that controversial debate and addresses the important research question if the argument of monetary stability holds considering the current development path of the WAEMU. More concretely, it contrasts the monetary union's resilience against the adverse effects of exchange rate volatility with international competitiveness and a long-term perspective on external debt. On the theoretical level, the study draws on the post-Keynesian liquidity preference theory to elaborate the exchange rate challenges that DEE with internationally integrated financial markets are confronted with. This approach highlights the hierarchical structure of the international monetary system and the resulting adverse implications for peripheral currency areas regarding monetary stability. Furthermore, monetary Keynesian economist have worked out the limitations of an exchange rate-based stabilization strategy arguing that it comes at the expense of losing international competitiveness and a rising international debtor position. These findings serve as a theoretical basis for studying the sustainability of the WAEMU's development path. |
| Keywords: | WAEMU, CFA franc, Post-Keynesian Economics, international currency hierarchy |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cessdp:301871 |
| By: | Jochem, Axel; Lecomte, Ernest |
| Abstract: | Commercial banks in some euro area member states hold large amounts of sovereign debt that offer a risk premium and hence higher yields than AAA-rated bonds issued by the most creditworthy countries. In particular, banks in vulnerable countries exhibit a bias towards domestically issued government bonds as de jure safe assets. We show that scarcity of the domestically available stock of de facto safe assets cannot by itself account for this home bias. Instead, we provide indications that differences in bank funding costs help explain the varying appetite of banks for relatively high-yielding (and hence riskier) government bonds at the expense of bonds issued by core countries governments or EU supranational entities, as banks match the return on their euro government bond portfolio with their own funding costs. In addition, prospects for a preferential treatment of domestic creditors in case of a public default and government pressure on banks to increase their holdings of government debt give incentives to hold domestic securities. |
| Keywords: | sovereign-bank nexus, safe assets, funding costs |
| JEL: | F02 G15 G21 H63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:302187 |
| By: | Cameron Cornell; Lewis Mitchell; Matthew Roughan |
| Abstract: | Financial networks can be constructed using statistical dependencies found within the price series of speculative assets. Across the various methods used to infer these networks, there is a general reliance on predictive modelling to capture cross-correlation effects. These methods usually model the flow of mean-response information, or the propagation of volatility and risk within the market. Such techniques, though insightful, don't fully capture the broader distribution-level causality that is possible within speculative markets. This paper introduces a novel approach, combining quantile regression with a piecewise linear embedding scheme - allowing us to construct causality networks that identify the complex tail interactions inherent to financial markets. Applying this method to 260 cryptocurrency return series, we uncover significant tail-tail causal effects and substantial causal asymmetry. We identify a propensity for coins to be self-influencing, with comparatively sparse cross variable effects. Assessing all link types in conjunction, Bitcoin stands out as the primary influencer - a nuance that is missed in conventional linear mean-response analyses. Our findings introduce a comprehensive framework for modelling distributional causality, paving the way towards more holistic representations of causality in financial markets. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.12210 |
| By: | Cormier, Benjamin; Naqvi, Natalya |
| Abstract: | Outside of the rich world, international financial markets are thought to discipline borrowing governments by monitoring political and economic characteristics. But increasingly, asset managers do not assess individual country risk/return profiles. They replicate benchmark indexes, delegating investment decisions to index providers. This has two effects. First, it relocates market discipline into the hands of index providers. Second, it alters the constraints sovereigns face when accessing bond markets, conditioning the relationship between a sovereign’s political-economic features and its ability to raise capital. Using a novel data set of index inclusion and weights, we show that country-specific factors traditionally associated with bond market access do not have the expected constraining effects on countries included in a major index but do continue to affect excluded countries. Index investment has profoundly restructured debt markets by circumscribing the disciplinary link between country characteristics and capital allocation, with wide-ranging implications for the political economy of debt and finance. |
| JEL: | H62 |
| Date: | 2023–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:117248 |
| By: | Sina Montazeri; Haseebullah Jumakhan; Sonia Abrasiabian; Amir Mirzaeinia |
| Abstract: | Building on our prior explorations of convolutional neural networks (CNNs) for financial data processing, this paper introduces two significant enhancements to refine our CNN model's predictive performance and robustness for financial tabular data. Firstly, we integrate a normalization layer at the input stage to ensure consistent feature scaling, addressing the issue of disparate feature magnitudes that can skew the learning process. This modification is hypothesized to aid in stabilizing the training dynamics and improving the model's generalization across diverse financial datasets. Secondly, we employ a Gradient Reduction Architecture, where earlier layers are wider and subsequent layers are progressively narrower. This enhancement is designed to enable the model to capture more complex and subtle patterns within the data, a crucial factor in accurately predicting financial outcomes. These advancements directly respond to the limitations identified in previous studies, where simpler models struggled with the complexity and variability inherent in financial applications. Initial tests confirm that these changes improve accuracy and model stability, suggesting that deeper and more nuanced network architectures can significantly benefit financial predictive tasks. This paper details the implementation of these enhancements and evaluates their impact on the model's performance in a controlled experimental setting. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.11859 |
| By: | Salih Zeki Atýlgan; Tarýk Aydoðdu; Hüseyin Öztürk; Muhammed Hasan Yýlmaz |
| Abstract: | By disentangling simultaneous supply and demand shocks in the loan market of an emerging economy, we examine how such loan shocks in the banking sector impact loan price dispersion. Our fixed effects panel estimations for the period 2012-2023 in Turkiye show that both positive credit supply and demand shocks are associated with heightened loan rate dispersion at the bank level. Our results are invariant to a number of robustness checks. In terms of a potential channel, we document that decreasing the competitive structure of the banking industry moderates the impact of credit supply shocks on interest rate dispersion. Our extended set of analyses indicates that increasing credit supply and demand shocks are associated with declining non-performing and stage 2 loan ratios, implying a lower likelihood of financial stability concerns. |
| Keywords: | Credit supply shocks, Credit demand shocks, Credit pricing dispersion, Micro data, Panel data analysis |
| JEL: | G21 E51 C33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2411 |
| By: | Andrea Alati (Bank of England); Johannes J. Fischer (Bank of England); Maren Froemel (Bank of England); Ozgen Ozturk (University of Oxford) |
| Abstract: | How do firms adjust their investment in response to sales shocks and what determines the response? Using a unique firm-level survey, we propose a novel approach to estimate UK firms’ marginal propensity to invest (MPI) out of additional income: the forecast error of their sales growth expectations. Investment responds significantly to these sales surprises, with a 1 percentage point unexpected growth in sales translating into a 0.31 percentage point increase in capital expenditure. We find attentive firms to be more responsive, consistent with sales growth surprises providing firms with information about their demand. Sales growth surprises also cause firms to increase their prices, supporting this interpretation. We do not find evidence that these results are driven by financial frictions, uncertainty, or productivity shocks. |
| Keywords: | Investment, survey data, corporate finance, financial frictions, learning |
| JEL: | D22 D25 D84 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2424 |