Staff working papers in the International Finance and Discussion Papers (IFDP) series are primarily materials produced by staff in the Division of International Finance. These topics are focused on, though by no means limited to, international macroeconomics, international trade, global finance, financial institutions, and markets, as well as international capital flows

IFDP 彩神8官方版-1283
The Hedging Channel of Exchange Rate Determination

Gordon Liao and Tony Zhang

Abstract: We document the exchange rate hedging channel that connects country彩神8官方版-level measures of net external financial imbalances with exchange rates. In times of market distress, countries with large positive external imbalances (e.g. Japan) experience domestic currency appreciation, and crucially, forward exchange rates appreciate relatively more than the spot after adjusting for interest rate differentials. Countries with large negative foreign asset positions experience the opposite currency movements. We present a model demonstrating that exchange rate hedging coupled with intermediary constraints can explain these observed relationships between net external imbalances and spot and forward exchange rates. We find empirical support for this currency hedging channel of exchange rate determination in both the conditional and unconditional moments of exchange rates, option prices, large institutional investors' disclosure of hedging activities, and central bank swap line usage during the COVID-19 market turmoil.

Keywords: Global imbalance, exchange rate, forward, hedging, covered interest rate parity, currency options, COVID19


IFDP 彩神8官方版-1282
Global Trade and GDP Co-Movement

François de Soyres and Alexandre Gaillard

Abstract: We revisit the association between trade and GDP comovement for 135 countries from 1970 to 2009. Guided by a simple theory, we introduce two notions of trade linkages: (i) the usual direct bilateral trade index and (ii) new indexes of common exposure to third countries capturing the role of similarity in trade networks. Both measures are economically and statistically associated with GDP correlation, suggesting an additional channel through which GDP fluctuations propagate through trade linkages. Moreover, high income countries become more synchronized when the content of their trade is tilted toward inputs while trade in final goods is key for low income countries. Finally, we present evidence that the density of the international trade network is associated with an amplification of the association between global trade flows and bilateral GDP comovement, leading to a significant evolution of the trade comovement slope over the last two decades.

Keywords: International trade, international business cycle comovement, networks, input-output linkages


IFDP 彩神8官方版-1281
The Impact of Financial Sanctions: The Case of Iran 2011-2016

Saeed Ghasseminejad and Mohammad R. Jahan-Parvar

Abstract: This study provides a detailed analysis of the impact of financial sanctions on publicly traded companies. We consider the effect of imposing and lifting sanctions on the target country彩神8官方版's traded equities and examine the differences in the reaction of politically connected firms and those without such connections. The paper focuses on Iran due to (1) its sizable financial markets, (2) imposition of sanctions of varying severity and duration on private and state-owned companies, (3) the significant presence of politically connected firms in the stock market, and (4) the unique event of the 2015 nuclear deal, resulting in fairly rapid lifting of a sizable portion of imposed sanctions. We find that sanctions affect politically connected rms more than ordinary firms, have lasting negative effects on profitability ratios, and that politically connected firms stock prices bounce back more slowly after removal of sanctions. Firms targeted by financial sanctions decrease their leverage and increase their cash holding to manage their perceived increase in risk profile.

Keywords: Financial Sanctions; capital structure; event study; political connections; Iran; national security


IFDP 彩神8官方版-1280
The Economics of Platforms in a Walrasian Framework

Anil K. Jain and Robert M. Townsend

Abstract: We present a tractable model of platform competition in a general equilibrium setting. We endogenize the size, number, and type of each platform, while allowing for different user types in utility and impact on platform costs. The economy is Pareto efficient because platforms internalize the network effects of adding more or different types of users by offering type-specific contracts that state both the number and composition of platform users. Using the Walrasian equilibrium concept, the sum of type-specific fees paid cover platform costs. Given the Pareto effciency of our environment, we argue against the presumption that platforms with externalities need be regulated.

Keywords: Two-sided markets, first and second welfare theorems, externalities


IFDP 彩神8官方版-1279
Uncertainty and Growth Disasters

Boyan Jovanovic and Sai Ma

Abstract: This paper documents several stylized facts on the real effects of economic uncertainty. First, higher uncertainty is associated with a more dispersed and negatively skewed distribution of output growth. Second, the response of economic growth to an increase in uncertainty is highly nonlinear and asymmetric. Third, higher asset volatility magni…es the negative impact of uncertainty on growth. We develop and estimate an analytically tractable model in which rapid adoption of new technology may raise economic uncertainty which causes measured productivity to decline. The equilibrium growth distribution is negatively skewed and higher uncertainty leads to a thicker left tail.

Keywords: Uncertainty and growth, volatility, downside risk, growth at risk


IFDP 彩神8官方版-1278
Emerging Markets and the New Geography of Trade: The Effects of Rising Trade Barriers

Ricardo Reyes-Heroles, Sharon Traiberman, and Eva Van Leemput

Abstract: Protectionist sentiments have been rising globally in recent years. The consequences of a surge in protectionist measures present policy challenges for emerging markets (EMs), which have become increasingly exposed to global trade. This paper serves two main purposes. First, we collect several stylized facts that characterize EMs' role in the new geography of trade. We focus on differences between advanced economies (AEs) and EMs in trade linkages, production structures, and factor supplies. Second, we build a dynamic, general equilibrium, quantitative trade model featuring multiple countries, sectors and factors of production. The model is motivated by and geared to jointly match the facts we present. We use the model to estimate the long-run global impacts of rising trade barriers on EMs|both direct impacts and spillovers through third-country彩神8官方版 effects. Heterogeneity in openness, production structure, trade linkages, and factor supplies leads to large di erences between the impacts on AEs versus EMs. We find that variations in both technological comparative advantage and factor supplies play key roles in shaping these differences.

Keywords: Emerging market economies, trade barriers, comparative advantage, dynamics


IFDP 彩神8官方版-1277
Patent-Based News Shocks

Danilo Cascaldi-Garcia and Marija Vukotić

Abstract: We exploit firm-level data on patent grants and subsequent reactions of stocks to identify technological news shocks. Changes in stock market valuations due to announcements of individual patent grants represent expected future increases in the technology level, which we refer to as patent-based news shocks. Our patentbased news shocks resemble diffusion news, in that they do not affect total factor productivity in the short run but induce a strong permanent effect after five years. These shocks produce positive comovement between consumption, output, investment, and hours. Unlike the existing empirical evidence, patent-based news shocks generate a positive response in inflation and the federal funds rate, in line with a standard New Keynesian model. Patenting activity in electronic and electrical equipment industries, within the manufacturing sector, and computer programming and data processing services, within the services sector, play crucial roles in driving our results.

Keywords: News Shocks, Patents, Patent-based news shocks


IFDP 彩神8官方版-1276
Sovereign Risk Matters: The Effects of Endogenous Default Risk on the Time-Varying Volatility of Interest Rate Spreads

Sergio de Ferra and Enrico Mallucci

Abstract: Emerging market interest rate spreads display substantial time-varying volatility. We show that a baseline model with endogenous sovereign default risk can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables. In particular, the model features a key non-linearity that allows it to replicate the volatility of interest rate spreads and its comovement with other economic variables. Volatility correlates positively with the level of the spreads and the trade balance and negatively with output and consumption.

Keywords: Sovereign risk, time-varying volatility, interest rates


IFDP 彩神8官方版-1275
Avoiding Sovereign Default Contagion: A Normative Analysis

Sergio de Ferra and Enrico Mallucci

Abstract: Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country彩神8官方版 sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country彩神8官方版 bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard an reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower's policies can be replicated in a decentralized setting with Pigouvian taxes on debt.

Keywords: Sovereign default, sovereign contagion, bailouts, Pigouvian taxes


IFDP 彩神8官方版-1274
How Much Will the Belt and Road Initiative Reduce Trade Costs?

François de Soyres, Alen Mulabdic, Siobhan Murray, Nadia Rocha, and Michele Ruta

Abstract: This paper studies the impact of transport infrastructure projects of the Belt and Road Initiative on shipment times and trade costs. Based on a new data on completed and planned Belt and Road transport projects, Geographic Information System analysis is used to estimate shipment times before and after the Belt and Road Initiative. Two sets of data are computed to address different research questions: a global database based on an analysis of 1,000 cities in 191 countries and 47 sectors and a regional database that focuses on more granular information (1,818 cities) for Belt and Road economies only. The paper uses sectoral estimates of “value of time” to transform changes in shipment times into changes in ad valorem trade costs at the country彩神8官方版‐sector level. The findings show that the Belt and Road Initiative will significantly reduce shipment times and trade costs. For the world, the average reduction in shipment time will range between 1.2 and 2.5 percent, leading to reduction of aggregate trade costs between 1.1 and 2.2 percent. For Belt and Road economies, the change in shipment times and trade costs will range between 1.7 and 3.2 percent and 1.5 and 2.8 percent, respectively. Belt and Road economies located along the corridors where projects are built experience the largest gains. Shipment times along these corridors decline by up to 11.9 percent and trade costs by up to 10.2 percent.

Keywords: Transport infrastructure, GIS analysis, shipment times, trade costs


IFDP 彩神8官方版-1273
Common Transport Infrastructure: A Quantitative Model and Estimates from the Belt and Road Initiative

François de Soyres, Alen Mulabdic, and Michele Ruta

Abstract: This paper presents a structural general equilibrium model to analyze the effects on trade, welfare, and gross domestic product of common transport infrastructure. The model builds on Caliendo and Parro (2015) to allow for changes in trade costs due to improvements in transportation infrastructure, financed through domestic taxation, connecting multiple countries. The model highlights the trade impact of infrastructure investments through cross-border input-output linkages. This framework is then used to quantify the impact of the Belt and Road Initiative. Using new estimates on the effects on trade costs of transport infrastructure related to the initiative, the model shows that gross domestic product will increase by up to 3.4 percent for participating countries and by up to 2.9 percent for the world. Because trade gains are not commensurate with projected investments, some countries may experience a negative welfare effect due to the high cost of the infrastructure.

Keywords: Transportation infrastructure, trade, structural general equilibrium, belt and road


IFDP 彩神8官方版-1272
Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints

S. Boragan Aruoba, Pablo Cuba-Borda, Kenji Higa-Flores, Frank Schorfheide, and Sergio Villalvazo

Abstract: We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle filter, the COPF significantly reduces the persistence of the Markov chain, improves the accuracy of Monte Carlo approximations of posterior moments, and drastically speeds up computations. We use the techniques to estimate a small-scale DSGE model to assess the effects of the government spending portion of the American Recovery and Reinvestment Act in 2009 when interest rates reached the zero lower bound.

Keywords: Bayesian Estimation, Nonlinear Filtering, Nonlinear Solution Methods, Particle MCMC, ZLB


IFDP 彩神8官方版-1271
The Elusive Gains from Nationally-Oriented Monetary Policy

Martin Bodenstein, Giancarlo Corsetti, and Luca Guerrieri

Abstract: The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages.

Keywords: Monetary policy cooperation, global imbalances, open-loop Nash games


IFDP 彩神8官方版-1270
Rising Import Tariffs, Falling Export Growth: When Modern Supply Chains Meet Old-Style Protectionism

Kyle Handley, Fariha Kamal, and Ryan Monarch

Abstract: We examine the impacts of the 2018-2019 U.S. import tariff increases on U.S. export growth through the lens of supply chain linkages. Using 2016 confidentia firm-trade linked data, we document the implied incidence and scope of new import tariffs. Firms that eventually faced tariff increases on their imports accounted for 84% of all exports and they represent 65% of manufacturing employment. For all affected firms, the implied cost is $900 per worker in new duties. To estimate the effect on U.S. export growth, we construct product-level measures of import tariff exposure of U.S. exports from the underlying firm micro data. More exposed products experienced 2 percentage point lower growth relative to products with no exposure. The decline in exports is equivalent to an ad valorem tariff on U.S. exports of almost 2% for the typical product and almost 4% for products with higher than average exposure.

Keywords: Global supply chains; tariffs; trade war; U.S. exports


IFDP 彩神8官方版-1269
When is Bad News Good News? U.S. Monetary Policy, Macroeconomic News, and Financial Conditions in Emerging Markets

Abstract: Rises in U.S. interest rates are often thought to generate adverse spillovers to emerging market economies (EMEs). We show that what appears to be bad news for EMEs might actually be good news, or at least not-so-bad news, depending on the source of the rise in U.S. interest rates. We present evidence that higher U.S. interest rates stemming from stronger U.S. growth generate only modest spillovers, while those stemming from a more hawkish Fed policy stance or inflationary pressures can lead to significant tightening of EME financial conditions. Our identification of the sources of U.S. rate changes is based on high-frequency moves in U.S. Treasury yields and stock prices around FOMC announcements and U.S. employment report releases. We interpret positive comovements of stocks and interest rates around these events as growth shocks and negative comovements as monetary shocks, and estimate the effect of these shocks on emerging market asset prices. For economies with greater macroeconomic vulnerabilities, the difference between the impact of monetary and growth shocks is magnified. In fact, for EMEs with very low levels of vulnerability, a growth-driven rise in U.S. interest rates may even ease financial conditions in some markets.


IFDP 彩神8官方版-1268
How ETFs Amplify the Global Financial Cycle in Emerging Markets

Nathan Converse, Eduardo Levy-Yeyati, and Tomas Williams

Abstract: This paper examines how the growth of exchange-traded funds (ETFs) has affected the sensitivity of international capital flows to global financial conditions. Using data on individual emerging market funds worldwide, we employ a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. We find that the sensitivity of flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. We then show that our findings have macroeconomic implications. In countries where ETFs hold a larger share of the equity market, total cross-border equity flows and returns are significantly more sensitive to global financial conditions. Our results imply that the increasing role of ETFs as a channel for international capital flows has amplified the global financial cycle in emerging markets.

Keywords: exchange-traded funds; mutual funds; global financial cycle; global risk; push and pull factors; capital flows; emerging markets


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Last Update: January 17, 2018