International Finance in the Global Markets

December 16-17, 2015
Kosuke Aoki, University of Tokyo; Shin-ichi Fukuda, University of Tokyo and TCER, Takeo Hoshi, University of California, San Diego and NBER, and Takashi Kano of Hitotsubashi University and TCER, Organizers

Gianluca Benigno, London School of Economics and CEPR

Contagious Sudden Stops

Anya Kleymenova, University of Chicago; Andrew Rose, University of California, Berkeley and NBER; and Tomasz Wieladek, Bank of England

Does Government Intervention Affect Banking Globalization?

Using data from British and American banks, Kleymenova, Rose, and Wieladek provide empirical evidence that government intervention affects banking globalization along three dimensions: depth, breadth and persistence. The researchers examine depth by studying whether a bank's preference for domestic, as opposed to external, lending (funding) changes when it is subjected to a large public intervention, such as bank nationalization. The authors' results suggest that, following nationalization, non-British banks allocate their lending away from the U.K. and increase their external funding. Second, they find that nationalized banks from the same country tend to have portfolios of foreign assets that are spread across countries in a way that is far more similar than either private banks from the same country or nationalized banks from different countries, consistent with an impact on the breadth of globalization. Third, the researchers study the Troubled Asset Relief Program (TARP) to examine the persistence of large government interventions. They find weak evidence that upon entry into the TARP, foreign lending declines but domestic does not. This effect is observable at the aggregate level, and seems to disappear upon TARP exit. Collectively, this evidence suggests that large government interventions affect the depth and breadth of banking globalization, but may not persist after public interventions are unwound.

Hiro Ito, Portland State University, and Masahiro Kawai, University of Tokyo and CEPR

Trade Invoicing in the Japanese Yen and the Deutsche Mark in the 1980s and 90s: Lessons for Renminbi Internationalization

Charles Engel, University of Wisconsin at Madison and NBER

Macroprudential Policy under High Capital Mobility: Policy Implications from an Academic Perspective

In this paper, Engel explicates the issues raised for macroprudential regulation in a global economy with high capital mobility. The study surveys the recent literature and aims to translate the academic rationale for such policies, in which market imperfections lead to external effects that require policy interventions. The new economics of capital controls is addressed, in which capital controls may be introduced to reduce financial market distortions or to help stabilize exchange rate movements in the face of other market distortions. The empirical literature on the effectiveness of such policies is surveyed.

Vahagn Galstyan and Rogelio Mercado, Trinity College Dublin; Philip Lane, Trinity College Dublin and CEPR; and Caroline Mehigan, OECD

The Holders and Issuers of International Portfolio Securities

Research on the geographical distribution of international portfolios has mainly focused on data aggregated to the country level. Galstyan, Lane, Mehigan, and Mercado exploit newly-available data that disaggregates the holders and issuers of international securities along sectoral lines. In addition, the researchers also explore newly-expanded data on the currency composition of international portfolios. They find that patterns evident in the aggregate data do not uniformly apply across the various holding and issuing sectors, such that a full understanding of cross-border portfolio positions requires a granular analytical approach.

Shin-ichi Fukuda

Strong Sterling Pound and Weak European Currencies in the Crises: Evidence from Covered Interest Parity of Secured Rates

In the post Lehman period, the interest rate of the U.S. dollar became low on the forward contract because of its role as international currency. However, in the Euro crisis, that of the Sterling pound became equally low, while the other European currencies increased its liquidity premium. By using secured rates, Fukuda examines why the Sterling pound and the Danish kroner showed asymmetric features in the two crises. The regression results suggest that there was a structural break in the determinants of deviations from covered interest parity (CIP) condition across the European currencies during the crises. Currency-specific money market risk was critical in explaining the deviations in the GFC, while EU banks' credit risk were useful in explaining the deviations in the Euro crisis. The asymmetry explains different features between the Sterling pound and the Danish kroner in the two crises.

Matteo Cacciatore, HEC Montréal; Fabio Ghironi, University of Washington and NBER; and Yurim Lee, University of Washington

Financial Market Integration, Exchange Rate Policy, and the Dynamics of Business and Employment in Korea

Cacciatore, Ghironi, and Lee study the consequences of different degrees of international financial market integration and exchange rate policies in a calibrated, medium-scale model of the Korean economy. The model features endogenous producer entry into domestic and export markets and search-and-matching frictions in labor markets. This allows the authors to highlight the consequences of financial integration and the exchange rate regime for the dynamics of business creation and unemployment. The researchers show that, under flexible exchange rates, access to international financial markets increases the volatility of both business creation and the number of exporting plants, but the effects on employment volatility are more modest. Pegging the exchange rate peg can have unfavorable consequences for the effects of terms of trade appreciation, and more financial integration is not necessarily beneficial under a peg. The combination of a floating exchange rate and internationally complete markets would be the best scenario for Korea among those considered.

Takashi Kano, and Kenji Wada, Hitotsubashi University

The First Arrow Hitting the Currency Target: A Long-run Risk Perspective

This paper reconsiders the successful currency outcome of the first arrow of the Abenomics. The Japanese yen depreciation against the U.S. dollar after the introduction of the first arrow co-moves tightly with long-term yield differentials between Japan and the United States. The estimated term structure of the sensitivity of the currency return of the Japanese yen to the two-country interest rate differential indeed shifts up and becomes steeper after the onset of the Abenomics. To explain this structural change in the term structure of the Fama regression coefficient, Kano and Wada employ a long-run risk model endowed with real and nominal conditional volatilities as in Bansal and Shaliastovich (2013). Under a plausible calibration, the model replicates the structural change when nominal uncertainty dominates real uncertainty in the U.S. bond market. The researchers conjecture that the arrow was shot off from the U.S. side, not the Japan side.

Ethan Ilzetzki, London School of Economics, and Keyu Jin, London School of Economics and CEPR

The Puzzling Change in the International Transmission of U.S. Macroeconomic Policy Shocks

Ilzetzki and Jin present two empirical conundrums on the nature of international policy transmission. First, there has been a qualitative shift in the impact of U.S. monetary and fiscal policy shocks on other economies after 1990. Second, the reactions to monetary shocks are particularly difficult to reconcile with standard new open-economy theories, even with several significant modifications to the benchmark model. This raises the question as to whether the theoretical reference point on which welfare analysis and policy prescriptions are based is still the appropriate one for the recent decades.

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us