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Jel Classification:G15 

Working Paper
Currency Manipulation

We propose a novel, risk-based transmission mechanism for the effects of currency manipulation: policies that systematically induce a country?s currency to appreciate in bad times, lower its risk premium in international markets and, as a result, lower the country?s risk-free interest rate and increase domestic capital accumulation and wages. Currency manipulations by large countries also have external effects on foreign interest rates and capital accumulation. Applying this logic to policies that lower the variance of the bilateral exchange rate relative to some target country (?currency ...
Working Paper Series , Paper 2016-15

Working Paper
Exchange rates and monetary policy

In this paper we confront the data with the financial-market folk wisdom that monetary policy is one of the key drivers of nominal exchange rates. Focusing on measures of conventional and unconventional monetary policy, we find that monetary policy surprises and changes in expectations about future monetary policy can explain a sizable fraction of the variation in exchange rate changes for certain currency pairs. However, our results show that expected excess returns account for most of this variation. We also find that the importance unconventional monetary policy plays for explaining ...
Working Papers , Paper 15-16

Working Paper
The Hedging Channel of Exchange Rate Determination

We document the exchange rate hedging channel that connects country-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 ...
International Finance Discussion Papers , Paper 1283

Working Paper
A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks?

We examine how U.S. monetary policy affects the international activities of U.S. Banks. We access a rarely studied U.S. bank-level regulatory dataset to assess at a quarterly frequency how changes in the U.S. Federal funds rate (before the crisis) and quantitative easing (after the onset of the crisis) affects changes in cross-border claims by U.S. banks across countries, maturities and sectors, and also affects changes in claims by their foreign affiliates. We find robust evidence consistent with the existence of a potent global bank lending channel. In response to changes in U.S. monetary ...
Finance and Economics Discussion Series , Paper 2018-008

Working Paper
Catalytic IMF? a gross flows approach

The financial assistance the International Monetary Fund (IMF) provides is assumed to catalyze fresh investment. Such a catalytic effect has, however, proven empirically elusive. This paper deviates from the standard approach based on the net capital inflow to study instead the IMF?s catalytic role in the context of gross capital flows. Using fixed-effects regressions, instrumental variables and local projection methods, we find significant differences in how resident and foreign investors react to IMF programs as well as in inward and outward flows. While IMF lending does not catalyze ...
Globalization Institute Working Papers , Paper 254

Working Paper
Portfolio Rebalancing in Times of Stress

This paper investigates time variation in the dynamics of international portfolio equity flows. We extend the empirical model of Hau and Rey (2004) by embedding a two-state Markov regime-switching model into the structural VAR. The model is estimated using monthly data, 1995-2015, on equity returns, exchange rate returns and equity flows between the United States and advanced and emerging economies. We find that the data are consistent with portfolio rebalancing. The estimated states match periods of low and high financial stress. Our main result is that for equity flows between the United ...
Globalization Institute Working Papers , Paper 322

Report
The Overnight Drift

This paper documents large positive returns to holding U.S. equity futures overnight during the opening hours of European markets. These returns are not explained by liquidity risk, volatility risk, tail events, or overnight news. Instead, consistent with models of inventory risk and demand for immediacy, we demonstrate a strong relationship with market sell-offs from the previous intraday session. Moreover, price reversals are strongest at the opening of European markets, when overnight trading volumes peak. Finally, the timing of overnight returns shifts predictably in response to exogenous ...
Staff Reports , Paper 917

Working Paper
Optimal Bailouts in Banking and Sovereign Crises

We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions ...
Globalization Institute Working Papers , Paper 406

Working Paper
The pricing of FX forward contracts: micro evidence from banks’ dollar hedging

We use transaction-level data on foreign exchange (FX) forward contracts for the period 2014 through 2016 in conjunction with supervisory balance sheet information to study the drivers of banks? dollar hedging costs. Comparing contracts of the same maturity that are initiated during the same hour of the same day, we find large heterogeneity in banks? hedging costs. We show that these costs (i) are higher for banks with a larger FX funding gap, (ii) depend on banks? FX funding composition in terms of the source (interbank versus retail) and rollover structure (long-term versus short-term), ...
Working Papers , Paper 18-6

Working Paper
Risk Taking and Interest Rates : Evidence from Decades in the Global Syndicated Loan Market

We study how low interest rates in the United States affect risk taking in the market for cross-border corporate loans. Because banks tend to originate these loans with intent to sell to nonbank investors, we examine risk taking by the broad financial system. To the extent that actions of the Federal Reserve affect U.S. interest rates, our analysis provides evidence of cross-border spillover effects of U.S. monetary policy and highlights the global lending and risk-taking channels. We find that movements in the U.S. interest rates have an important effect on ex-ante credit risk of ...
International Finance Discussion Papers , Paper 1188

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