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China’s evolving managed float: an exploration of the roles of the fix and broad dollar movements in explaining daily exchange rate changes
Clark, John (2017-11-01)
We investigate the drivers of daily changes in the exchange value of the Chinese currency (CNY) since early 2016, when a new regime was introduced for setting the fix?the midpoint of the CNY?s daily trading range against the U.S. dollar. Daily changes in the fix, which is announced just prior to the onset of onshore trading, are shown to be highly predictable and very responsive to the change in the CNY/USD rate during the previous day?s onshore trading session and to changes in dollar cross rates. While highly predictable, the fix is shown to have uneven predictive power for the subsequent ...
Staff Reports , Paper 828

Working Paper
Bank Interventions and Options-based Systemic Risk: Evidence from the Global and Euro-area Crisis
Tian, Mary; Londono, Juan M. (2014-09-04)
Using a novel dataset on central bank interventions to financial institutions, we examine the impact of capital injection announcements on systemic risk for the banking sector in the U.S. and the euro area between 2008 and 2013. We propose a new measure of options-based systemic risk called downside correlation risk premium (DCRP), which quantifies the compensation investors demand for being exposed to the risk of large correlated drops in bank stock prices. DCRP is calculated using options that provide a hedge against large drops in the price of a bank index and its individual components. We ...
International Finance Discussion Papers , Paper 1117

Working Paper
Domestic Policies and Sovereign Default
Espino, Emilio; Sanchez, Juan M.; Martin, Fernando M.; Kozlowski, Julian (2022-05-23)
A model with two essential elements, sovereign default and distortionary fiscal and monetary policies, explains the interaction between sovereign debt, default risk and inflation in emerging countries. We derive conditions under which monetary policy is actively used to support fiscal policy and characterize the intertemporal tradeoffs that determine the choice of debt. We show that in response to adverse shocks to the terms of trade or productivity, governments reduce debt and deficits, and increase inflation and currency depreciation rates, matching the patterns observed in the data for ...
Working Papers , Paper 2020-017

Working Paper
Innovation, Productivity, and Monetary Policy
Moran, Patrick Donnelly; Queraltó, Albert (2017-11-22)
To what extent can monetary policy impact business innovation and productivity growth? We use a New Keynesian model with endogenous total factor productivity (TFP) to quantify the TFP losses due to the constraints on monetary policy imposed by the zero lower bound (ZLB) and the TFP benefits of tightening monetary policy more slowly than currently anticipated. In the model, monetary policy influences firms incentives to develop and implement innovations. We use evidence on the dynamic effects of R&D and monetary shocks to estimate key parameters and assess model performance. The model suggests ...
International Finance Discussion Papers , Paper 1217

Discussion Paper
Ring-Fencing and “Financial Protectionism” in International Banking
Gupta, Arun; Goldberg, Linda S. (2013-01-09)
Some market watchers and academic researchers are concerned about a “Balkanization” of banking, owing to a sharp decline in cross-border international banking activity (see chart below), and an increased home bias of financial transactions. Meanwhile, policy and regulatory efforts are under consideration that may further induce banks to shift away from international activity, including ring-fencing of domestic banking operations, other forms of “financial protectionism,” and enhanced oversight and prudential measures.
Liberty Street Economics , Paper 20130109

Working Paper
Spillovers at the Extremes: The Macroprudential Stance and Vulnerability to the Global Financial Cycle
Forbes, Kristin J.; Dilts Stedman, Karlye; Chari, Anusha (2021-12-17)
Evidence suggests that macroprudential policy has small and insignificant effects on the volume of portfolio flows. We show, however, that these minor effects mask very different relationships across the global financial cycle. A tighter ex-ante macroprudential stance amplifies the impact of global risk shocks on bond and equity flows—increasing outflows by significantly more during risk-off episodes and increasing inflows significantly more during risk on episodes. These amplification effects are more prominent at the “extremes,” especially for extreme risk-off periods, and are larger ...
Research Working Paper , Paper RWP 21-16

Working Paper
A seniority arrangement for sovereign debt
Eyigungor, Burcu; Chatterjee, Satyajit (2015-01-31)
A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the ?absolute priority" or ?first-in-time" rule). In this paper, we propose a modification of the absolute priority rule that is more suited to the sovereign debt context and analyze its positive and normative implications ...
Working Papers , Paper 15-7

Report
Informational contagion in the laboratory
Cipriani, Marco; Guarino, Antonio; Guazzarotti, Giovanni; Tagliati, Federico; Fischer, Sven (2015-03-01)
We study the informational channel of financial contagion in the laboratory. In our experiment, two markets with correlated fundamentals open sequentially. In both markets, subjects receive private information. Subjects in the market opening second also observe the history of trades and prices in the first market. We find that although in both markets private information is only imperfectly aggregated, subjects are able to make correct inferences based on the public information coming from the market that opens first. As a result, we observe financial contagion in the laboratory: Indeed, the ...
Staff Reports , Paper 715

Working Paper
US Equity Tail Risk and Currency Risk Premia
Fan, Zhenzhen; Xiao, Xiao; Londono, Juan M. (2019-07-08)
We find that a US equity tail risk factor constructed from out-of-the-money S&P 500 put option prices explains the cross-sectional variation of currency excess returns. Currencies highly exposed to this factor offer a low currency risk premium because they appreciate when US tail risk increases. In a reduced-form model, we show that country-specific tail risk factors are priced in the cross section of currency returns only if they contain a global risk component. Motivated by the intuition from the model and by our empirical results, we construct a novel proxy for a global tail risk factor by ...
International Finance Discussion Papers , Paper 1253

Working Paper
Capital Flows in Risky Times: Risk-On / Risk-Off and Emerging Market Tail Risk
Lundblad, Christian T.; Dilts Stedman, Karlye; Chari, Anusha (2020-07-01)
This paper characterizes the implications of risk-on/risk-off shocks for emerging market capital flows and returns. We document that these shocks have important implications not only for the median of emerging markets flows and returns but also for the left tail. Further, while there are some differences in the effects across bond vs. equity markets and flows vs. asset returns, the effects associated with the worst realizations are generally larger than on the median realization. We apply our methodology to the COVID-19 shock to examine the pattern of flow and return realizations: the sizable ...
Research Working Paper , Paper RWP 20-08

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