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Working Paper
International Dollar Flows
Using confidential Federal Reserve data, we study the factors driving U.S. banknote flows between the United States and other countries. These flows are a significant component of capital flows in emerging market economies, where physical U.S. currency functions as a safe asset and precautionary demand for U.S. banknotes is a form of flight to quality. Prior to the global financial crisis, country-specific factors, including local economic uncertainty, largely explain the volume and heterogeneity of the flows. Since the crisis, global factors, particularly, global economic uncertainty, ...
Working Paper
Large Capital Inflows, Sectoral Allocation, and Economic Performance
This paper describes the stylized facts characterizing periods of exceptionally large capital inflows in a sample of 70 middle- and high-income countries over the last 35 years. We identify 155 episodes of large capital inflows and find that these events are typically accompanied by an economic boom and followed by a slump. Moreover, during episodes of large capital inflows capital and labor shift out of the manufacturing sector, especially if the inflows begin during a period of low international interest rates. However, accumulating reserves during the period in which capital inflows are ...
Working Paper
Capital Flows, Asset Prices, and the Real Economy: A "China Shock" in the U.S. Real Estate Market
We study the effects of foreign real estate capital flows on local asset prices and employment using detailed housing transactions data. We document (i) a "China shock" in the U.S. real estate market after 2007 driven by the Chinese government's house purchase restrictions and (ii) "home bias" in foreign Chinese housing purchases in the United States as they are concentrated in ZIP codes historically populated by ethnic Chinese. Exploiting the quasi-random temporal and spatial variation of real estate capital inflows from China, we find that foreign Chinese housing purchases have a positive ...
Report
The shifting drivers of global liquidity
The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flows to U.S. monetary policy rose substantially in the immediate aftermath of the global financial crisis, peaked around the time of the 2013 Federal Reserve ?taper tantrum,? and then partially reverted toward pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably after the crisis and became similar ...
Working Paper
Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America
Since 1950, the economies of East Asia grew rapidly but received little international capital, while Latin America received considerable international capital even as their economies stagnated. The literature typically explains the failure of capital to flow to high growth regions as resulting from international capital market imperfections. This paper proposes a broader thesis that country-specific distortions, such as domestic labor and capital market distortions, also impact capital flows. We develop a DSGE model of Asia, Latin America, and the Rest of the World that features an ...
Working Paper
A Theory of the Global Financial Cycle
We develop a theory to account for changes in prices of risky and safe assets and gross and net capital flows over the global financial cycle (GFC). The multi-country model features global risk-aversion shocks and heterogeneity of investors both within and across countries. Within-country heterogeneity is needed to account for the drop in gross capital flows during a negative GFC shock (higher global risk-aversion). Cross-country heterogeneity is needed to account for the differential vulnerability of countries to a negative GFC shock. The key vulnerability is associated with leverage. In ...
Working Paper
Exchange Rate Policies at the Zero Lower Bound
We study how a monetary authority pursues an exchange rate objective in an environment that features a zero lower bound (ZLB) constraint on nominal interest rates and limits to international arbitrage. If the nominal interest rate that is consistent with interest rate parity is positive, the central bank can achieve its exchange rate objective by choosing that interest rate, a well-known result in international ?nance. However, if the rate consistent with parity is negative, pursuing an exchange rate objective necessarily results in zero nominal interest rates, deviations from parity, capital ...
Report
The Global Financial Resource Curse
Since the late 1990s, the United States has received large capital flows from developing countries and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods. This induces a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the ...
Working Paper
Natural Resources and Global Misallocation
We explore the efficiency in the allocation of physical capital and human capital across countries. The observed marginal products can differ across countries because of differences in technology (i.e. production functions) and in distortions (i.e. differences in use of factors) across countries. To identify differences in technology, we use new data and propose a simple method to estimate output shares of natural resources, and thus adjust the estimated marginal products of physical and human capital. With a sample of 79 countries from 1970 to 2005, we find that the world has decidedly moved ...
Corporate Indebtedness: Improving Financial Stability Monitoring
U.S. nonfinancial corporate credit has been identified as an area where growth in the quantity of debt and deterioration in the quality of underwriting could be a source of concern.