Financial markets

Nicholas Ford, Charles Yuji Horioka, 05 May 2016

The Feldstein-Horioka puzzle concerns why levels of investment and saving are correlated across countries. This is puzzling because financial markets can rapidly move capital between countries, and there is no reason why the best investment opportunities should be in a saver’s home country. This column posits a disarmingly simple solution to this longstanding puzzle – global capital markets cannot by themselves achieve net capital transfers between countries. This solution may have implications for related issues such as the interaction of interest rates, exchange rates, and current account imbalances.

Dennis Bams, Magdalena Pisa, Christian C. P. Wolff, 02 May 2016

In the absence of full information about small businesses’ risk of loan default, banks are unable to accurately calculate counterparty risk. This column suggests that banks can use industry and linked-industry data to better establish counterparty risk, because distress from one industry is transmitted to supplier and customer industries. A reliable and easily available signal for such distress is any failure reported by S&P.

Galina Hale, Tümer Kapan, Camelia Minoiu, 28 April 2016

Since the Global Crisis, cross-border lending among banks and its role in the transmission of financial shocks have gained a lot of attention. This column describes evidence from direct and indirect lending exposures among a large number of banks. The findings show that a larger number of exposures to banks in countries experiencing a systemic banking crisis reduces profitability and the supply of new credit. Both direct and indirect connections have economically significant effects, supporting the notion that interconnected systems are prone to shock transmission.

Barthélémy Bonadio, Andreas Fischer, Philip Sauré, 21 April 2016

According to standard estimates, exchange rate shocks affect import prices only slowly. This column presents evidence that challenges this view. Focusing on the large, unanticipated change in the Swiss franc in 2015, it shows that a change in import prices materialised very quickly. Prices started to move on the second working day after the exchange rate shock, and the medium-run pass-through of roughly 50% was reached after six additional working days.

Alex Cukierman, 19 April 2016

Following the collapse of Lehman Brothers, there was a fall in growth rates of net banking credit and total net new bond issues. This column discusses these events in detail. It also suggests that the decrease in credit was mainly due to supply shrinkage. The persistence of credit arrest beyond the two years following Lehman’s collapse is due to gradual enactment of tougher banking regulations along with growing awareness of low bailout probabilities. 

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