Financial markets

Roberto De Santis, 16 March 2017

French sovereign spreads have risen in recent months, coinciding with debate over the euro ahead of the country’s presidential elections in May. Italian sovereign spreads have been rising since the beginning of 2016. This column argues that investors are not pricing a break-up of France from the Eurozone. Most likely, they are pricing the possibility that the newly elected French government will not have enough supremacy to undertake important economic reforms. Market perception of redenomination risk in Italy, on the other hand, is rising slowly. 

Bruno Cabrillac, Ludovic Gauvin, Jean-Baptiste Gossé, 07 March 2017

Interest in nominal GDP-indexed bonds has grown in the context of the debate on how to prevent future sovereign debt crises. This column uses simulations up to 2040 to identify which countries would benefit from using such bonds instead of conventional debt. By issuing GDP-indexed bonds, these countries would protect their debt ratios against deflation and recession, and investors could benefit from the catching-up of emerging economies, could partially hedge their currency risk, and could diversify their portfolio compared to equity. The contribution of GDP-indexed bonds to international financial stability would justify international coordination to promote their use.

Thorsten Beck, Steven Poelhekke, 26 February 2017

The financial sector plays a critical role in intermediating domestic savings into domestic investment, so it should serve as an important absorption tool for natural resource windfalls. Using a panel dataset of over 150 developed and developing countries, this column argues that unexpected exogenous windfalls from natural resource rents are not intermediated. The findings are consistent with the negative long-term relationship between the reliance of a country on natural resources and financial sector development.

Alexander Wagner, Richard Zeckhauser, Alexandre Ziegler, 24 February 2017

The election of Donald Trump as president of the United States will profoundly affect the US and world economies. This column argues that the stock market has already identified winners and losers among companies and industries. It finds, for example, that investors expect US firms paying high taxes to be relative winners from the Trump presidency, and firms with substantial foreign involvement to be relative losers.   

Barry Eichengreen, Poonam Gupta, Oliver Masetti, 24 February 2017

According to conventional wisdom, capital flows are fickle. Focusing on emerging markets, this column argues that despite recent structural and regulatory changes, much of this wisdom still holds today. Foreign direct investment inflows are more stable than non-FDI inflows. Within non-FDI inflows, portfolio debt and bank-intermediated flows are most volatile. Meanwhile, FDI and bank-related outflows from emerging markets have grown and become increasingly volatile. This finding underscores the need for greater attention from analysts and policymakers to the capital outflow side.

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