International finance

Simeon Djankov, Eva (Yiwen) Zhang, 04 December 2020

Foreign direct investment flows to the US have seen a sharp decline in the past two years, despite a cut in the corporate tax rate from 35% to 21% in 2017. Previous research suggests that such a tax cut should have resulted in increased investor appetite. This column argues that countervailing forces, in particular the shift in investment sentiment driven by the corrosion of US openness to trade and global cooperation, have played the dominant role in reducing flows.  

Tim Willems, 17 November 2020

The COVID-induced surge in public debt has raised concerns about its sustainability, further increasing the need to improve the debt-restructuring process. This column proposes an auction-based strategy to restructure sovereign debt that tailors the shape of the restructured debt stock optimally to creditor preferences, subject to debt being sustainable post-restructuring. Any debt relief provided to the country gets optimally distributed over its creditors, thus minimising the pain inflicted upon them. A version of the winner’s curse can reduce the ‘holdout problem’ of creditors trying to free-ride on each other’s contributions towards debt relief. All this should smoothen the restructuring process and enable the debtor to mobilise greater creditor support (given the amount of relief provided). 

Banu Demir, Beata Javorcik, Tomasz K. Michalski, Evren Örs, 29 October 2020

Firm-level interconnections have important implications for the propagation of economic shocks and the effectiveness of government policy. This column analyses the effect of a tax policy change on firm-level production chains and performance. Using granular administrative data, it shows that unexpected and non-localised supply shocks propagate downstream through production networks, affecting sales, input usage, and buyer and supplier linkages. In addition, it shows that the effects are amplified in firms facing financial constraints, highlighting the importance of liquidity in the resilience to shocks. 

Stefano Micossi, 20 October 2020

As the world comes to terms with a post-Covid reality, the euro area must confront its growing fiscal and sovereign debts. This column argues that common euro area policies are justified in order to address sovereign debt externalities and risks to financial stability. It considers a mechanism involving large transfers of euro area sovereigns from the ECB to the ESM as a possible way forward.

Valentin Lang, David Mihalyi, Andrea Presbitero, 14 October 2020

To mitigate the effects of the Covid-19 crisis, the international community has endorsed a programme suspending debt service payments for poor countries. This column shows that the programme has led to a substantial decrease in sovereign borrowing costs by providing liquidity. Importantly, the results do not lend support to the widespread concern that such debt relief could generate stigma and signal debt sustainability concerns.   

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