International finance

Saleem Bahaj, Ricardo Reis, 21 September 2020

Only a handful of currencies are regularly used for cross-border payments, with the US dollar dominating almost any measure of international use. This column analyses the preconditions for a currency to achieve international status and asks whether government policies can assist in this process. Theoretically, it argues that international status depends on several thresholds, including a currency’s volatility, the size of the issuing country, and the borrowing costs involved. Empirically, it shows that swap line agreements signed by the People’s Bank of China significantly increase the likelihood of renminbi usage in the following months, signalling the effectiveness of this policy.

Silvana Tenreyro, 04 September 2020

Understanding the nature of the global economy remains an important and interesting topic of discussion for both policymakers and researchers. This column presents a summary of two recent evaluations of aspects of the open economy. The author summarises work concerning global currencies and trading networks, offering insights into how the research agenda on each area may evolve over the coming years. 

Reinout De Bock, Dimitris Drakopoulos, Rohit Goel, CFA, Lucyna Gornicka, Evan Papageorgiou, Patrick Schneider, Can Sever, 19 August 2020

The COVID-19 pandemic caused an unprecedented sharp reversal of portfolio flows in emerging and frontier markets, triggering concerns about financial stability and consequently, strong policy responses. This column uses a novel analytical framework, the capital-flows-at-risk methodology, to show that changes in global financial conditions tend to influence portfolio flows more during surges and reversals than in normal times. Furthermore, stronger domestic fundamentals do not necessarily lead to surges in portfolio flows but help mitigate outflows. Hence, the weaker growth outlook for emerging markets due to COVID-19 will worsen local currency flows, while global financial conditions will affect hard currency flows.

Katharina Bergant, Francesco Grigoli, Niels-Jakob Hansen, Damiano Sandri, 12 August 2020

The vulnerability of emerging markets to global financial shocks leads to recurrent calls for policymakers to deploy additional policy tools besides relying on exchange rate flexibility. This column presents evidence that a more stringent level of macroprudential regulation can considerably dampen the effects of global financial shocks on economic activity in emerging markets. A possible channel through which macroprudential regulation enhances macroeconomic resilience is by allowing for a more countercyclical monetary policy response. The authors do not find evidence that capital flow restrictions provide similar benefits.

Bilge Erten, Anton Korinek, José Antonio Ocampo, 11 August 2020

Recent market volatility has underlined how fickle international capital flows can be, and how important it is for emerging economies to have an adequate system of macroprudential policies in place. Capital controls that protect recipient countries from excessively risky types of flows are a crucial ingredient of such a system. This column motivates capital controls theoretically based on the existence of externalities from capital flows, describes recent empirical evidence on their use, and summarises the surrounding policy debate.

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