International finance

Matteo Maggiori, Brent Neiman, Jesse Schreger, 18 June 2018

Currency is a far more important factor for cross-border capital flows than is typically assumed. This column demonstrates that investors exhibit a strong bias toward securities denominated in their home currency even when investing in bonds issued by developed countries, implying that the majority of foreign firms that do not issue foreign currency bonds typically do not borrow from abroad directly. A key exception to this pattern is the US, as the global taste for dollars enables smaller firms that issue only dollar-denominated bonds to access foreign capital. The benefit that the dollar’s status offers the US appears to have increased since the Global Crisis at the expense of the euro.

Jeromin Zettelmeyer, Álvaro Leandro, 01 June 2018

The euro area lacks a common safe asset, leaving banks to rely on bonds issued by their own countries and thus magnifying fiscal crises and contributing to financial fragmentation. To address this problem, an influential proposal advocates sovereign-bond backed securities, the most senior of which would play the role of safe asset. This column, which introduces a new CEPR Policy Insight, investigates whether criticism of the proposal’s reliance on securitisation is justified and compares it with alternatives that would not require tranching.

Martin Ellison, Andreas Tischbirek, 10 May 2018

The bond premium puzzle arises because the excess yield that investors require to hold a long-term bond is too small in quantitative macroeconomic models. Drawing on the beauty contest literature, this column argues that realistic term premia can be generated by differentiating between private and public information and by introducing strategic complementarities in the formation of expectations. It shows that a significant proportion of US term premia is driven by a beauty contest in forecasting, which rewards investors for being accurate andclose to the average forecast of others.

Ambrogio Cesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci, 24 April 2018

During 2016-17, market analysts and policymakers grappled with the puzzling coexistence of subdued market volatility and heightened policy uncertainty and geopolitical risk. The rise in world growth expectations can explain some but by no means all of the decline in market volatility during this period. This column argues that excess optimism about future growth prospects might have fuelled the decline in volatility. This would imply that gradual unwinding of such expectations could bring more bursts of market volatility, as we have begun to witness since the start of 2018.

Thorsten Beck, Maria Soledad Martinez Peria, Maurice Obstfeld, Andrea Presbitero, 12 April 2018

Research has shown that financial inclusion is closely linked to economic development and growth. However, more work is needed to establish the magnitude and channels of this effect and to pinpoint the types of financial services that have a stronger payoff without threatening financial stability. This column tackles these questions by presenting new evidence from a recent IMF-DFID conference on financial inclusion. It also suggests avenues for future research on the topic.

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