International finance

Maik Schmeling, Christian Wagner, 22 February 2019

According to Ben Bernanke, “monetary policy is 98% talk and 2% action”.Using data on policy rate announcements and press conferences by the ECB between 1999 and 2017, this column shows that central bank tone affects asset prices, even after controlling for policy actions and economic fundamentals. The results are consistent with the idea that communication tone is a monetary policy tool that allows central banks to affect the risk appetite of market participants and the risk premia they require.

Matt Lowe, Chris Papageorgiou, Fidel Pérez Sebastián, 20 February 2019

Capital doesn’t flow to developing countries as much as economic theory suggests it should, and this might imply that capital is misallocated across nations. This column argues that once public capital is removed from the equation, the evidence shows that private capital is allocated remarkably efficiently across nations. It also suggests that the inefficiencies related to the allocation of public capital across countries can be significant and much larger than those related to private capital. 

Anil Kashyap , Natalia Kovrijnykh, Jian Li, Anna Pavlova, 18 February 2019

A well-known puzzle in economics is that when stocks are added to the S&P 500 index, their prices rise. Using a theoretical framework and empirical evidence, this column shows that this ‘benchmark inclusion subsidy’ arises because asset managers have incentives to hold some of the equity of firms in the benchmark regardless of the risk characteristics of these firms. As a result, asset managers effectively subsidise investments by benchmark firms. As the asset management industry continues to grow, the benchmark inclusion subsidy will only get bigger. 

Lourdes Acedo Montoya, Marco Buti, 01 February 2019

Although the euro instantly became the second-most important global currency upon its creation, its internationalisation was not a primary concern for policymakers at the time. This column argues that while the euro area has full ‘monetary independence’, ‘monetary sovereignty’ needs to be built on the basis of a reassessment of the benefits and costs attached to the international role of the euro. It also argues that the former outweigh the latter. There is no silver bullet, however, that would rapidly increase use of the euro abroad. This requires a comprehensive package of measures and time.

Nils Friewald, Florian Nagler, 30 January 2019

Previous studies show that conventional factors, such as firm-specific and macroeconomic variables, do a poor job of explaining yield spread changes. Using data from the US corporate bond market, this column shows that over-the-counter frictions explain around 23% in the variation of the common component and one third of the total variation in yield spread changes. The combination of search and bargaining frictions is slightly more important for the dynamics of yield spread changes than inventory frictions. The findings are broadly consistent with leading theories of intermediation frictions in over-the-counter markets.

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