International finance

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.

Mathias Hoffmann, Egor Maslov, Bent Sørensen, Iryna Stewen, 10 January 2019

Bank-to-bank lending in the euro area has increased, direct cross-border lending has not. The column shows that dependence on domestic banks reduces risk-sharing in a crisis, reducing GDP growth in affected country-sectors. Benefits from banking integration are only robust to global shocks if banking integration takes the form of cross-border lending to firms and households.

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