International finance

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.

Charles Calomiris, Mauricio Larrain, Sergio Schmukler, 24 December 2018

In emerging economies, studies of the relationship between foreign investor participation in public equity markets and aggregate economic activity find strong effects on productivity, investment, economic growth, and the price of publicly traded stocks. But it is not clear why. The column shows that equity capital inflows increase the supply of funding available to firms in emerging market economies, encouraging firms to obtain more equity financing to invest and expand. Large firms benefit most from those inflows. 

Yossi Saadon, Nathan Sussman, 31 October 2018

Global integration has increased rapidly over recent decades, leaving basic theories of exchange rate equilibrium ripe for reconsideration. This column tests two such theories – purchasing power parity and uncovered interest rate parity – using the case of the advanced, small open economy of Israel and the US. The results show that when the necessary conditions are met, the purchasing power parity and uncovered interest rate parity relationships continue to hold in the short run. 

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