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We use panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies. We document that global uncertainty (VIX) and global financial conditions (U.S. monetary policy) shocks have a strong impact on the distribution of the REER changes, with larger impacts in the tails of the distribution, and especially in economies with shallower FX markets, lower central bank credibility, and higher credit risk (i.e., weaker macro fundamentals). Foreign exchange intervention (FXI) partially offsets the impact of these shocks, especially in the left tail (large depreciations) and particularly in economies with weaker fundamentals but, more importantly, when FXI is used sporadically. Thus, our results highlight the importance of deepening FX markets, improving central bank credibility, and strengthening macro fundamentals against the potential dynamic trade-offs of overreliance on a policy that would exacerbate the previously mentioned frictions. While our results point to low effectiveness of capital flow management in preventing large REER movements, they seem to enable more impactful foreign exchange intervention in the immediate aftermath of shocks.
Macroeconomics --- Economics: General --- Foreign Exchange --- Finance: General --- Investments: General --- Open Economy Macroeconomics --- International Financial Markets --- Investment --- Capital --- Intangible Capital --- Capacity --- Economic & financial crises & disasters --- Economics of specific sectors --- Currency --- Foreign exchange --- Finance --- Real effective exchange rates --- Real exchange rates --- Foreign exchange intervention --- Currency markets --- Financial markets --- Depreciation --- National accounts --- Currency crises --- Informal sector --- Economics --- Foreign exchange market --- Saving and investment
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Selected Issues.
Money and Monetary Policy --- International Economics --- Foreign Exchange --- Environmental Economics --- Natural Disasters --- Finance: General --- Monetary Policy --- International Agreements and Observance --- International Organizations --- Climate --- Natural Disasters and Their Management --- Global Warming --- International Financial Markets --- Environmental Economics: General --- Monetary economics --- International institutions --- Currency --- Foreign exchange --- Climate change --- Natural disasters --- Finance --- Monetary policy --- International organization --- Environment --- Financial markets --- International agencies --- Climatic changes --- Foreign exchange market --- Mauritania, Islamic Republic of
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We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
Macroeconomics --- Economics: General --- Foreign Exchange --- Finance: General --- Inflation --- Mathematical Methods and Programming: General --- Macroeconomic Aspects of International Trade and Finance: General --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Economywide Country Studies: General --- International Financial Markets --- Price Level --- Deflation --- Economic & financial crises & disasters --- Economics of specific sectors --- Currency --- Foreign exchange --- Finance --- Currency markets --- Financial markets --- Foreign exchange intervention --- Exchange rates --- Prices --- Exchange rate adjustments --- Currency crises --- Informal sector --- Economics --- Foreign exchange market
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This paper assembles a comprehensive sovereign green bond database and estimates the sovereign greenium. The development of green bond markets has been one of the most important financial breakthroughs in the domain of sustainable finance during the last 15 years. A central benefit associated with green bonds has been that they exhibit a positive green premium (greenium), i.e., a lower yield relative to a similar conventional bond. Yet, issuances at the sovereign level have been relatively recent and not well documented in the literature. We find that green bonds are issued at a relatively small premium (4 basis points on average) in Advanced Economies. Yet, importantly, the greenium is growing over time and is considerably larger (11 basis points on average) for Emerging Market Economies.
Macroeconomics --- Economics: General --- Environmental Economics --- Investments: Bonds --- International Lending and Debt Problems --- International Financial Markets --- Debt --- Debt Management --- Sovereign Debt --- Sustainable Development --- Environmental Economics: Government Policy --- Environmental Economics: General --- General Financial Markets: General (includes Measurement and Data) --- Economic & financial crises & disasters --- Economics of specific sectors --- Green finance / sustainable finance --- Investment & securities --- Climate finance --- Environment --- Bonds --- Financial institutions --- Sovereign bonds --- Currency crises --- Informal sector --- Economics --- Climatic changes --- Germany
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This selected issue paper discusses the desirable institutional and macro-financial conditions and optimal path toward greater exchange rate flexibility in the Islamic Republic of Mauritania. It also identifies the macro-financial risks that arise and mitigation measures supporting a smooth transition and discusses reforms needed for a successful and smooth shift, including the need for an alternative nominal anchor and modern monetary policy framework, more developed financial markets, and resilient financial sector. Mauritania is a small economy exposed to terms-of-trade shocks. The current account deficit is volatile and sometimes sizeable. International reserves remained adequate until 2021 but are expected to fall around the adequacy threshold due to the negative external shock. A more flexible exchange rate would reduce the economy’s vulnerability to external shocks and preserve international reserves. Countries that are heavily reliant on a single commodity or a group of commodities need more exchange rate flexibility to respond to changes in world commodity prices and to mitigate their spillovers into other sectors.
Money and Monetary Policy --- International Economics --- Foreign Exchange --- Environmental Economics --- Natural Disasters --- Finance: General --- Monetary Policy --- International Agreements and Observance --- International Organizations --- Climate --- Natural Disasters and Their Management --- Global Warming --- International Financial Markets --- Environmental Economics: General --- Monetary economics --- International institutions --- Currency --- Foreign exchange --- Climate change --- Natural disasters --- Finance --- Monetary policy --- International organization --- Exchange rate flexibility --- Environment --- Exchange rates --- Currency markets --- Financial markets --- International agencies --- Climatic changes --- Foreign exchange market --- Mauritania, Islamic Republic of
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This paper explores how non-U.S. central banks behave when firms in their economies engage in currency mismatch, borrowing more heavily in dollars than justified by their operating exposures. We begin by documenting that, in a panel of 53 countries, central bank holdings of dollar reserves are significantly correlated with the dollar-denominated bank borrowing of their non-financial corporate sectors, controlling for a number of known covariates of reserve accumulation. We then build a model in which the central bank can deal with private-sector mismatch, and the associated risk of a domestic financial crisis, in two ways: (i) by imposing ex ante financial regulations such as bank capital requirements; or (ii) by building a stockpile of dollar reserves that allow it to serve as an ex post dollar lender of last resort. The model highlights a novel externality: individual central banks may tend to over-accumulate dollar reserves, relative to what a global planner would choose. This is because individual central banks do not internalize that their hoarding of reserves exacerbates a global scarcity of dollar-denominated safe assets, which lowers dollar interest rates and encourages firms to increase the currency mismatch of their liabilities. Relative to the decentralized outcome, a global planner may prefer stricter financial regulation (e.g., higher bank capital requirements) and reduced holdings of dollar reserves.
Macroeconomics --- Economics: General --- Banks and Banking --- Finance: General --- Foreign Exchange --- Financial Risk Management --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Macroeconomic Aspects of International Trade and Finance: General --- International Financial Markets --- Monetary Policy --- Financial Crises --- General Financial Markets: Government Policy and Regulation --- Financial Institutions and Services: Government Policy and Regulation --- Economic & financial crises & disasters --- Economics of specific sectors --- Banking --- Finance --- Currency --- Foreign exchange --- Financial crises --- Economic sectors --- International reserves --- Central banks --- Banking crises --- Currency mismatches --- Financial sector policy and analysis --- Reserves accumulation --- Exchange rates --- Currency crises --- Informal sector --- Economics --- Foreign exchange reserves --- Financial risk management --- Banks and banking, Central --- Hong Kong Special Administrative Region, People's Republic of China
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The assessment of external positions and exchange rates of member countries is a key mandate of the IMF. The External Balance Assessment (EBA) methodology has provided the framework for conducting external sector assessments by Fund staff since its introduction in 2012. This paper provides the latest version of the EBA methodology, updated in 2022 with additional refinements to the current account and real exchange rate regression models, as well as updated estimates for other components of the EBA methodology. The paper also includes an assessment of how estimated current account gaps based on EBA are associated with future external adjustment.
Macroeconomics --- Economics: General --- Exports and Imports --- Foreign Exchange --- International Investment --- Long-term Capital Movements --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- International Policy Coordination and Transmission --- International Financial Markets --- Economic Development: Financial Markets --- Saving and Capital Investment --- Corporate Finance and Governance --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Economic & financial crises & disasters --- Economics of specific sectors --- International economics --- Currency --- Foreign exchange --- External balance assessment (EBA) --- External position --- Real effective exchange rates --- Current account --- Balance of payments --- Current account balance --- Real exchange rates --- Currency crises --- Informal sector --- Economics --- International finance --- United States
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In a complex global production landscape, the quest for measures of economic activity by multinational enterprises (MNEs) has become more pressing. Foreign Direct Investment (FDI) statistics, which capture financing aspects of MNEs, have often been used as a proxy for multinational production given their wide availability and cross-country comparability, but concerns that multinational production occurs in different countries than where financial positions are recorded call this practice into question. This paper revisits the main objections to the use of FDI as a proxy for multinational production, explores counterarguments, and provides guidance on the use of FDI statistics to measure multinational production.
Macroeconomics --- Economics: General --- Exports and Imports --- Financial Risk Management --- Investments: Stocks --- Banks and Banking --- International Factor Movements and International Business: General --- Multinational Firms --- International Business --- Methodology for Collecting, Estimating, and Organizing Macroeconomic Data --- Data Access --- International Investment --- Long-term Capital Movements --- International Financial Markets --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- International Lending and Debt Problems --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Investment & securities --- Banking --- Foreign direct investment --- Balance of payments --- Special purpose vehicle --- Asset and liability management --- Stocks --- Financial institutions --- Offshore financial centers --- Financial services --- Currency crises --- Informal sector --- Economics --- Investments, Foreign --- Asset-liability management --- International finance
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China’s equity markets internationalization process started in the early 2000s but accelerated after 2012, when Chinese firms’ shares listed in Shanghai and Shenzhen gradually became available to international investors. This paper studies the effects of the post-2012 internationalization events by comparing the evolution of equity financing and investment activities for: (i) domestic listed firms relative to firms that already had access to international investors and (ii) domestic listed firms that were directly connected to international markets relative to those that were not. The paper finds large increases in financial and investment activities for domestic listed and for connected firms, with significant aggregate effects. The evidence also suggests the rise in firms’ equity issuances was primarily and initially financed by domestic investors. International investors’ portfolio holdings in Chinese equity markets and ownership in firms increased markedly only once Chinese firms’ locally issued shares became part of the MSCI Emerging Markets Index.
Macroeconomics --- Economics: General --- Finance: General --- Investments: Stocks --- Corporate Finance --- International Monetary Arrangements and Institutions --- Financial Economics: General --- Financial Crises --- International Financial Markets --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Capital Budgeting --- Fixed Investment and Inventory Studies --- General Financial Markets: General (includes Measurement and Data) --- Multinational Firms --- International Business --- Financial Markets and the Macroeconomy --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Investment & securities --- Multinationals --- Stock markets --- Financial markets --- Stocks --- Financial institutions --- Foreign corporations --- Economic sectors --- Emerging and frontier financial markets --- Market capitalization --- Currency crises --- Informal sector --- Economics --- Stock exchanges --- Financial services industry --- China, People's Republic of
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During the March 2020 market turmoil, euro area money-market funds (MMFs) experienced significant outflows, reaching almost 8% of assets under management. This paper investigates whether the volatility in MMF flows was driven by investors’ liquidity needs related to derivative margin payments. We combine three highly granular unique data sources (EMIR data for derivatives, SHSS data for investor holdings of MMFs and Refinitiv Lipper data for daily MMF flows) to construct a daily fund-level panel dataset spanning from February to April 2020. We estimate the effects of variation margin paid and received by the largest holders of EURdenominated MMFs on flows of these MMFs. The main findings suggest that variation margin payments faced by some investors holding MMFs were an important driver of the flows of EUR-denominated MMFs domiciled in euro area.
Macroeconomics --- Economics: General --- Industries: Financial Services --- Investments: Stocks --- Finance: General --- Public Finance --- Banks and Banking --- Contingent Pricing --- Futures Pricing --- option pricing --- International Financial Markets --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Portfolio Choice --- Investment Decisions --- Social Security and Public Pensions --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Large Data Sets: Modeling and Analysis --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Investment & securities --- Pensions --- Financial services law & regulation --- Data capture & analysis --- Stocks --- Financial institutions --- Liquidity --- Asset and liability management --- Mutual funds --- Nonbank financial institutions --- Pension spending --- Expenditure --- Currency crises --- Informal sector --- Economics --- Financial services industry --- Luxembourg
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