The current crisis saw an unprecedented collapse in international capital flows after years of using financial globalization. We identify the stylized facts and main drivers of this development. The ...retrenchment in international capital flows is a highly heterogeneous phenomenon: first, across time, being especially dramatic in the wake of the Lehman Brothers' failure; secondly, across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception; and thirdly, across regions, with emerging economies experiencing shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature - with countries relying on bank flows bang the hardest hit - as well as domestic macroeconomic conditions and their connection to world trade flows.
We show that distance matters for the volatility of international trade and financial transactions on top of its well-known impact for their levels. We conduct event studies on the global financial ...crisis and the Covid-19 pandemic with country-level and product-level data, and a longer panel data analysis. We consider measures of physical, virtual, and language distance jointly – the latter two proxying for ease of communication. We find evidence of larger trade declines in more distant country dyads and underscore the relevance of information frictions rather than shipment costs. Physical distance matters for trade volatility beyond goods, as do virtual and language distances. Physical and virtual distances amplify each other's effects at the country level, as do virtual and language distances at the product level. Distance effects are also weaker for homogenous products and foreign direct investment and banking activity entailing local presence, again pointing to the importance of information frictions.
The currency used in invoicing international trade matters for the impact of exchange rate movements in the presence of price rigidities. We present stylized facts on specific macro, micro and other ...drivers of invoicing based on 45 million Canadian import transactions. Four main results emerge. First, a large share of invoicing takes place in “vehicle” currencies that are neither the exporters nor the importers. Second, we document a novel link between the size of individual transactions and invoicing. Both the absolute value of a transaction and its relative size at the industry level matter. Third, the exchange rate plays an important role along three dimensions: exchange rate volatility, exchange rate regime, and currency transaction volumes in foreign exchange markets. Finally, we confirm the role of the market share of an exporting country at the industry level. Our results identify the most salient patterns in order to guide further developments in theoretical models of invoicing currency choice.
Abstract Since the global financial crisis, a rich and expanding literature on the so‐called global financial cycle (GFCy) has emerged. This has fueled a debate in academic and policy circles on how ...to measure the GFCy, and how it impacts international capital flows, possibly in a time‐varying way. We review the literature that has shown the relevance of the GFCy, as well as the heterogeneity of its impact on capital flows and its variations over time. We assess how various indicators of the GFCy affect episodes of large capital flows, and find a robust effect especially on episodes driven by non‐resident investors. Non‐linearity and instability over time, notably a less strong impact after the global financial crisis, are found at least for some GFCy indicators.
Recent years have witnessed a large increase in international financial integration in the form of largely offsetting cross-holdings across countries. We assess how such financial leverage affects ...the international transmission of monetary shocks, and find that it leads to sizable welfare differentials that far exceed the impact due to nominal rigidities. We document the relevance of the exact nature of holdings, with bond holdings associated with larger effects than equity holdings. The impact of financial leverage on welfare is also sensitive to the extent of exchange rate pass-through and the substitutability between goods produced in different countries.
We explore the major driving forces for currency invoicing in international trade with a simple model and a novel dataset covering 24 countries. We contrasts a “coalescing” effect, where exporters ...minimize the movements of their prices relative to their competitors', with incentives to hedge macroeconomic volatility and transaction costs. The key determinants of invoice currency choice are industry features and country size, with some role for foreign-exchange bid–ask spreads. The coalescing effect also goes a long way to explaining the well-known dominance of the dollar. Trade flows to the United States are predominantly invoiced in dollar, as foreign exporters face competition with U.S. firms. The use of the dollar in trade flows that do not involve the United States reflects trade in homogeneous products where firms need to keep their price in line with their competitors'.
International capital flows Tille, Cédric; van Wincoop, Eric
Journal of international economics,
03/2010, Letnik:
80, Številka:
2
Journal Article
Recenzirano
The surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice. We develop the implications of portfolio choice for both gross ...and net international capital flows in the context of a simple two-country dynamic stochastic general equilibrium (DSGE) model. We focus on the time-variation in portfolio allocation following shocks, and resulting capital flows. Endogenous time-variation in expected returns and risk, which are the key determinants of portfolio choice, affect capital flows in often subtle ways. The model is consistent with a broad range of empirical evidence. An additional contribution of the paper is to overcome the technical difficulty of solving DSGE models with portfolio choice by developing a broadly applicable solution method.
An ongoing active debate considers the role of the Global Financial Cycle (GFC) in driving international capital flows - especially in emerging economies - as well as the policy options available to ...absorb their impact. We make two contributions to the debate. First, we rely on a structural measure of the GFC developed in a companion paper to identify episodes of large capital flows and currency crises driven by global conditions. Second, using both OLS and instrumental variables we evaluate whether the availability and actual use of elements of the Global Financial Safety Net (GFSN) can help emerging markets cushion the impact of these episodes. We find some evidence that potential access to IMF support can help countries. We also find that the use of IMF support and reserves cushions the impact of global shocks on GDP growth. This effect is quite heterogeneous across types of crises and across time, as it is mostly present during currency crises, and the benefits only occur with a delay.
It is well established that private information is critical to our understanding of asset prices. In this paper we argue that it also affects international capital flows and use a simple two-country ...DSGE model to illustrate its impact. We show that private information (i) increases the volatility of both net and gross capital flows, (ii) leads to a high correlation between capital inflows and outflows, (iii) leads to a disconnect of capital flows from observed macro fundamentals and (iv) implies that capital flows contain information about the future macro fundamentals. We also show that dispersed information affects capital flows both through asset prices and directly, so that the impact on flows is not just the mirror image of the impact on prices.
The U.S. dollar holds a dominant place in the invoicing of international trade. In addition to a direct role for most U.S. exports and imports, it plays a global role for trade flows outside the ...United States. Using a simple center–periphery model, we show that this global role magnifies the exposure of periphery countries to the U.S.'s monetary policy even when trade flows with the U.S. are limited. This generates gains from coordinated monetary policy, as U.S. policy leads to inefficient movements in intra-periphery relative prices. Despite this inefficiency, flexible exchange rates remain valuable.
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