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Working Paper
Credit Migration and Covered Interest Rate Parity
Liao, Gordon Y. (2019-08)
This paper examines the connection between deviations in covered interest rate parity and differences in the credit spread of bonds of similar risk but different currency denomination. These two pricing anomalies are highly aligned in both the time series and the cross-section of currencies. The composite of these two pricing deviations ? the corporate basis ? represents the currency-hedged borrowing cost difference between currency regions and explains up to a third of the variation in the aggregate corporate debt issuance flow. I show that arbitrage aimed at exploiting one type of security ...
International Finance Discussion Papers , Paper 1255

Working Paper
Managing Capital Flows in the Presence of External Risks
Tenorio, Gabriel; Reyes-Heroles, Ricardo M. (2017-09)
We introduce external risks, in the form of shocks to the level and volatility of world interest rates, into a small open economy model subject to the risk of sudden stops?large recessions together with abrupt reversals in capital inflows| and characterize optimal macroprudential policy in response to these shocks. In the model, collateral constraints create a pecuniary externality that leads to "overborrowing" and sudden stops that arise when the constraints bind. The typical sudden stop generated by the model replicates existing empirical evidence for emerging market economies: Low and ...
International Finance Discussion Papers , Paper 1213

Working Paper
Even Keel and the Great Inflation
Mukherjee, Sanchita; Humpage, Owen F.; Consolvo, Victoria (2020-10-23)
During the early part of the Great Inflation (1965-1975), the Federal Reserve undertook even-keel operations to assist the US Treasury’s coupon security sales. Accordingly, the central bank delayed any tightening of monetary policy and permanently injected reserves into the banking system. Using real-time Taylor-type and McCallum-like reaction functions, we show that the Fed routinely undertook these operations only when it was otherwise tightening monetary policy. Using a quantity-equation framework, we show that the Federal Reserve’s even-keel actions added approximately one percentage ...
Working Papers , Paper 20-33

Working Paper
Cross-border returns differentials
Curcuru, Stephanie E.; Warnock, Francis E.; Dvorak, Tomas (2007)
Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, we find that the returns differential of U.S. claims over U.S. liabilities is far smaller than previously reported and, importantly, is near zero for portfolio equity and debt securities. ; > For portfolio securities, we confirm our finding using a separate dataset on the actual foreign equity and bond ...
Globalization Institute Working Papers , Paper 04

Working Paper
The effects of government spending on real exchange rates: evidence from military spending panel data
Miyamoto, Wataru; Nguyen, Thuy Lan; Sheremirov, Viacheslav (2016-10-01)
Using panel data on military spending for 125 countries, we document new facts about the effects of changes in government purchases on the real exchange rate, consumption, and current accounts in both advanced and developing countries. While an increase in government purchases causes real exchange rates to appreciate and increases consumption significantly in developing countries, it causes real exchange rates to depreciate and decreases consumption in advanced countries. The current account deteriorates in both groups of countries. These findings are not consistent with standard ...
Working Papers , Paper 16-14

Working Paper
International Spillovers of Monetary Policy : Conventional Policy vs. Quantitative Easing
Curcuru, Stephanie E.; Kamin, Steven B.; Rodriguez, Marius del Giudice; Li, Canlin (2018-08-21)
This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short rates, while balance-sheet policy is believed act through the term premium. To distinguish the effects of these two types of policies we use a term structure model to decompose ...
International Finance Discussion Papers , Paper 1234

Working Paper
US Monetary Policy and International Bond Markets
Gilchrist, Simon; Zakrajšek, Egon; Yue, Vivian Z. (2018-02-15)
This paper uses high-frequency data to analyze the effects of US monetary policy--during the conventional and unconventional policy regimes--on foreign government bonds markets in advanced and emerging market economies. The results indicate that an expansionary US monetary policy steepens the foreign yield curve--denominated in local currency--during a conventional US monetary policy regime and flattens the foreign yield curve during an unconventional policy regime. The passthrough of unconventional US monetary policy to foreign bond yields is, on balance, comparable to that of conventional ...
Finance and Economics Discussion Series , Paper 2018-014

Journal Article
Chinese Foreign Exchange Reserves, Policy Choices, and the U.S. Economy
Neely, Christopher J. (2017)
China is both a major trading partner of the United States and the largest official holder of U.S. assets in the world. The value of Chinese foreign exchange reserves peaked at just over $4 trillion in June 2014 but has since declined to $3.19 trillion (as of August 2016). This very large decline in foreign exchange reserves is unprecedented, and some analysts have speculated that continued sales of these (mostly U.S.) assets might significantly impact the U.S. and global economies. This article explains the reasons for this large decline in official assets, China?s available policy choices, ...
Review , Volume 99 , Issue 2

Report
Intermediary Balance Sheets and the Treasury Yield Curve
Du, Wenxin; Hébert, Benjamin; Li, Wenhao (2022-07-01)
We have documented a regime change in the U.S. Treasury market post-Global Financial Crisis (GFC). We first derived bounds on Treasury yields that account for dealer balance sheet costs, which we call the net short and net long curves. We show that actual Treasury yields moved from the net short curve pre- GFC to the net long curve post-GFC, consistent with the shift in the dealers’ net position. We then use a stylized model to demonstrate that increased bond supply and tightening leverage constraints can explain this change in regime. This change, in turn, helps explain negative swap ...
Staff Reports , Paper 1023

Working Paper
Global Drivers of Gross and Net Capital Flows
Davis, J. Scott; Van Wincoop, Eric; Valente, Giorgio (2019-03-27)
While prior to the global financial crisis, the empirical international capital flow literature has focused on net capital flows (the current account), since the crisis there has been an increased focus on gross flows. In this paper we jointly analyze global drivers of gross flows (outflows plus inflows) and net flows (outflows minus inflows) by estimating a latent factor model. We find evidence of two global factors, which we call the GFC (global financial cycle) factor and a commodity price factor as they closely track respectively the Miranda-Agrippino and Rey asset price factor and an ...
Globalization Institute Working Papers , Paper 357

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