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International Spillovers and Local Credit Cycles
Julian di Giovanni, Federal Reserve Bank of New York

Baskaya, di Giovanni, Kalemli-Ozcan, and Peydró show that capital inflows lead to a decrease in the cost of borrowing and an associated domestic credit expansion in an emerging economy, Turkey, during 2003–2013. Instrumenting capital inflows by changes in global risk (VIX) at the aggregate level and using a firm-bank-loan level dataset to isolate “capital inflow” driven credit supply at the micro level, the researchers show that during episodes of low global risk and U.S. quantitative easing, bank intermediated domestic credit for corporates expands and the cost of such credit declines. Credit supply that is driven by exogenous capital inflows can explain roughly 30 percent of the observed change in aggregate credit growth. The researchers' data allow them to identify heterogeneous financial constraints. Larger banks provide more loans and charge lower interest rates relative to smaller banks when global liquidity is abundant, whereas smaller banks charge relatively lower interest rates on foreign currency loans during such periods. As they show, during periods of low global risk, domestic currency loans become cheaper relative to foreign currency loans, a fact that possibly drives total credit growth and the procylicality of larger banks. The researchers' interpretation of these findings is that larger banks’ funding costs decrease more during episodes of abundant global liquidity, given their better connections to international financial markets, and this lower funding cost is reflected in lower real borrowing cost for firms. The results suggest that empirical studies focusing on cross-country data alone will miss key international spillover effects, since time-varying heterogeneity at the micro level lies at the heart of the relaxation of financial constraints due to capital flows.

World Shocks, World Prices, And Business Cycles: An Empirical Investigation
Andrés Fernández, Central Bank of Chile
Stephanie Schmitt-Grohé, Columbia University and NBER
Martín Uribe, Columbia University and NBER

There is no consensus on the importance of world prices in explaining aggregate fluctuations in individual countries. Existing studies, both theoretical and empirical, concentrate on single measures of the terms of trade constructed in different ways. This paper presents an empirical framework in which, for each country, agricultural, metal, and fuel commodity prices enter separately as mediators of world disturbances. Fernández, Schmitt-Grohé, and Uribe find that jointly, these three commodity prices explain on average 30 percent of aggregate fluctuations in a group of 138 countries. This contribution lies in between the range of values obtained by existing empirical and theoretical studies.

Financial Intermediation, Exchange Rates, and Unconventional Policy in an Open Economy
Luis Felipe Céspedes, Universidad de Chile
Roberto Chang, Rutgers University and NBER
Andrés Velasco, London School of Economics

Cespedes, Chang, and Velasco study the effects of unconventional policies in an open economy where financial intermediaries face occasionally binding collateral constraints. The model highlights interactions among the real exchange rate, interest rates, and financial frictions. The exchange rate can affect international credit constraints via a net worth effect and a novel leverage ratio effect. Unconventional policies are non-neutral if financial constraints bind. Credit programs are most effective when targeted towards financial intermediaries. Sterilized foreign exchange interventions matter because the increased availability of tradables caused by sterilization relaxes financial frictions. This perspective is new in the literature.

Disaster Risk and Asset Returns: An International Perspective
Karen K. Lewis, University of Pennsylvania and NBER
Edith Liu, Federal Reserve Board of Governors

Recent studies have shown that disaster risk can generate an equity premium similar to the data. Moreover, time variation in the risk of disasters can help explain the excess volatility of equity returns over that of government bill rates. However, these studies have ignored the cross-country asset pricing implications of the disaster risk model. This paper shows that standard disaster risk model assumptions lead to counterfactual international asset pricing implications. Given consumption pricing moments, disaster risk cannot explain the range of equity premia and government bill rates nor the high degree of equity return correlation. Moreover, the independence of disasters presumed in some studies generates counterfactually low cross-country correlations in equity markets. Alternatively, if disasters are all shared, the model generates correlations that are excessively high. Lewis and Liu show that common and idiosyncratic components of disaster risk are needed to explain the pattern in consumption and equity co-movements.

Revisiting the Commodity Curse: a Financial Perspective
Enrique Alberola, Bank for International Settlements (BIS)
Gianluca Benigno, Federal Reserve Bank of New York

This paper was distributed as Working Paper 23169, where an updated version may be available.

Measuring the Natural Rate of Interest: International Trends and Determinants
Kathryn Holston, Harvard University
Thomas Laubach, Federal Reserve Board
John Williams, Federal Reserve Bank of San Francisco

U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies – Canada, the Euro Area, and the United Kingdom. Holston, Laubach, and Williams find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

Optimal Capital Flows in a Model with Financial Frictions and Imperfectly Competitive Banking Sector
Vania Stavrakeva, London Business School

The extent of foreign monetary policy spillovers can vary across countries. This paper studies one potential source of this heterogeneity -- different degrees of banking sector competition -- and the relevant optimal policy. Stavrakeva builds a model with imperfect banking sector competition and financial frictions, which generates inefficient pecuniary externalities. A more competitive banking sector implies larger foreign monetary policy spillovers and higher optimal tax on inflows, conditional on the cost of accessing foreign interbank markets not being too large. However, if this cost is fairly large, larger spillovers need not imply an optimally higher capital inflow tax. Furthermore, there exists an "optimal" level of banking sector competition for which the over-investment due to the pecuniary externalities cancels off the under-investment due to the monopolistic competition and no capital controls are required. Finally, Stavrakeva tests the comparative statics of the model using individual bank-level data and show that there is support for the predictions of the model in emerging markets.

If the Fed Sneezes, Who Catches a Cold?
Luca Dedola, European Central Bank
Livio Stracca, European Central Bank
Giulia Rivolta, University of Brescia

We look at the global e¤ects of US monetary policy shocks using a two stage
approach. We …rst estimate a large Bayesian VAR and identify US monetary policy
shocks using sign restrictions, and then analyse their e¤ects on a number of real
and …nancial variables in countries other than the US. We …nd that a surprise
US monetary tightening leads to a dollar appreciation vis-á-vis most countries in
our sample. Moreover, in most countries industrial production and real GDP fall,
unemployment rises, and in‡ation declines. We …nd signi…cant heterogeneity across
countries, and emerging economies tend to experience larger e¤ects. At the same
time, we do not …nd any systematic relation between the country responses and
the most likely relevant country characteristics, such as income level, exchange rate
regime, …nancial openness, trade openness vs. the US, and dollar exposure.
Keywords: monetary policy shocks, international transmission, exchange rate
regime, capital mobility.
JEL: F32, F34.

Preliminary and incomplete version, please do not circulate. The views expressed in the paper belong
to the authors and are not necessarily shared by the European Central Bank (ECB). We thank Peter
Karadi for sharing his data and Michele Lenza his BVAR codes, as well as M. Ca'Zorzi, F. Canova, G.
Corsetti, T. Dahlhaus, G. Georgiadis, L. Goldberg, O. Jeanne, S. Kalemli-Ozcan, P. Lane, A. Mehl, G.
Primiceri, J. Rogers, V. Vanasco, I. van Robays, and participants in seminars at the NY Fed, NBER SI
IFM 2015, CEMLA, the ECB and the 3rd University of Ghent Workshop on Empirical Macroeconomics
for useful suggestions.





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