Using regulatory data, we study German bank lending in countries targeted by financial sanctions. We find that domestic banks in Germany reduce lending in sanctioned countries, whereas their foreign bank affiliates outside Germany increase lending. In some cases, this is because the bank affiliates’ host countries have not imposed sanctions themselves. However, even German bank affiliates in host countries that enact sanctions like Germany increase lending if these host countries lack strong institutions and anticrime policies. These findings suggest that even universally adopted sanctions distort bank capital flows and competition if the level of their enforcement varies across bank locations.
{"title":"Freeze! Financial Sanctions and Bank Responses","authors":"Matthias Efing, Stefan Goldbach, Volker Nitsch","doi":"10.2139/ssrn.3297404","DOIUrl":"https://doi.org/10.2139/ssrn.3297404","url":null,"abstract":"\u0000 Using regulatory data, we study German bank lending in countries targeted by financial sanctions. We find that domestic banks in Germany reduce lending in sanctioned countries, whereas their foreign bank affiliates outside Germany increase lending. In some cases, this is because the bank affiliates’ host countries have not imposed sanctions themselves. However, even German bank affiliates in host countries that enact sanctions like Germany increase lending if these host countries lack strong institutions and anticrime policies. These findings suggest that even universally adopted sanctions distort bank capital flows and competition if the level of their enforcement varies across bank locations.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-05-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131128949","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper analyzes the consumption-real exchange rate anomaly in a multi-country model with complete markets under various preference specifications: (i) standard time-additive preferences; (ii) recursive preferences of Epstein and Zin; and (iii) habit formation preferences of Campbell and Cochrane. Recent research indicates that non-standard preferences can successfully replicate the low correlation between consumption and real exchange rates as in the data, thus resolving the anomaly. Optimal consumption risk sharing requires a reallocation of traded goods across countries. I show that such an optimal reallocation in this class of models links bilateral real exchange rate dynamics to consumption in both countries and to the ratio of domestic consumption of home endowment relative to exports of domestic goods to the foreign country. This implication finds little empirical support with data for 9 OECD economies.
{"title":"Consumption of traded goods, exchange rate dynamics, and risk sharing.","authors":"Maxym Chaban","doi":"10.2139/ssrn.3443890","DOIUrl":"https://doi.org/10.2139/ssrn.3443890","url":null,"abstract":"The paper analyzes the consumption-real exchange rate anomaly in a multi-country model with complete markets under various preference specifications: (i) standard time-additive preferences; (ii) recursive preferences of Epstein and Zin; and (iii) habit formation preferences of Campbell and Cochrane. Recent research indicates that non-standard preferences can successfully replicate the low correlation between consumption and real exchange rates as in the data, thus resolving the anomaly. Optimal consumption risk sharing requires a reallocation of traded goods across countries. I show that such an optimal reallocation in this class of models links bilateral real exchange rate dynamics to consumption in both countries and to the ratio of domestic consumption of home endowment relative to exports of domestic goods to the foreign country. This implication finds little empirical support with data for 9 OECD economies.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131196220","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
J. Ferry, Badri Narayanan Gopalakrishnan, Amanda Mayoral
On May 5, 2020, the U.S. Trade Representative announced plans to negotiate a free trade agreement with the United Kingdom. We use GTAP to model the economic impacts of this free trade agreement, exclusively focusing on the bilateral tariff elimination. We find that a standard GTAP model leads to a general improvement in economic conditions for both countries, but more for the U.K. than the U.S. However, in a second model we build on previous studies that incorporate worker displacement effects and our results show a small negative impact to employment for both countries and a negative effect on GDP for the U.S. Our results suggest the importance of incorporating worker displacement when modelling international trade.
{"title":"The Economic Impact of Tariff Eliminations in a U.S.-U.K. Free Trade Agreement: A CGE Model with Worker Displacement","authors":"J. Ferry, Badri Narayanan Gopalakrishnan, Amanda Mayoral","doi":"10.2139/ssrn.3894566","DOIUrl":"https://doi.org/10.2139/ssrn.3894566","url":null,"abstract":"On May 5, 2020, the U.S. Trade Representative announced plans to negotiate a free trade agreement with the United Kingdom. We use GTAP to model the economic impacts of this free trade agreement, exclusively focusing on the bilateral tariff elimination. We find that a standard GTAP model leads to a general improvement in economic conditions for both countries, but more for the U.K. than the U.S. However, in a second model we build on previous studies that incorporate worker displacement effects and our results show a small negative impact to employment for both countries and a negative effect on GDP for the U.S. Our results suggest the importance of incorporating worker displacement when modelling international trade.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"177 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125815868","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Motivated by evidence of systematic forecast errors by market participants and professional forecasters, we construct a model of exchange rate determination where investors each (1) receive noisy private signals about the future path of interest rate differentials between the US and other countries and (2) overestimate the persistence of interest rate differentials. Our model is able to explain the forward premium puzzle, a well-known failure of the uncovered interest rate parity condition implied by traditional models (UIP), in a manner consistent with the survey evidence, in addition to a number of additional puzzles that existing models have struggled to simultaneously explain. These include the initial underreaction and delayed overreaction of currencies in response to monetary news; positive short-horizon and negative long-horizon autocorrelations of currency excess returns; and the lower return predictability of interest rate differentials for UIP trades implemented with longer maturity bonds. Our model is also useful for understanding the strong relationship between survey-based measures of macroeconomic news and exchange rates despite the weak relationship between macroeconomic fundamentals and exchange rates, the persistence of subjective beliefs, and the seeming reversal of the failure of UIP in recent years. Our results highlight the important role that investors' beliefs may play in exchange rate behavior.
{"title":"The Role of Beliefs in Asset Prices: Evidence from Exchange Rates","authors":"João Valente, K. Vasudevan, Tian Wu","doi":"10.2139/ssrn.3872077","DOIUrl":"https://doi.org/10.2139/ssrn.3872077","url":null,"abstract":"Motivated by evidence of systematic forecast errors by market participants and professional forecasters, we construct a model of exchange rate determination where investors each (1) receive noisy private signals about the future path of interest rate differentials between the US and other countries and (2) overestimate the persistence of interest rate differentials. Our model is able to explain the forward premium puzzle, a well-known failure of the uncovered interest rate parity condition implied by traditional models (UIP), in a manner consistent with the survey evidence, in addition to a number of additional puzzles that existing models have struggled to simultaneously explain. These include the initial underreaction and delayed overreaction of currencies in response to monetary news; positive short-horizon and negative long-horizon autocorrelations of currency excess returns; and the lower return predictability of interest rate differentials for UIP trades implemented with longer maturity bonds. Our model is also useful for understanding the strong relationship between survey-based measures of macroeconomic news and exchange rates despite the weak relationship between macroeconomic fundamentals and exchange rates, the persistence of subjective beliefs, and the seeming reversal of the failure of UIP in recent years. Our results highlight the important role that investors' beliefs may play in exchange rate behavior.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117187643","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The purpose of this paper is to empirically analyze the United States’ trade patterns in goods based on the gravity model and evaluate whether trade agreements such as the North American Free Trade Agreement (NAFTA) are in the best interest of the US economy. The Gravity Model, US-Canada empirical trade data, and US-Mexico data supports the theoretical model. While it’s hard to incorporate all the factors into the assumptions in estimating the trade among NAFTA, the econometric model proved that there is some positive impact in terms of increasing the overall goods trading volume as a result of the United States implementing NAFTA in the early 1990s. However, it is hard to evaluate the overall benefits due to the limitations of the model such as small sample sizes and few independent variables. The Ricardian model and the Heckscher-Ohlin model are used to provide theoretical grounds.
{"title":"A Gravity Model Analysis of the Impact On U.S.A.’s Involvement in NAFTA","authors":"Xinye Yang","doi":"10.2139/ssrn.3806949","DOIUrl":"https://doi.org/10.2139/ssrn.3806949","url":null,"abstract":"The purpose of this paper is to empirically analyze the United States’ trade patterns in goods based on the gravity model and evaluate whether trade agreements such as the North American Free Trade Agreement (NAFTA) are in the best interest of the US economy. The Gravity Model, US-Canada empirical trade data, and US-Mexico data supports the theoretical model. While it’s hard to incorporate all the factors into the assumptions in estimating the trade among NAFTA, the econometric model proved that there is some positive impact in terms of increasing the overall goods trading volume as a result of the United States implementing NAFTA in the early 1990s. However, it is hard to evaluate the overall benefits due to the limitations of the model such as small sample sizes and few independent variables. The Ricardian model and the Heckscher-Ohlin model are used to provide theoretical grounds.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124916385","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the relation between 39 firm-level characteristics and stock returns in 40 Non-U.S. countries using instrumented principal components analysis (IPCA). A conditional factor model with six latent factors does well in describing return variation, but contrary to studies for the U.S. market, characteristics continue to anomalously affect returns beyond instrumenting for systemic exposure. The global model performs better in emerging than in developed markets, while showing substantial differences across countries. On average, only ten characteristics contribute significantly to the models' performance. Market beta, investment, value and momentum characteristics do not instrument for systemic exposure.
{"title":"Firm Characteristics and Global Stock Returns: A Conditional Asset Pricing Model","authors":"Steffen Windmüller","doi":"10.2139/ssrn.3760593","DOIUrl":"https://doi.org/10.2139/ssrn.3760593","url":null,"abstract":"This paper studies the relation between 39 firm-level characteristics and stock returns in 40 Non-U.S. countries using instrumented principal components analysis (IPCA). A conditional factor model with six latent factors does well in describing return variation, but contrary to studies for the U.S. market, characteristics continue to anomalously affect returns beyond instrumenting for systemic exposure. The global model performs better in emerging than in developed markets, while showing substantial differences across countries. On average, only ten characteristics contribute significantly to the models' performance. Market beta, investment, value and momentum characteristics do not instrument for systemic exposure.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130016426","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop and apply a new methodology to study the transmission mechanisms of international macroeconomic and financial shocks in the context of emerging markets. Our approach combines aspects of factor analysis and GVAR models by replacing the cross-unit averages that serve as foreign variables in the GVAR model with macroeconomic and financial factors extracted hierarchically from unbalanced panels of country-level data. Furthermore, we allow for time variation in both the model parameters and shock volatility. Our key empirical findings are as follows. First, we find that the macroeconomic conditions in the emerging economies under consideration became more sensitive to global financial conditions during and after the recent financial crisis. Moreover, they appear more concerned with financial stability as they do not try to offset the contractionary effects of tightening in global financial conditions by decreasing their policy rates. Second, deterioration of financial conditions in other emerging market country groups has a loosening effect on domestic financial conditions. Third, as we include a global financial risk factor along with the US monetary policy rate, our results suggest that the contractionary effects of US interest rate shocks are taken over by the global financial risk shock. Lastly, we find some evidence that macroeconomic interdependencies among emerging economies have been increasing while their dependencies on advanced economies have been decreasing over time.
{"title":"An Analysis of International Shock Transmission: A Multi-Level Factor Augmented TVP GVAR Approach","authors":"Bahar Sungurtekin Hallam","doi":"10.2139/ssrn.3398285","DOIUrl":"https://doi.org/10.2139/ssrn.3398285","url":null,"abstract":"We develop and apply a new methodology to study the transmission mechanisms of international<br>macroeconomic and financial shocks in the context of emerging markets. Our approach combines<br>aspects of factor analysis and GVAR models by replacing the cross-unit averages that serve as<br>foreign variables in the GVAR model with macroeconomic and financial factors extracted hierarchically from unbalanced panels of country-level data. Furthermore, we allow for time variation in both the model parameters and shock volatility. Our key empirical findings are as follows. First, we find that the macroeconomic conditions in the emerging economies under consideration became more sensitive to global financial conditions during and after the recent financial crisis. Moreover, they appear more concerned with financial stability as they do not try to offset the contractionary effects of tightening in global financial conditions by decreasing their policy rates. Second, deterioration of financial conditions in other emerging market country groups has a loosening effect on domestic financial conditions. Third, as we include a global financial risk factor along with the US monetary policy rate, our results suggest that the contractionary effects of US interest rate shocks are taken over by the global financial risk shock. Lastly, we find some evidence that macroeconomic interdependencies among emerging economies have been increasing while their dependencies on advanced economies have been decreasing over time.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"127 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134182031","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the relationship between trade openness and economic growth in Bangladesh. Contrary to the previous studies we use the data only for the period after the trade liberalization in the early 1990s. Both cointegration and Granger causality analysis are used to find the short-run and long-run effects of trade openness on economic growth. The result indicates that trade openness has positive and significant effects on economic growth in Bangladesh. Granger causality analysis tells us that trade openness causes economic growth in the long run, though not in the short run. Other factors like gross domestic investment, labor force, and education also cause economic growth in the long run.
{"title":"The Relationship between Trade Openness and Economic Growth in Bangladesh: An Empirical Analysis","authors":"Md Musleh Uddin Hasan","doi":"10.2139/ssrn.3905331","DOIUrl":"https://doi.org/10.2139/ssrn.3905331","url":null,"abstract":"This paper examines the relationship between trade openness and economic growth in Bangladesh. Contrary to the previous studies we use the data only for the period after the trade liberalization in the early 1990s. Both cointegration and Granger causality analysis are used to find the short-run and long-run effects of trade openness on economic growth. The result indicates that trade openness has positive and significant effects on economic growth in Bangladesh. Granger causality analysis tells us that trade openness causes economic growth in the long run, though not in the short run. Other factors like gross domestic investment, labor force, and education also cause economic growth in the long run.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116559870","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract Do the benefits of central bank transparency depend on the structure of financial markets? We address this question in a two-country model with dispersed information among price-setting firms. The volatility of the real exchange rate is non-monotonic in the precision of public communications. Despite this non-monotonicity, under complete markets, greater provision of public information always improves welfare and full transparency is optimal. By contrast, under incomplete markets, more accurate public signals can decrease welfare by exacerbating the cost of cross-country demand imbalances. If the trade elasticity is low, optimal public announcements are intentionally imprecise.
{"title":"Central Bank Transparency, Exchange Rates, and Demand Imbalances","authors":"Giacomo Candian","doi":"10.2139/ssrn.3583097","DOIUrl":"https://doi.org/10.2139/ssrn.3583097","url":null,"abstract":"Abstract Do the benefits of central bank transparency depend on the structure of financial markets? We address this question in a two-country model with dispersed information among price-setting firms. The volatility of the real exchange rate is non-monotonic in the precision of public communications. Despite this non-monotonicity, under complete markets, greater provision of public information always improves welfare and full transparency is optimal. By contrast, under incomplete markets, more accurate public signals can decrease welfare by exacerbating the cost of cross-country demand imbalances. If the trade elasticity is low, optimal public announcements are intentionally imprecise.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116560888","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I study the role of foreign currency risk in affecting export behavior. The dominant role of the United States Dollar in the international payments system exposes many emerging market firms to exchange rate risk in international trade due to unexpected movements in prices paid in local currency. In 2008, Brazil and Argentina agreed to a “Local Currency Payments” (SML) system, which allowed exporters and importers to operate in their own local currencies. This system was responsible for nearly 10% of exports from Brazil to Argentina by 2012. I estimate the effect of eliminating foreign currency risk via the SML system by leveraging plausibly exogenous municipal variation in access to authorized financial institutions. Using a triple difference design, I find that municipalities with high access to the SML system exported 22% more to Argentina relative to other South American export destinations compared to municipalities with low access. Applying estimates of the trade elasticity from the literature, this effect is equivalent to reducing trade barriers by approximately 10%. I complement this finding with a firm-level analysis using confidential customs data. Export transactions through the SML system were on average 44% larger than otherwise similar transactions. In a stylized model of export behavior, I discuss these results as stemming from export frictions such as risk aversion or currency fees.
{"title":"Foreign Currency as a Barrier to Trade: Evidence from Brazil","authors":"Todd Messer","doi":"10.2139/ssrn.3888401","DOIUrl":"https://doi.org/10.2139/ssrn.3888401","url":null,"abstract":"I study the role of foreign currency risk in affecting export behavior. The dominant role of the United States Dollar in the international payments system exposes many emerging market firms to exchange rate risk in international trade due to unexpected movements in prices paid in local currency. In 2008, Brazil and Argentina agreed to a “Local Currency Payments” (SML) system, which allowed exporters and importers to operate in their own local currencies. This system was responsible for nearly 10% of exports from Brazil to Argentina by 2012. I estimate the effect of eliminating foreign currency risk via the SML system by leveraging plausibly exogenous municipal variation in access to authorized financial institutions. Using a triple difference design, I find that municipalities with high access to the SML system exported 22% more to Argentina relative to other South American export destinations compared to municipalities with low access. Applying estimates of the trade elasticity from the literature, this effect is equivalent to reducing trade barriers by approximately 10%. I complement this finding with a firm-level analysis using confidential customs data. Export transactions through the SML system were on average 44% larger than otherwise similar transactions. In a stylized model of export behavior, I discuss these results as stemming from export frictions such as risk aversion or currency fees.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"40 2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124386075","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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