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Topics in International Finance

Paper Session

Friday, Jan. 5, 2024 2:30 PM - 4:30 PM (CST)

Convention Center, 221B
Hosted By: American Economic Association
  • Chair: Saroj Bhattarai, University of Texas-Austin

Dollar Debt and the Inefficient Global Financial Cycle

Paul Fontanier
,
Yale University

Abstract

This paper proposes a tractable model of the Global Financial Cycle and study its welfare implications for emerging market economies (EMEs). When local firms issue debt denominated in dollars, central banks must increase their policy rate as the U.S. tightens in order to offset balance sheet effects stemming from the depreciation of their currency. When global financial markets are imperfect, this synchronized policy response has negative spillovers: all individual countries seek to attract capital inflows at the expense of one another, exacerbating the Global Financial Cycle. This congestion externality requires further tightening and results in inefficiently low levels of output and employment in EMEs, and generates gains from coordination. On the contrary, discouraging debt issuance in dollars through macroprudential policy has positive spillovers, and does not necessarily require coordination between EMEs. Its optimal use dampens the Global Financial Cycle and its inefficiencies.

Geoeconomic Fragmentation and Commodities Markets

Martin Stuermer
,
International Monetary Fund
Petia Topalova
,
International Monetary Fund
Jorge Alvarez
,
International Monetary Fund
Mehdi Benatiya Andaloussi
,
International Monetary Fund
Chiara Maggi
,
International Monetary Fund

Abstract

This paper studies the economic impact of fragmentation of commodity trade. We assemble a novel dataset of production and bilateral trade flows of the 48 most important energy, mineral and agricultural commodities. We develop a partial equilibrium framework to assess which commodity markets are most vulnerable in the event of trade disruptions and the economic risks that they pose. We find that commodity trade fragmentation -- which has accelerated since Russia's invasion of Ukraine -- could cause large price changes and price volatility for many commodities. Mineral markets critical for the clean energy transition and selected agricultural commodity markets appear among the most vulnerable in the hypothetical segmentation of the world into two geopolitical blocs examined in the paper. Trade disruptions result in heterogeneous impacts on economic surplus across countries. However, due to offsetting effects across commodity producing and consuming countries, surplus losses appear modest at the global level.

Real Consequences of Shocks to Intermediaries Supplying Corporate Hedging Instruments

Hyeyoon Jung
,
Federal Reserve Bank of New York

Abstract

I show that shocks to financial intermediaries supplying hedging instruments to corporations have real effects. I exploit a quasi-natural experiment in South Korea in 2010, where banking regulations required banks to hold enough capital for taking foreign exchange derivatives (FXD) positions. Using the variation in exposure to this regulation across different banks, I find that the regulation caused a reduction in the supply of FXD, leading to a significant decline in exports for firms contracting derivatives with more exposed banks. The impact was large for smaller firms that relied heavily on hedging using FXD. These results indicate the crucial role of intermediaries in allocating risks through derivatives provision, and establish a causal relationship between financial hedging and real economic outcomes.

The Dollar in an Era of International Retrenchment

Ryan Chahrour
,
Cornell University
Rosen Valchev
,
Boston College

Abstract

Recent trends suggest the world economy may be tending towards an equilibrium with two distinct trading blocs, each internally integrated, but with significant isolation between the blocs. This paper uses a quantitative theory to explore how far this bifurcation would need to go to pose a threat to the special role of the Dollar. The theory will be useful to explain which policies may encourage or prevent the emergence of a distinct common currency in each block. Welfare consequences and the dynamics of a possible transition path will be considered.
JEL Classifications
  • F4 - Macroeconomic Aspects of International Trade and Finance