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59 posts on "International Economics"

May 18, 2016

International Evidence on the Use and Effectiveness of Macroprudential Policies



LSE_International Evidence on the Use and Effectiveness of Macroprudential Policies

In recent years, policymakers in advanced and emerging economies have employed a variety of macroprudential policy tools—targeted rules or requirements that enhance the stability of the financial system as a whole by addressing the interconnectedness of individual financial institutions and their common exposure to economic risk factors. To examine the foreign experience with these tools, we constructed a novel macroprudential policy (MAPP) index. This index allows us to quantify the effects of these policies on bank credit and house prices, two variables that are often the target of policymakers because of their links to boom-bust leverage cycles. We then used the index in the empirical analysis to measure the effectiveness of these policies in emerging market countries and advanced economies. Our estimates suggest that macroprudential tightening can significantly reduce credit growth and house price appreciation.

Continue reading "International Evidence on the Use and Effectiveness of Macroprudential Policies" »

Posted by Blog Author at 7:00 AM in International Economics, Monetary Policy | Permalink | Comments (0)

May 09, 2016

The Turnaround in Private and Public Financial Outflows from China



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China lends to the rest of the world because it saves much more than it needs to fund its high level of physical investment spending. For years, the public sector accounted for this lending through the Chinese central bank’s purchase of foreign assets, but this changed in 2015. The country still had substantial net financial outflows, but unlike in previous years, more private money was pouring out of China than was flowing in. This shift in private sector behavior forced the central bank to sell foreign assets so that the sum of net private and public outflows would equal the saving surplus at prevailing exchange rates. Explanations for this turnaround by private investors include lower returns on domestic investment spending and a less optimistic outlook for China’s currency.


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Posted by Blog Author at 7:00 AM in Financial Markets, International Economics | Permalink | Comments (0)

May 02, 2016

Lower Oil Prices and U.S. Economic Activity



Lower Oil Prices and U.S. Economic Activity

After a period of stability, oil prices started to decline in mid-2015, and this downward trend continued into early 2016. As we noted in an earlier post, it is important to assess whether these price declines reflect demand shocks or supply shocks, since the two types of shocks have different implications for the U.S. economic outlook. In this post, we again use correlations of weekly oil price changes with a broad array of financial variables to quantify the drivers of oil price movements, finding that the decline since mid-2015 is due to a mix of weaker demand and increased supply. Given strong interest in the drivers of oil prices, the oil price decomposition is information we will be sharing in a new Oil Price Dynamics Report on our public website each Monday starting today. We conclude this post using another model that finds that the higher oil supply boosted U.S. economic activity in 2015, though this impact is expected to wear off in 2016.

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Posted by Blog Author at 7:00 AM in Financial Markets, International Economics, Macroecon | Permalink | Comments (0)

March 30, 2016

The Effect of Exchange Rate Shocks on Domestic Prices



The Effect of Exchange Rate Shocks on Domestic Prices


Changes in exchange rates directly affect import prices. Since the beginning of 2014, the U.S. dollar has strengthened by 17 percent against the currencies of its major trading partners while import prices have fallen by 4 percent. The pass-through from exchange rates into import prices in the United States is estimated to be quite low, at around 30 percent, and this is often attributed to the fact that imports are mostly invoiced in U.S. dollars. In addition to this direct impact of exchange rates on import prices, there can also be an effect on domestic prices. Suppose that a stronger U.S. dollar means that cars imported from Japan will be cheaper for U.S. consumers. If domestic auto producers do not then reduce their U.S. prices they could lose market share. By how much do they adjust their prices? In this post, we draw on a new study—“International Shocks and Domestic Prices: How Large Are Strategic Complementarities?”—that uses micro-level data for Belgian firms to shed light on this question.

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Posted by Blog Author at 7:00 AM in International Economics | Permalink | Comments (1)

March 21, 2016

What Tracks Commodity Prices?



LSE_2016_growth-commodities_klikgaard_460_art

Various news reports have asserted that the slowdown in China was a key factor driving down commodity prices in 2015. It is true that China’s growth eased last year and, owing to its manufacturing-intensive economy, that slackening could reasonably have had repercussions for commodity prices. Still, growth in Japan and Europe accelerated in 2015, with the net result that global growth was fairly steady last year, casting doubt on the China slowdown explanation. An alternative story relies on the strong correlation between the dollar and commodity prices over time. A simple regression shows that both global growth and the dollar track commodity prices, and in this framework, it is the rise of the dollar that captures last year’s drop in commodity prices. Thus a forecast of stable global growth and a relatively unchanged dollar suggests little change in commodity prices in 2016.

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Posted by Blog Author at 7:00 AM in International Economics, Macroecon | Permalink | Comments (3)

January 06, 2016

Hedging Income Fluctuations with Foreign Currency Assets



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The world has gone through a process of financial globalization over the past decades, with countries increasing their holdings of foreign assets and liabilities. At the same time, countries have started to have a more positive foreign currency exposure by reducing their bias toward holding assets in domestic currency instead of foreign currency. One possible reason for these changes is that nations view demand shocks as more likely than supply shocks. That is, a dip in output will be accompanied by lower inflation rather than higher inflation. Monetary policy responds to demand shocks by cutting interest rates and letting the domestic currency depreciate. As a consequence, shifting the currency composition of assets and liabilities to increase net foreign currency holdings is a hedging strategy to protect the country’s income and wealth during downturns.

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Posted by Blog Author at 7:00 AM in Household Finance, International Economics | Permalink | Comments (0)

November 30, 2015

U.S. Banks’ Changing Footprint at Home and Abroad



tall-bank-buildings

Some banks are quite simple, while others are part of complex multi-layered organizations with affiliates in many industries scattered all around the world. The latter organizations are formally called bank holding companies (BHCs). In this post, we investigate changes in BHC geography, especially the rising share of BHC affiliates in tax havens and financial secrecy jurisdictions. We examine what has happened since 2000, including the period after the 2010 Dodd-Frank Act, which focused attention on the size and complexity of large BHCs. Our analysis complements a growing body of work on large and complex BHCs and their global affiliates, including this blog series based on papers from the Economic Policy Review.


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Posted by Blog Author at 7:00 AM in Financial Institutions, International Economics | Permalink | Comments (0)

November 18, 2015

The Importance of Commodity Prices in Understanding U.S. Import Prices and Inflation



LSE_2015_dollar-and-import-prices_klitgaard_460-b_art

The dollar rose sharply against both the euro and yen in 2014 and 2015 and non-oil import prices subsequently fell. An explanation for this relationship is that a stronger dollar reduces the dollar-denominated cost of producing something in Germany or Japan, giving firms room to lower their dollar prices in order to gain sales against their U.S. competitors. A breakdown by type of good, however, shows that import prices for autos, consumer goods, and capital goods tend not to move much with changes in the dollar as foreign firms choose to keep the prices of their goods stable in the U.S. market. Instead, the connection between import prices and the dollar largely reflects the tendency for commodity prices to fall in dollar terms when the dollar strengthens. As a consequence, the dampening effect of a stronger dollar on U.S. inflation is transmitted much more through falling commodity prices than through cheaper imported cars and consumer goods.


Continue reading "The Importance of Commodity Prices in Understanding U.S. Import Prices and Inflation" »

Posted by Blog Author at 7:00 AM in International Economics, Macroecon, Monetary Policy | Permalink | Comments (0)

August 12, 2015

Do Asset Purchase Programs Push Capital Abroad?

Thomas Klitgaard and David Lucca

LSE_2015_asset-purchase_lucca_450_art

Euro area sovereign bond yields fell to record lows and the euro weakened after the European Central Bank (ECB) dramatically expanded its asset purchase program in early 2015. Some analysts predicted massive financial outflows spilling out of the euro area and affecting global markets as investors sought higher yields abroad. These arguments ignore balance of payments accounting, which requires any financial outflow from the euro area to be matched by a similar-sized inflow, absent a quick and substantial current account improvement. The focus on cross-border financial flows also is misguided since, according to asset pricing principles, the euro and global asset prices can move without any change in financial outflows.

Continue reading "Do Asset Purchase Programs Push Capital Abroad?" »

August 11, 2015

Around the World in 8,379 Foreign Entities



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The largest U.S. financial institutions conduct business around the world, maintaining a strong presence through branches and subsidiaries in foreign countries. This blog post highlights trends in their foreign ownership over the past twenty-five years, complementing recent research from the New York Fed on large and complex banks. We document a constant decline in the importance of foreign branches for U.S. financial institutions, an increase in the complexity of foreign subsidiary networks, and a shift of activity from Latin America and the Caribbean to Europe and other regions.

Continue reading "Around the World in 8,379 Foreign Entities" »

Posted by Blog Author at 7:00 AM in Financial Institutions, International Economics | Permalink | Comments (1)
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