Interest Rates and International Monetary Policy
Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: Jason Jones, Furman University
Foreign Currency Loans and Credit Risk: Evidence from United States Banks
AbstractWhen firms borrow in foreign currency but collect revenues in local currency, exchange rate changes can affect their ability to repay their debt. Using loan-level data from U.S. banks’ regulatory filings, this paper studies the effect of exchange rate changes on firms’ loan payments. A 10 percent depreciation of the local currency makes a firm with foreign currency debt 69 basis points more likely to become past due on its loans than a firm with local currency debt. This result implies that firms do not perfectly hedge against exchange rate risk and that this risk translates into credit risk for banks. The findings lend support to both the balance sheet channel and the financial channel of exchange rates.
Monetary Policy Spillovers through Invoicing Currencies
AbstractUnited States monetary policy affects macro-financial outcomes globally. I introduce
heterogeneity in invoicing currencies into an open economy New Keynesian model that also
allows for differences in country size and household preferences. Within the model, cross-
sectional variation in U.S. monetary policy spillover effects is fully captured by heterogeneity
in countries’ shares of dollar invoiced trade. Moreover, central banks of countries in which
a larger share of exports are invoiced in dollars face a worse output-inflation trade-off,
i.e., a steeper Phillips Curve. Using high frequency measures of monetary policy shocks, I
find support for the model’s predictions. Countries’ shares of dollar invoiced trade explain
cross-sectional heterogeneity in spillovers from U.S. monetary policy shocks onto foreign
exchange rates, interest rates and industrial production. Constructing a new data set of
monetary policy shocks emanating from the European Central Bank, the Bank of Japan
and the Bank of England, I show currency invoicing explains variation in monetary policy
spillovers from these other central banks as well. After controlling for currency invoicing in
trade, the magnitude of U.S. monetary policy spillovers are not significantly different from
those of other central banks.
Searching for Yield Abroad: Risk-Taking through Foreign Investment in United States Bonds
AbstractThe much discussed risk-taking effects of low interest rates have been hard to document due to a paucity of data and challenges in identification. Analyzing unique, comprehensive, security-level data that capture 25 economies' entire investments in U.S. corporate bonds allows us to accurately characterize shifts in risk and help detect the causal mechanism. We show that declining home-country interest rates lead investors to shift their portfolios toward riskier bonds in non-crises times. A 200 basis points decline leads investors to seek a 43 additional basis points yield pick-up, with effects even stronger when home interest rates reach very low levels.
US Monetary Policy and the Stability of Currency Pegs
AbstractI study the pricing of American Depositary Receipts around FOMC meetings to identify the impact of US monetary policy on managed exchange rates. ADR investors assess the domestic central bank’s reluctance to maintain a currency peg regime if the costs of mimicking policy rate increases in the US are high, i.e., the current state of the domestic economy is poor. In line with currency crises models of interest rate defence, I find that positive US monetary surprises increase the breakdown probability of pegs with low real GDP growth, high fiscal deficits, high sovereign risk and a weak domestic banking sector.
- F3 - International Finance