Financial Globalization and International Banks
Paper Session
Saturday, Jan. 8, 2022 12:15 PM - 2:15 PM (EST)
- Chair: Laura Alfaro, Harvard Business School
Multinational Banks and Financial Stability
Abstract
We study the scope for international cooperation in macroprudential policies. Multinational banks contribute to and are affected by fire sales in countries they operate in. National governments setting quantity regulations non-cooperatively fail to achieve the globally efficient outcome, under-regulating domestic banks and over-regulating foreign banks. Surprisingly, non-cooperative national governments using Pigouvian taxation can achieve the global optimum. Intuitively, this occurs because governments internalize the business value of foreign banks through the tax revenue collected. Our theory provides a unified framework to think about international bank regulations and yields concrete insights with the potential to improve on the current policy stance.Foreign Reserve Management
Abstract
This paper presents a theory of how a central bank that pursues a monetary policy objective should manage its portfolio of foreign reserves. When private agents have limited resources to deploy in domestic financial markets, the central bank can purchase/sell foreign reserves so to affect prices and returns of some domestic securities. By doing so, the central bank can alter the risk-adjusted real rate faced by domestic agents and alter the allocation of consumption across time and states. Manipulating prices and returns of securities comes at cost, as when the central bank does so, the domestic economy experiences arbitrage losses to foreigners. For a relatively closed economy these losses are minor and it is optimal for the central bank to engage in active portfolio management. For a relatively open economy, the central bank minimizes arbitrage losses and it does so by following a passive portfolio management. In this case, a sufficient condition for optimality is that intermediaries hold domestic risk-free assets.Financial Globalization: Winners and Losers
Abstract
Using wedge accounting in an international investment gravity model, we quantify the effects of the last five decades of financial globalization on world output, cross-country inequality, and the cross-section of wages and capital rents. We find that uneven financial globalization has led to a worsening of the allocation of capital, resulting in a lower world output by 4%. In addition, inequality across countries has widened: output per capita has declined by 23% in the poorest economies on average. While financial globalization has increased wages and lowered capital returns in high-income countries, it has led to the opposite result in low-income countries. Despite the diversification of their portfolio towards capital-scarce high-returns economies, capital-owners in high-income economies have seen the average returns on their portfolio decline by 18% because returns on the domestic asset have declined by 29%.JEL Classifications
- F3 - International Finance