International Capital Flows, Sovereign Debt, and Financial Risks
Paper Session
Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Sergio Schmukler, World Bank
Financial Fractures: Sovereign Borrowing and Private Access to International Capital Markets
Abstract
The boom-bust cycles in international capital flows have been at the center of attention of academicand policy circles. At the core of this focus is that capital flow bonanzas tend to turn into sudden
stops, with financial crises erupting. While factors behind the boom-bust cycles are many, the most
frequently mentioned are the cycles of monetary easing and tightening in the United States. But are
these cycles in the financial center reinforced in the periphery? Or, are they weakened? Our focus is
the link between public and private issuance in the periphery during monetary cycles in the financial
center. Using granular data, in part, collected from archives, we construct a database on capital flows
starting with the collapse of the Bretton Woods System in the early 1970s. This data allows us to study
the effects of government issuance on the ability of various types of firms to access international
capital markets.
Global Fund Flows and Emerging Market Tail Risk
Abstract
This paper shows that global risk and risk aversion shocks have distinct distributional impacts onemerging market capital flows and returns. In particular, global risk-on risk-off shocks have salient
consequences for tail risk in emerging markets. Open-end mutual fund trading provides a key
mechanism linking shocks facing global investors to extreme capital flow and return realizations. The
effects are heterogeneous across asset class and fund type. The limited discretion and higher
conformity of passive fund investments, linked to benchmarking, create pass-through effects that
engender abnormal co-movements in emerging market flows and returns.
A Framework for Geoeconomics
Abstract
Governments use their countries’ economic strength from existing financial and traderelationships to achieve geopolitical and economic goals. We refer to this practice as
geoeconomics. We build a framework based on three core ingredients: input output
linkages, limited contract enforceability, and externalities. Geoeconomic power arises
from the ability to jointly exercise threats arising from separate economic activities.
Being able to retaliate against a deviating country across multiple arenas, often involving
indirect threats from third parties also being pressured, increases the off equilibrium
threats and, thus, helps in equilibrium to increase enforceability. A world hegemon, like
the United States, exerts its power on firms and governments in its economic network
by asking these entities to take costly actions that benefit the hegemon. We characterize
the optimal actions and show that they take the form of mark-ups on goods or
higher rates on lending, but also import restrictions and tariffs. The input-output amplification
makes controlling some sectors more valuable for the hegemon since changes
in the allocation of these strategic sectors have a larger influence on the world economy.
This formalizes the idea of economic coercion as a combination of strategic pressure
and costly actions. We apply the framework to two leading examples: national security
externalities and the Belt and Road Initiative.
Discussant(s)
Walker Ray
,
London School of Economics
Valentina Bruno
,
American University
Mariassunta Giannetti
,
Stockholm School of Economics
Rosen Valchev
,
Boston College
JEL Classifications
- F3 - International Finance
- G3 - Corporate Finance and Governance