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International Capital Flows, Sovereign Debt, and Financial Risks

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Conference Room 20
Hosted By: Latin American and Caribbean Economic Association
  • Chair: Sergio Schmukler, World Bank

Inelastic Demand Curves in Global Sovereign Bond Markets: Micro-Evidence and Macro Implications

Matias Moretti
University of Rochester
Lorenzo Pandolfi
Sergio Schmukler
World Bank
German Villegas-Bauer
International Monetary Fund
Tomas Williams
George Washington University


This paper studies the demand elasticity for emerging economies sovereign bonds in a liquid market
heavily used for government financing. First, we estimate shocks to the investor demand by computing
the flow-implied rebalancing (the FIR measure developed by Pandolfi and Williams, 2019) derived
from changes in the benchmark indexes followed by institutional investors. These shocks are
uncorrelated with country fundamentals. We find that higher expected inflows are positively related
with higher bond returns around these index rebalancings. Second, we take these inflows as shocks to
the available supply of bonds in these markets and estimate the residual demand curve in this market.
We show that this demand curve slopes downward and is considerably inelastic. Third, we build a
small open-economy model that allows for global investor demand shocks to affect sovereign bond
prices. We use the case of risk-neutral and deep-pocket foreign investor as our benchmark model and
show that as the demand curves in global sovereign bond markets become more inelastic, debtfinanced expansionary fiscal policy is less effective in affecting output and employment. This happens
because debt issuance in this market reduces significantly debt prices and constrains the fiscal space.
In a calibration exercise, we show that with our estimated demand elasticity, the government spending
multiplier is significantly smaller relative to the benchmark case of risk-neutral and deep-pocket
foreign investors.

Financial Fractures: Sovereign Borrowing and Private Access to International Capital Markets

Pablo Hernando-Kaminsky
Johns Hopkins University
Graciela Laura Kaminsky
George Washington University
Shiyi Wang
Southwestern University of Finance and Economics


The boom-bust cycles in international capital flows have been at the center of attention of academic
and 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.

Capital Flows in Risky Times: Risk-on/Risk-off and Emerging Market Tail Risk

Anusha Chari
University of North Carolina-Chapel Hill
Karlye Dilts Stedman
Federal Reserve Bank of Kansas City
Christian Lundblad
University of North Carolina-Chapel Hill


This paper shows that global risk and risk aversion shocks have distinct distributional impacts on
emerging 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

Christopher Clayton
Yale University
Matteo Maggiori
Stanford University
Jesse Schreger
Columbia University


Governments use their countries’ economic strength from existing financial and trade
relationships 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.

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