Cross-border Spillovers Research Articles

Cross-Border Spillover of Imported Sovereign Risk to China: key factors identification based on XGBoost-SHAP explainable machine learning algorithm

This paper examines the imported sovereign risk from G20 countries to China and the transmission channels. To explore how sovereign risk transmit in different conditions, the study constructs QVAR model to measure China's imported sovereign risk and use XGBoost-SHAP machine learning algorithm to explain the key channels. The research reveals key findings. First, external sovereign risk importing to China in upper and lower conditions are asymmetric. Second, developing countries have more significant risk spillovers to China comparing to advanced countries in normal condition. Third, there are significant differences in risk transmission channels under different quantile conditions.

How does Russia's economy affect the region? Transmission channels and policy options

This paper studies how output fluctuations in Russia are transmitted internationally. Using dynamic panel models, the paper finds that Russia's output fluctuations are an important driver of output fluctuations of countries in the region, especially for oil importers, and are transmitted increasingly via trade and market confidence channels. The magnitude of cross-border spillovers is larger for countries with relatively high bilateral trade concentration, low export diversification, and weak external buffers. The paper also finds evidence that stronger public institutional quality- especially in the fiscal area- may help insulate countries from volatility in the Russian sovereign debt market.

Reimagining the global economic order*

A retreat from the post-1990s model of deep economic integration was inevitable and is not necessarily a bad thing. Today’s worries about de-globalization should not blind us to the possibility that the present crisis may in fact produce a better globalization. This essay describes the frailties of the hyper-globalization model and lays out two key prerequisites for the construction of a better global economic order: the prioritization of the domestic social, economic and environmental objectives to build more inclusive societies and polities; and the avoidance of global primacy by major powers. It then discusses the limits of global governance, emphasizing the need to restrict our ambitions with respect to global cooperation to domains where it is most needed and likely to pay dividends. The normative core of the paper is a proposal for a meta-regime for the global economic order that presumes relatively little agreement among countries on desirable economic policies and focuses on minimizing worst cases of adverse cross-border spillovers while building trust (and increased cooperation) over time.

Revisiting the effect of democracy on population health

Abstract I use a novel dichotomous measure of democracy to simulate a quasi-natural experiment and implement a difference-in-differences analysis to identify the heterogeneous treatment effect of democracy on population health across countries from 1960 to 2010. To counteract potential sources of bias resulting from unparallel and stochastic trends between treated and control units, I adopt a principal components difference-in-differences estimator that exploits factor proxies constructed from control units to account for unobserved trends. The main results indicate that countries that transitioned from non-democracy to democracy are more likely to experience health improvements, compared to countries retaining non-democratic institutions. However, the health-enhancing impact of democratization turns out to be much smaller in size than previously established. I posit that conventional estimates exaggerate the economic significance of the health returns to democratization due to inadequate attention to cross-border spillovers, global common shocks, and worldwide heterogeneity in the democracy-health nexus.

Cross-border spillovers in G20 sovereign CDS markets: cluster analysis based on K-means machine learning algorithm and TVP–VAR models

Cross-border spillovers in G20 sovereign CDS markets: cluster analysis based on K-means machine learning algorithm and TVP–VAR models

An EU Fund to Incentivise Public Investments with Positive Externalities

Abstract This contribution, based on the proposals by Bakker, Beetsma, and Buti (2024a. “The Case for a European Public-Goods Fund.” Project Syndicate, 4 March. https://www.project-syndicate.org/commentary/public-goods-fund-could-finance-green-transition-and-ensure-fiscal-responsibility-by-age-bakker-et-al-2024-03, 2024b. “Two Birds with One Stone: Investing in European Public Goods while Maintaining Fiscal Discipline at Home.” Intereconomics 59 (2): 1–6), discusses an EU fund to finance investments with positive cross-border spill-overs, such as large infrastructures, that are too expensive for individual countries to finance, or of which the benefits are insufficiently internalised by individual investing countries. Each country receives a given part (“envelope”) of the fund. The envelope size and the contribution as well as the eventual debt repayment burden could be proportional to the size of the economy, thereby minimising cross-border redistribution. Access to the fund’s resources is conditional on adherence to the EU’s new fiscal rulebook. If a country fails to make full use of its envelope, the remaining resources are re-allocated over the other envelopes. Hence, the fund provides an incentive for countries to simultaneously undertake investments that benefit groups of countries or the EU at large, and to maintain fiscal discipline. We discuss the size of the fund, how it fits within the EU current instrument set, its governance, its financing and its potential political appeal.

International transmission of quantitative easing policies: Evidence from Canada

What are the cross-border spillovers from major economies' quantitative easing policies to their trading partners? We provide evidence by concentrating on spillovers from the US to Canada during the ZLB period when QE policies were actively used. We identify QE shocks in the US and estimate their impact on a large number of Canadian macroeconomic and financial variables. Then we analyze transmission channels of foreign QE shocks to the domestic economy. Our results suggest that US QE shocks are expansionary for Canada despite a currency appreciation. This is because they spill over to domestic borrowing costs, lowering long-term rates as well as financial premiums, and increasing asset prices. We find evidence for both portfolio balance and risk channels.

How to smooth US-China economic relations for the benefit of the global economy: A light model of global economic governance

The U.S.-China conflict is threatening continued global economic prosperity and this has inspired a variety of predictions and prescriptions on the future global order. This paper proposes a light model of global governance not only to form international agreements across countries but also to smooth U.S.-China relations. There are two elements of the light model: 1) A transparency-enhancing process for domestic policy making and 2) A meta-regime for global order that only requires a minimal set of initial agreement among states for managing economic conflict while encouraging cooperation. There are two main reasons behind my proposal. First, in the economic domain there fewer global public goods than is widely believed. Second, international cooperation should be restricted to true beggar-thy-neighbor policies, rather than other kinds of cross-border spillovers.

Comment on: “The International Spillovers of Synchronous Monetary Tightening” by Dario Caldara, Francesco Ferrante, Matteo Iacoviello, Andrea Prestipino, and Albert Queralto

Ever since Rogoff, 1985, international policy cooperation has been considered particularly counterproductive in periods of disinflation—the argument being that cross-border agreement aiming to moderate the global recessionary effects of monetary policy would erode the credibility of domestic monetary authorities in the eyes of domestic workers and firms. The paper by Caldara et al. offers a timely and healthy warning—cross-border spillovers of monetary tightening may be highly non linear: The cumulative effects of strongly anti-inflationary stance in many countries may worsen the trade off faced by each national monetary authority.

Exchange Rate Dynamics and Monetary Spillovers with Imperfect Financial Markets

Abstract We develop a quantitative model with imperfections in domestic and international financial markets that generates strong effects of U.S. monetary policy on emerging markets (EMs). Financial imperfections prevent arbitrage both between local EM lending and borrowing rates, and between local-currency and dollar borrowing rates. An adverse feedback effect between financial health and external conditions amplifies the domestic “financial accelerator,” leading to large cross-border spillovers of U.S. monetary policy shocks. The model implies a link between uncovered interest parity violations and local credit spreads, a prediction we show the data strongly supports. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Spillover effects from inland waterway transport development: Spatial assessment of the Rhine-Alpine Corridor

Inland waterways have the potential to enhance port-hinterland connectivity and foster sustainable freight transport. Their development as transport corridors is highly dependent on geography, yet spatial spillovers of port throughput are often overlooked. In Europe, the configuration of inland container terminals can lead to cross-border spillovers. This paper analyzes inland container throughput between 2007 and 2021 in the Rhine-Alpine Corridor to quantify its spatial dependence and economic spillover effects. The assessment involves 43 regions from Belgium, France, Germany, Netherlands, Luxemburg, and Switzerland. A Spatial Durbin Model is developed accounting for economic conditions, fixed effects, and time trends. The results suggest that throughput exhibited spatial concentration patterns, which intensified after water levels dropped in 2018. Second, the spatial dependence is heterogeneous between transport performance in tonne-km vs. TEU-km. Third, technological resources and population density were positively associated with throughput, while the opposite was found for employment and motorways. Notably, the spillovers of technological resources and employment were considerably higher than the local impact. Based on these findings, the paper advises on spatially oriented policies to address low water levels, workforce decline, and the need for new business models.

Global energy security: Do internal and external risk spillovers matter? A multilayer network method

The spillover effects in the risk networks of global energy firms within and among economies have brought increasing uncertainty to national energy security, which is largely unexplored in the existing literature. To this end, our study examines the shock transmission within and among 46 economies from January 2006 to June 2022, by employing a complex multilayer risk network based on a high-dimensional framework. Furthermore, this paper investigates the impact of risk contagion on energy security using panel data models. The findings reveal significant spillover effects within and among economies, which show a pronounced upward trend since the outbreak of the global financial crisis in 2008, COVID-19 in 2020, and the war in Ukraine in 2022. We further find that the two types of risk spillovers can negatively affect national energy security. In particular, domestic risk contagion effects dominate security risks of countries worldwide, whereas cross-border risk spillovers weaken security performance of energy-importing countries. Moreover, energy production and end-use energy price serve as two influencing mechanisms through which risk contagion affects security issues. The adverse impact of domestic contagion relies on two channels, but the cross-border spillovers induce security risk only via the price channel. Overall, this paper offers some suggestions for policy makers worldwide regarding energy security strategies to prevent or mitigate energy shock-induced negative externalities.

What drives the cross-border spillover of climate transition risks? Evidence from global stock markets

Despite increasing efforts to better understand the financial consequences of climate change, the question of how climate-related financial risks could spill over across borders remains largely unexplored. By studying the role of countries’ climate transition risks in the bilateral co-movement of stock market returns in 42 countries, this paper finds that climate transition risks could increase the co-movement of stock market returns. The effect of climate transition risks increases with greater similarity of economic conditions and a higher dependence on import between two countries, which we interpret as a proof of cross-border climate transition risk spillover. While good country performances in combating climate change can help reduce the impact, an effective mitigation likely requires good performances by both. Our results suggest that countries with lower transition risks are not immune to the impact of climate change risks because of the potential for international spillover, and there is a strong need for international efforts to deal with the risks of climate change to financial stability.

We are All in the Same Boat: Cross-Border Spillovers of Climate Shocks Through International Trade and Supply Chain

We are All in the Same Boat: Cross-Border Spillovers of Climate Shocks Through International Trade and Supply Chain

Трансграничное углеродное регулирование: взгляд из Китая

On March 15, 2022 the Carbon Border Adjustment Mechanism (CBAM, also known as the EU Carbon Tariff) was preliminarily approved by the EU Council. It was planned to be formally implemented since January 1, 2023, with a three-year transition period. This means that EU member states support the implementation of carbon tariff policies. As the world’s first proposal to address climate change in the form of a carbon tariff, the carbon border adjustment mechanism will have a profound impact on global trade. Our study aims to analyze the implications and further development of CBAM. The carbon tax leads to the promotion of an accelerated and healthy carbon market, stimulating the growth of demand for green electricity, and rooting the authentication of low and zero carbon products. However, the practical implementation of the introduction of the tax still faces many obstacles. CBAM widens the gap between developed and developing countries in terms of GDP and wealth. This could exacerbate income and wealth disparities between rich and poor economies and further undermine the ability of some low-income countries to decarbonize their economies. To ensure a fair transition to a low-carbon economy and prevent excessive negative impacts on developing countries during the transition period, the IMF must play a key role in identifying and addressing the cross-border spillovers of climate policy, especially those that affect the balance of payments and growth trajectories of vulnerable countries. As an option to address this side impact, we briefly discussed the possibility of creating an Equitable Decarbonization Fund with CBAM funds to support decarbonization projects in low-income countries and the development of green technologies.

We are All in the Same Boat: Cross-Border Spillovers of Climate Shocks Through International Trade and Supply Chain

We are All in the Same Boat: Cross-Border Spillovers of Climate Shocks Through International Trade and Supply Chain

Low pass-through and international synchronization in general equilibrium: Reassessing vertical integration

We investigate the difficulties of the canonical open New Keynesian model to i) reproduce the observed exchange rate pass-through disconnect, i.e. a pass-through high for import prices and low for consumer prices, and ii) to generate international business cycle synchronization. The literature tackled them separately: i) strategic complementarities for exporting firms to mitigate the pass-through to consumer prices and ii) intermediate inputs trade to enhance cross-border spillovers. We prove that foreign intermediate inputs also efficiently address the pass-through dimension, but, unlike strategic complementarities, solve the exchange rate pass-through disconnect puzzle. These results carry over to the general equilibrium effects of a depreciation. Furthermore, we show analytically that both types of vertical integration weaken sharply the expenditure switching effect. This feature strengthens real synchronization in response to productivity and monetary policy shocks, but lowers it in response to private demand shocks, a point which complements the existing literature.

English

This study examines the level of linkage between Nigeria and some selected African countries on one hand and the linkages between economic growth, inflation, and unemployment on the other hand, in these economies. The study covers the period between 2000 and 2019. The study aims to first measure the economic distance between Nigeria and these countries using the approach proposed by Mazurek. Second, the degree of spillovers was characterized between Nigeria and these countries, using a VAR-based spillover index method proposed by Diebold and Yilmaz. The main finding of the study is that the selected African economies are quite economically dispersed, and the level of cross-border spillover is negligible. This would suggest that growth in one economy has not been influenced by the growth in the other economies in the region. Given this, the study recommends that policies that will improve intra-African trade should be formulated. Such policies should incorporate a trade-by-barter-like framework, where Africa can demand what it produces and produce what it demands. Essentially, much more attention should be paid to the supply side of the market than the demand side following the Says law that increasing production will naturally result in proportionate increase in demand. To achieve this, enabling environment should be created to engender technological innovations while improving human and capital infrastructures.   Key words: African, development, economic distance, growth, spillovers.

Finance and Green Growth

Abstract We study how countries’ financial structure affects their transition to low-carbon growth. Using global industry-level data, we document that carbon-intensive industries reduce emissions faster in economies with deeper stock markets. The main channel underpinning this stylised fact is that stock markets facilitate green innovation in carbon-intensive sectors, resulting in lower carbon emissions per unit of output. More tentative evidence indicates that stock markets also help to reallocate investment towards more energy-efficient sectors. Cross-border spillovers are limited: less than 5% of these industry-level reductions in domestic emissions are offset by carbon embedded in imports. A firm-level analysis of an exogenous shock to the cost of equity in Belgium confirms our findings.

What drives cross-border spillovers among sovereign CDS, foreign exchange and stock markets?

In the wake of financial globalization, the volatility spillovers between financial markets have become increasingly prominent. Thus, this study focuses on three typical multi-country markets, i.e., the sovereign credit default swap (CDS), foreign exchange, and stock markets. Based on the Diebold–Yilmaz spillover index and complex network technique, this study not only compares the degree and structural characteristics of cross-border spillovers in these markets but also analyzes the cross-market spillovers in pairs. Secondary regressions are also conducted to understand the drivers of cross-border spillovers among these markets. Based on the findings, the stock market has the most prominent cross-border spillover effect, with net spillover effects on the sovereign CDS and foreign exchange markets. Moreover, market sentiment drives the majority of the cross-border spillovers within the stock and sovereign CDS markets, while cross-border spillovers in the foreign exchange market are mainly driven by economic fundamentals and monetary policies.