Financial Spillovers Research Articles

Financial spillovers of foreign direct investment: Evidence from China

We study the financial spillovers of Foreign Direct Investment (FDI) to local suppliers through a trade credit channel and a bank loan channel. Using rich Chinese firm-level data, we provide robust evidence that a high concentration of FDI in downstream industries substantially reduces domestic suppliers' trade credit provision and improves their access to bank loans, especially unsecured loans. A variety of empirical strategies suggest that the effects are causal. Furthermore, the beneficial bank loan effect is more pronounced for local suppliers facing more severe information frictions. We also use supplier-customer links to provide additional evidence for FDI's financial spillovers.

The External Financial Spillovers of CBDCs

The External Financial Spillovers of CBDCs

China’s Financial Spillovers to Emerging Markets

China’s Financial Spillovers to Emerging Markets

The external financial spillovers of CBDCs

We set up a DSGE model to study the macroeconomic consequences of a foreign central bank digital currency (CBDC) available to residents in a small open economy. We find that a gradual and permanent increase in the domestic households' preferences toward the foreign CBDC leads to a structural reduction in economic activity, especially if the CBDC is designed to be similar to domestic deposits. Imposing capital flow management measures on outflows, relaxing macroprudential policy, or selling foreign reserves can smooth the transition. A Taylor rule that targets PPI inflation is more effective in limiting the disruptive effects than a CPI targeting or an exchange rate peg. A central bank's liquidity facility available to commercial banks is able to avoid the long-run GDP loss, at the cost of a larger short-run consumption fall. We also show that an economy with a large stock of foreign CBDC is better shielded from exogenous increases in the interest rate on foreign debt, if the CBDC remuneration remains constant.

Spatial Multivariate GARCH Models and Financial Spillovers

We estimate the risk spillover among European banks from equity log-return data via Conditional Value at Risk (CoVaR). The joint dynamic of returns is modeled with a spatial DCC-GARCH which allows the conditional variance of log-returns of each bank to depend on past volatility shocks to other banks and their past squared returns in a parsimonious way. The backtesting of the resulting risk measures provides evidence that (i) the multivariate GARCH model with Student’s t distribution is more accurate than both the standard multivariate Gaussian model and the Filtered Historical Simulation (FHS), and (ii) the introduction of a spatial component improves the assessment of risk profiles and the market risk spillovers.

Risk-off shocks and spillovers in safe havens

This paper examines real and financial spillovers to safe haven financial flow destinations due to risk-off shocks in global financial markets. Using country-specific structural vector autoregression (VAR) models over the period 1990 to 2021, we show that dynamics for Japan appear to be different to those of Switzerland and the US in three main ways. First, in response to risk-off episodes, the yen real effective exchange rate (REER) appreciated significantly, with the effect persisting for around 25 days. Second, no significant effects on portfolio flows to Japan are found, in spite of the exchange rate effects, suggesting a rapid adjustment of financial markets to shifts in equilibrium exchange rates. Third, negative real spillovers from risk-off shocks appear to only apply to Japan with exchange rate appreciation exacerbating declines in GDP growth. Our findings have important implications for policymakers in safe haven destinations in managing domestic financial vulnerabilities associated with risk-off episodes.

Are there financial stability gains from international macroprudential policy coordination?

AbstractWe construct a core‐periphery theoretical model based on the cross‐border spillover effects of macroprudential policies, to calculate the financial stability gains from macroprudential policy coordination between the two countries. Numerical simulation results show that the gains from coordination between the core and the periphery are zero when facing reverse monetary policy shocks, when macroprudential policy coordination is not needed; however, in the case of high simultaneous loosening (tightening) of monetary policies in both countries, the macroprudential policy coordination mechanism can reduce the negative externalities of cross‐border financial spillovers and increase the total gains from financial stability; the total gains from macroprudential policy coordination increase as the peripheral macroprudential policy operating space decreases, the degree of cross‐border financial spillovers increases, and the degree of cross‐border spillovers from core monetary policy increases. Therefore, the international coordination of macroprudential policies has certain possibilities and necessities.

Financial risk assessment management of cloud accounting SOEs based on spillover index

Abstract The international capital flows between the financial markets of state-owned enterprises are frequent and closely linked, and the difficulty of assessing and managing risks is deepening day by day. In order to be able to provide some useful references for corporate financial institutions in theory and practice, this paper is oriented to cloud accounting SOEs, modeling and calculating SOE returns and volatilities to obtain corporate financial spillover indices. The calculated spillover index is introduced into the basic assessment system to establish the financial risk assessment system. Based on the expert scoring results of the assessment indexes, a judgment matrix is constructed to obtain the fuzzy assessment weights of each index. Combined with the system assessment results, the risk matrix is used to classify risk levels and develop corresponding management strategies. It is experimentally verified that the intensity of the total risk spillover index and the probability of risk occurrence between different submarkets of corporate finance are higher during the unpracticed period, 76% and 83.48%, respectively. In contrast, the spillover index intensity and the probability of risk occurrence in the practice period are only 50% and 61.15%. This shows that the proposed method can carry out effective risk assessment management based on the spillover index, which meets the needs of the times and realistic needs of cloud accounting SOEs for financial risk assessment management and promotes the financial business development of SOEs.

Global banking, financial spillovers and macroprudential policy coordination

AbstractThe transmission of financial shocks and the gains from international macroprudential policy coordination are studied in a two‐region, core–periphery model with a global bank, a two‐level financial structure and imperfect financial integration. The model replicates the stylized facts associated with global banking shocks, with respect to output, credit, house prices and real exchange rate fluctuations in recipient countries, as documented empirically. Numerical experiments, based on a parametrized version of the model, show that the gains from coordination increase with the degree of financial integration, which raises the scope for spillback effects from the periphery to the core, through trade and private capital flows. However, even when coordination is Pareto‐improving, the resulting gains may be highly asymmetric across regions.

Trade Shocks and Credit Reallocation

This paper shows that there are endogenous financial constraints arising from trade liberalization. Banks with a large share of loans on firms exposed to competition from China suffer an increase in non-performing loans and reduce their credit capacity. The drop in credit supply affects both firms directly exposed to import-competition from China, and firm expected to expand upon trade liberalization, with economically relevant implications in terms of employment, investment, and output. This financial spillover between losers and winners from trade retards the reallocation of factors of production between firms and sectors, crucial to the welfare implication of trade liberalization.

The External Financial Spillovers of CBDCs

The External Financial Spillovers of CBDCs

The spillover effect of international monetary policy on China's financial market

<abstract> <p>This study analyzes the impact of global financial integration and monetary policies from the United States, European Union and Japan on China's financial markets post-pandemic. Using TVP-FAVAR (Time-Varying Parameter Factor Augmented Vector Autoregression) and TVP-VAR-DY (Time-Varying Parameter Vector Autoregression DY) models, a Chinese financial market stress index was developed, showing that developed nations' monetary policies influence China's financial stress. The impact varies based on the economy's size and policy effectiveness. The spillovers occur mainly through accelerated short-term capital flows and foreign exchange reserve fluctuations. These effects have evolved over two decades, particularly noticeable during economic crises and the COVID-19 pandemic, highlighting the need for emerging economies, like China, to protect against international financial spillovers.</p> </abstract>

Will Green Innovation Bring about the Financial Spillover Effect? Evidence from China’s High-Carbon Listed Companies

Is there a spillover effect from enterprises’ green innovation activities that promotes the coordinated development of the economy and the environment? Very few studies examine the impact of green innovation on corporate performance. Based on the data from Chinese listed firms in high-carbon industries from 2000 to 2021, this paper finds that green innovation has a significant promotion effect on enterprise performance, and the degree of regional intellectual property protection and enterprises’ financial resource base positively regulate the relationship between green innovation and enterprise performance. Further heterogeneity analysis shows that high-quality green innovation can better promote improvements in enterprise performance. In nonstate-owned enterprises, the spillover effect of such high-quality green innovation is more significant than that in state-owned enterprises. Meanwhile, the heterogeneity of the corporate governance level also affects the relationship between green innovation and enterprise performance. Green innovation has played a more significant role in promoting company performance in companies with high equity ratios. Finally, this paper proposes that companies should completely utilize their resource advantages to carry out high-quality green innovation practices to realize the coordinated development of the economy and the environment. This study provides empirical evidence and policy implications for accelerating the high-quality, sustainable development of enterprises.

Global financial cycle, commodity terms of trade and financial spreads in emerging markets and developing economies

We examine how negative shocks which affect global financial conditions spill over into EMDEs through a fall in commodity terms of trade and greater financial spread. We estimate a two-equation dynamic panel data model for 33 of these economies during 1999.Q1-2020.Q4 to identify the effect of changes in the global financial conditions on the terms of trade and financial spread of commodities in these countries. In the first round, we focus on the diffusion of external negative financial spillovers from the financial center (the US) to the financial periphery, and to terms of trade and financial spread of commodities, leaving aside the feedback which operates from the first variable to the second one. In the second round, we allow commodities terms of trade to exert feedback on financial spreads. We find that the sign of this relationship depends on the productive structure and external trade pattern but differs from that of commodity net exporters and commodity net importers.

International portfolio bond spillovers

We analyze spillovers of financial conditions on international portfolio bond flows. We document significant US financial conditions spillovers using data from developed and emerging countries. To disentangle the nature of spillovers, we rely on panel spatial autoregressive models, and third market competition on global trade flows to capture direct and indirect effects. We find that 30% of US spillovers are due to indirect effects in mutual funds with a regional-target investment focus. • We analyze global spillovers of US and domestic financial conditions on portfolio bonds. • We disentangle the nature of spillover into direct and indirect components. • We find a heterogeneous spillover effect based on the investment scope of funds. • US financial conditions play a significant role in international bond flows compared to domestic financial conditions. • A 30% of US financial spillovers are due to indirect effects in funds investing regionally.

What Happens in China Does Not Stay in China

Spillovers from China to global financial markets have been found to be small owing to China's limited integration in the global financial system. In this paper, however, we provide evidence that China constitutes an important driver of the global financial cycle. We argue that because of China's importance for global consumption, stronger Chinese growth raises global growth prospects, inducing an increase in global risk sentiment and an expansion in global asset prices and global credit. Two contributions are key to this finding: (1) We construct a measure of China's credit impulse to identify Chinese policy-induced demand shocks. Our approach takes advantage of the fact that a primary tool of China's stabilization policy-encompassing monetary, fiscal, and regulatory policies-is controlling the amount of credit in the economy. Without China's credit impulse, it is difficult to discern global financial spillovers; (2) We estimate an alternative measure of Chinese GDP growth that captures its business cycle given data concerns about the smoothness of official GDP data. Without China's alternative GDP measure, it is difficult to attribute any global cycle movements to economic developments in China.

The international monetary system: evolution and revolution

ABSTRACT Since the collapse of the Bretton Woods system in 1973, evolution has been the defining feature of changes in the IMS. The IMS has always been dominated by the US dollar. With it comes four structural issues: imbalance, lack of coordination, inade quacy, and weaponization of financial infrastructure. The Russia–Ukraine conflict will further accelerate the diversification and fragmentation of the IMS. But it might also lead to revolutionary changes such as balkanization of the IMS and even the end of financial globalization. Diversification of reserve currency could alleviate the imbalance and inadequacy problems of the IMS, restraining the dollar weaponization to some extent, but could not solve the problem of incoordination. Without a fair and inclusive IMS, ever larger financial spillovers will come from center countries to peripheral ones, and the global economy and financial system will face greater challenges in both efficiency and stability.

International financial stress spillovers to bank lending: Do internal characteristics matter?

The purpose of this paper is to unveil and assess the potential US financial spillover on Gulf Cooperative Council (GCC) bank lending and to check whether bank's internal characteristics shape such an effect or not. For this purpose, a dynamic panel model is estimated using the GMM system using data on an unbalanced panel of GCC banks over the period 2003–2018. We have found evidence of financial stress spillovers on bank lending and that their distributional impacts vary across time, banks size and capitalization. However, the role of banks liquidity in shaping the impacts of financial stress on lending is found to depend on dry-ups/abundance of market funding liquidity. The results are robust to both splitting the sample into pre- and post- crisis periods as well as to the inclusion of additional potential lending supply determinants.

Contagion as a Dealmaker? The Effect of Financial Spillovers on Regional Lending Programs

Contagion as a Dealmaker? The Effect of Financial Spillovers on Regional Lending Programs

A tale of two global monetary policies

We compare the macroeconomic and financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in the two areas are followed by a contraction in global activity and trade, a retrenchment in global capital flows, a fall in global stock markets, and a rise in risk aversion. Bilateral spillovers in both directions are also powerful. We find that Fed and ECB monetary policies propagate internationally through the same channels – trade and risk-taking. While the magnitude of ECB spillovers to global aggregates is smaller, proxies for global risk aversion respond in the same way and to the same degree to ECB and Fed unconventional monetary policy shocks, pointing to an equally powerful risk-taking channel for their international transmission that operates through global financial markets. Spillovers of the unconventional policies of the two central banks to international asset prices are equivalent to a very large extent.