U.S. Monetary Expectations and Emerging Market Debt Flows

In Media: Econbrowser

This paper examines the effects that changes to U.S. monetary expectations have had on debt flows to emerging markets since the Global Financial Crisis. First, daily interest rate expectations measured by federal fund futures and a shadow rate model are used to classify Federal Reserve announcements as easing (unexpected), tightening (unexpected), easing (expected), and tightening (expected). Second, the announcements classified by the shadow rate model are used for an event study on daily emerging market debt flows classified by currency (all currencies, hard currency, local currency, mixed currency), investor (all investors, active investors, passive investors), and region (Asia excluding Japan, Europe Middle East and Africa (EMEA), Latin America, and Global Emerging Markets (Global EM)). The results show that tightening (unexpected) announcements cause emerging market debt outflows, hard currency debt flows respond more to announcements than local currency debt flows, and passive investors respond more than active investors. Debt flows to Latin America respond more to announcements than debt flows to Asia ex-Japan, EMEA, and Global EM.

JEL Classification: E43, F21, F32, F34, G23

Bank Avalanche Model of Systemic Risk (with Robert Logan, Judith Samson)

In Media: Center for Analytical Finance

This paper examines how financial network architecture affects financial system performance and systemic risk. First, this paper outlines the behavioral rules of the banks, non-financial transactors, and related aspects of this agent-based model.  Second, this paper analyzes the financial stability of this agent-based model in a complete network, unconnected network, circle network, and star network using computer simulations. Simulations are conducted for good economic conditions and for bad economic conditions.  The results indicate that the circle network performs best in terms of bank lifespan and profitability among all other networks and that there is greater dispersion in profitability and financial stability when there are good economic conditions than when there are bad economic conditions.

JEL Classification: D85, E37, G21, G33, G38

Monetary Surprises and Global Financial Flows: A Case Study of Latin America

This paper examines the effect of Federal Reserve announcements on global financial flows to Latin America since the Global Financial Crisis. The Federal Reserve announcements are classified using daily measures of expectations from a shadow rate term structure model as easing (unexpected), tightening (unexpected), easing (expected), and tightening (expected). This classification is then used for an event study on daily global financial flows classified by asset class (debt, equity), currency (all currencies, hard currency, local currency), and region (Latin America, Brazil, Mexico). The results suggest easing (unexpected) and tightening (unexpected) announcements cause debt outflows but have no effect on equity flows to Latin America. Local currency debt flows to Latin America are more sensitive than the hard currency debt flows and Brazil is the country in Latin America that responds most to these announcements.

JEL Classification: F32, G14, G15, N26