Geoeconomics is the use of a countrys economic strength to exert influence on foreign entities to achieve geopolitical or economic goals. We discuss how concepts of power in the political science and economics literature can be used to guide research on geoeconomics. Economic threats as a form of...
Great powers are increasingly using their economic and financial strength for geopolitical aims. This rise of "geoeconomics" has the potential to reshape the international trade and financial system. This paper examines the role of domestic political economy forces in determining a government's...
Hegemonic powers, like the United States and China, exert influence on other countries by threatening the suspension or alteration of financial and trade relationships. Mechanisms that generate gains from integration, such as external economies of scale and specialization, also increase the hegemons...
We assess Euro Area financial integration correcting for the role of onshore offshore financial centers (OOFCs) within the Euro Area. The OOFCs of Luxembourg, Ireland, and the Netherlands serve dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign...
We explore the consequences of global capital market segmentation by currency for the optimal currency composition of borrowing by firms. Global bond portfolios are driven by the currency of denomination of assets as investors prefer to lend in their home currency or the international currency, the...
Governments use their countries economic strength from financial and trade relationships to achieve geopolitical and economic goals. We provide a model of the sources of geoeconomic power and how it is wielded. The source of this power is the ability of a hegemonic country to coordinate threats...
We survey the literature on global capital allocation. We begin by reviewing the rise of cross-border investment, the shift towards portfolio investment, and the literature focusing on aggregate patterns in multilateral and bilateral positions. We then turn to the recent literature that uses micro...
We consider a New Keynesian model with strategic monetary and fiscal interactions. The fiscal authority maximizes social welfare. Monetary policy is delegated to a central bank with an anti-inflation bias that suffers from a lack of commitment. The impact of central bank hawkishness on debt issuance...
March 1, 2023 - Article
Tax havens are increasingly the avenue for emerging market countries, particularly China, to raise money from foreign investors. Many Chinese companies use financing subsidiaries and shell companies located in the tax havens, which makes them hard to trace. The firms involved range from Chinese tech...
We document the rise of China in offshore capital markets. Chinese firms use global tax havens to access foreign capital both in equity and bond markets. In the last twenty years, China's presence went from raising a negligible amount of capital in these markets to accounting for more than half of...
We empirically characterize how China is internationalizing its bond market by staggering the entry of different types of foreign investors into its domestic market and propose a dynamic reputation model to explain this strategy. Our framework rationalizes Chinas strategy as trying to build...
We use textual analysis of earnings conference calls held by listed firms around the world to measure the amount of risk managers and investors at each firm associate with each country at each point in time. Flexibly aggregating this firm-country-quarter-level data allows us to systematically...
The covered interest rate parity (CIP) condition is a fundamental arbitrage relationship in international finance. In this chapter, we review its breakdown during the Global Financial Crisis and its continued failure in the subsequent decade. We review how to measure CIP deviations, discuss the...
March 30, 2021 - Article
In recent decades, global flows of assets and goods have grown rapidly relative to GDP and have shifted aggressively during crises such as the global financial crisis and the current pandemic. Corporations and governments increasingly borrow from foreign investors, who face more options for...
Global firms finance themselves through foreign subsidiaries, often shell companies in tax havens, which obscures their true economic location in official statistics. We associate the universe of traded securities issued by firms in tax havens with their issuer's ultimate parent and restate...
It is surprisingly difficult to find economic variables that strongly co-move with exchange rates, a phenomenon codified in a large literature on exchange rate disconnect. We demonstrate that a variety of common proxies for global risk appetite, which did not co-move with exchange rates prior to...
The modern notion of an international currency involves use in areas of international finance and trade that extend well beyond central banks' coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and...
August 15, 2018 - Article
Many investors avoid currency risk when buying debt issued by borrowers in foreign countries, but the U.S. dollar's international status makes dollar-denominated debt an easier sell. Almost all owners of foreign bonds hold that debt in their own currencies, rather than in the currency of the nation...
We establish currency as an important factor shaping global portfolios. Using a new security-level dataset, we demonstrate that investor holdings are biased toward their own currencies to such an extent that countries typically hold most of the foreign debt securities denominated in their currency....
September 21, 2017 - Article
An investor preference that for decades reduced borrowing costs for the U.S. government has disappeared since the global financial crisis. Investors have traditionally preferred U.S. Treasury bonds over the government bonds of other nearly default-free nations, a "specialness" that has reduced...
We quantify the difference in the convenience yield of U.S. Treasuries and the bonds of near default-free sovereigns by measuring the gap between the FX swap-implied dollar yield paid by foreign governments and the U.S. Treasury dollar yield. We call this wedge the U.S. Treasury Premium. We find...
We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy commitment...
Government forecasts of GDP growth and budget balances are generally more over-optimistic than private sector forecasts. When official forecasts are especially optimistic relative to private forecasts ex ante, they are more likely also to be over-optimistic relative to realizations ex post. For...
We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of Republic of Argentina v. NML Capital. We find that a 10% increase in...
Why do countries find it so hard to get their budget deficits under control? Systematic patterns in the errors that official budget agencies make in their forecasts may play an important role. Although many observers have suggested that fiscal discipline can be restored via fiscal rules such as a...
