| dc.description.abstract | This thesis comprises three essays. The first essay (Chapter 2) analyzes the shock absorption role of external positions by looking at the relation between external stock imbalances and their currency of denomination. The second essay (Chapter 3) focuses on the re-routing activities of non-financial corporations (NFCs) through their foreign affiliates by looking at the relationship between NFCs' offshore issuance and their within-company loans. The third essay (Chapter 4) studies the status of the euro and the US dollar as international currencies and connects them with currency movements by looking at international financial integration and its equity and debt components.
Chapter 2 presents a comprehensive analysis of the shock absorption role of external positions. While the literature has frequently studied how the net international investment position and its currency composition determine the direction and scale of valuation effects, we focus on their amplitude. This is of central importance for global financial stability, given the large and increasing scale of external balance sheets. To that end, we propose an indicator showing the extent to which external positions absorb or amplify exchange rate shocks.
Analysing a set of 50 countries over the period 1990-2017, we find the external shock absorption role to be present for advanced economies, while this was initially not the case for emerging markets economies (EMEs). In recent years, however, EMEs' external positions increasingly showed a shock absorption capacity. Our regression-based analysis reveals that the level of economic and financial development is associated with a greater capacity to absorb exchange rate shocks.
Chapter 3 analyses the re-routing activity of offshore affiliates and its link with the economic environment by looking at the co-movement of offshore debt issuance and within-company loans. The size of external borrowing of non-financial corporations (NFCs) through overseas affiliates is continuously increasing post-global financial crisis (GFC). In addition, offshore bond issuance has become more important than onshore bond issuance as a transmission channel of global liquidity because of its strong link with the global financial cycle and fluctuation in the US dollar. Therefore, offshore issuance of NFCs has become central for assessing the risk profile of debt issuance. However, the risk profile of offshore debt is likely to be very different depending on whether the issuing affiliate uses proceeds for operations in the country of residence or channels funds to the parent company.
This chapter documents three stylized facts. First, re-routing external debt by foreign affiliates to their parents is prevalent in advanced, emerging, and developing countries. Second, institutional development, access to the international capital market, and carry trade motivation shape the striking heterogeneity in re-routing activities. Third, the quality of the legal environment, the deepness of the investor base, and capital controls on international lending, amongst others, are key factors in explaining the share of offshore in total issuance.
Chapter 4 analyzes the status of the euro and US dollar as international currencies by looking at the euro and US dollar composition of international financial integration (IFI) indicators. The literature has studied the role of the euro and USD in international investment positions (IIP) components individually and relates them to the availability of safe assets or liquidity. This chapter focuses on the euro and dollar breakdown of IFI as well as its equity and debt components and associates it with being a relatively safe currency. This is of central importance not only for global financial stability and transmission of monetary policies but also for the privileges arising from being the owner of the prevailing currency. This chapter presents a newly compiled and updated dataset for the euro and US dollar composition of IIP for 39 countries from 2001 to 2021.
We find that while the euro share expanded rapidly until 2007, it declined after the global financial crisis (GFC) and has been overtaken since 2014 as a result of a decrease in the euro share debt component and a comparatively faster increase in the USD share of the equity component. In addition, there is no prospect for substantial change in the euro?s distant secondary role after the dollar due to its limited role in emerging economies. Analyses of the link between exchange rate and valuation-adjusted currency shares in IFI reveal that the relative strength of the currency matters for the share of this currency in external assets and liabilities. Still, it matters, to a lesser extent, for the equity compared to the debt component. Furthermore, the complementarity between the currency share in trade and finance is prevalent. | en |
