The Second Wave of Global Liquidity: Why are Firms Acting Like Financial Intermediaries?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The second wave of global liquidity: Why are firms acting like financial intermediaries? Terms of use: Documents inJulian CaballeroInter-American Development Bank Ugo PanizzaThe Graduate Institute, Geneva and CEPR Andrew PowellInter-American Development Bank AbstractRecent work suggests that non-financial firms have acted like financial intermediaries particularly in emerging economies. We corroborate these findings but then ask why? Our results indicate evidence for carry-trade activities but focused in countries with higher levels of capital controls, particular controls on inflows. We find little evidence for such activities given other potential motives. We posit that this phenomenon is due more to the reaction to low global interest rates and strong capital inflows than to incomplete markets or the retreat of global banks due to impaired balance-sheets or tighter regulations.

What slice of the pie? The corporate bond market boom in emerging economies

“…Bruno and Shin (2015b) relate increase in the US dollar-denominated bonds issuance to financial risktaking behavior of EM NFCs, motivated by the dollar carry trade attractiveness in the periods of abundant global liquidity. Caballero et al (2015) highlight that the effect is stronger in countries with tighter capital controls on capital inflows. Lo Duca et al (2016) show a positive effect of US quantitative easing policies on NFC bond issuance in a sample of advanced and emerging economies.…”

“…Nevertheless, to the extent that market participants form their expectations on the basis of past foreign exchange rate change (Moscowitz et al, 2012), our choice of regressor should be a good alternative. In particular, Column 1 in Table 6 reports estimates using the interest rate differential between the local money market rate and the US BAA yield (Caballero et al, 2015). The estimated coefficient is not statistically significant in level, but negative and strongly significant over the post-crisis period.…”

Bond finance, bank credit, and aggregate fluctuations in an open economy

“…The representative holding arrives at period t with some amount of equity K log Z i t . 13 This normalization will prove useful in the following discussion. 14 …”

“…Using rm level data, Alfaro et al (2016) nd that the evidence is mixed: they document an increase in tangible xed asset investment among rms in emerging markets that exceeds the average for the full emerging market sample in the pre-Asian crisis period; but they also uncover some cases of weaker liquidity, solvency, and corporate distress indications compared to the pre-Asian crisis average. See also Caballero, Panizza and Powell (2016), who nd that non-nancial rms in emerging economies are more likely to act like nancial intermediaries in countries with tighter capital controls. 10 Repullo and Suárez (2000) also endogenize the choice between bank nance and market nance within an environment where rms are heterogeneous in the amount of available net worth.…”

Emerging Market Nonfinancial Corporate Debt: How Concerned Should We Be?

“…All errors are our own. 2 Bruno and Shin (2015) show that EME corporates tend to borrow in dollars to maintain higher levels of cash and liquid assets during periods when domestic interest rates exceed U.S. rates and thus the dollar carry trade is favorable, and Caballero et al (2015) show that this especially true for countries that have tighter capital controls. 3 For example, even though China has greater vulnerabilities with respect to corporate debt, it is also generally believed that they have relatively more resources to address problems that may arise.…”