ESSAYS ON INTERNATIONAL MACROECONOMICS: EVIDENCE FROM CROSS-BORDER FINANCIAL FLOWS

Abstract

This thesis is a collection of three essays that analyse the interplay between cross-border financial flows and macroprudential and monetary policies, and migration policies. In Chapter 1, we examine the impact of cross-border bank flows from source countries on the lending behavior of banks in destination countries. Separately, we investigate how this spillover might change due to macroprudential policy action taken in source countries and if there is a role for destination-country macroprudential policy in mitigating an inward transmission. We tackle these issues by combining bilateral cross-border credit data with destination-country bank-level loan data and data on national macroprudential policies. We find evidence in favor of a bank-lending channel of cross-border flows, where destination-country banks issue more loans to non-bank borrowers in response to a greater inflow of credit from abroad. Macroprudential policy tightening in source countries reduces the magnitude of the international spillover, unveiling a bank-lending channel of foreign macroprudential policy that is more pronounced for supply-side policy instruments. However, we find no role for destination-country macroprudential policy in mitigating the impact of cross-border flows on host-bank lending. In Chapter 2, we analyse the incidence and severity of sudden stops in euro area countries before and after introducing the ECBs asset purchase programmes. We define sudden stops as abrupt declines in private net financial inflows, i.e., total net flows adjusted for EU and IMF loans and changes in TARGET2 balances. Distinguishing between mild and severe sudden stops, we document that sudden stops were more frequent and severe in euro area countries than in other OECD economies from 1999 to 2020. Based on a multinomial logit model, we find that the susceptibility of euro area countries to severe sudden stops mainly reflects domestic fundamentals. There is no clear evidence of a direct adverse effect of being part of the euro area. On the contrary, TARGET2 appears to act as an automatic stabiliser, counteracting sudden stops in private financial inflows. Moreover, our econometric analysis suggests that the asset purchase programmes implemented by the ECB since 2015 have almost halved the risk of severe sudden stops in euro area countries. We find tentative evidence that this effect operates through confidence channels. In Chapter 3, we study the role of migration in reducing portfolio equity home bias, one of the major puzzles in international macroeconomics. Using the recent experience of the European Union to open up the largest labour market in the world by fostering the free movement of labour among member states in phases, we find that a high degree of cross-border labour mobility boosts international portfolio diversification.

Date of Award	1 Aug 2023
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Akos Valentinyi (Supervisor) & Kyriakos Neanidis (Supervisor)