Research

Covered Interest Parity in Emerging Markets: Measurement and Drivers, March 2025

with Mai C. Dao. IMF Working Paper 2025/057

We study the behavior of Covered Interest Parity (CIP) deviations – aka the CIP basis – in Emerging Markets (EM). A major challenge in computing the CIP basis in EM’s lies in measuring local currency interest rates which are free of local credit risk. To do so, we construct a ‘purified’ CIP basis for eight major EM currencies using supranational bonds issued in EM local currencies and US dollar going back twenty years. We show that this ‘purified’ CIP basis aligns well with theory-implied predictions. In the cross-section and the time-series, the basis correlates with fundamental forces driving supply and demand for dollar forwards. Shocks to global dollar funding costs, global intermediary’s balance sheet capacity, and the demand for dollar safe assets interact with currency-specific dollar hedging and funding needs in moving the CIP basis in EM’s.

Changing Global Linkages: Bridging Geopolitical Fragments, forth. AEA Papers and Proceedings, May 2025

with Gita Gopinath, Andrea F. Presbitero and Petia Topalova. The recent surge in geopolitical tensions and trade restrictions raises important questions about the global allocation of production, investment and trade across countries. Using bilateral sectoral data on FDI, trade and trade distortive measures over the past decade, we show that countries have responded to trade restrictions imposed on their exports by moving production to third countries whose exports face few import restrictions from their trading partners. Our findings show that FDI flows are fragmenting along geopolitical lines but are also responding to trade restrictions by relocating to countries that can serve as producers and `connectors'.

New Evidence on the US Excess Return on Foreign Portfolios, submitted, October 2024

with Carol C. Bertaut, Stephanie Curcuru and Ester Faia. We provide new estimates of the return on US external claims and liabilities using confidential, high-quality, security-level data. The excess return is positive on average, since claims are tilted toward higher-return equities. The excess return is large and positive in normal times but large and negative during global crises, reflecting the global insurance role of the US external balance sheet. Controlling for issuer’s nationality, we find that US investors have a larger exposure to equity issued by Asia-headquartered corporations than reported in the aggregate statistics. Finally, equity portfolios are concentrated in ’superstar’ firms, but for US liabilities foreign holdings are less concentrated than the overall market.

Global Safe Assets, June 2012, prepared for the 11th BIS Annual Conference

with Olivier Jeanne. Will the world run out of `safe assets' and what would be the consequences on global financial stability? We argue that in a world with competing private stores of value, the global economic system tends to favor the riskiest ones. Privately produced stores of value cannot provide sufficient insurance against global shocks. Only public safe assets may, if appropriately supported by monetary policy. We draw some implications for the global  financial system.

Also available as BIS working paper 399.

[Media coverage: Financial Times, Jan. 8, 2013]