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International Capital Flows, Sovereign Debt, and Financial Risks

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Conference Room 20
Hosted By: Latin American and Caribbean Economic Association
  • Chair: Sergio Schmukler, World Bank

Inelastic Markets: The Demand and Supply of Risky Sovereign Bonds

Matias Moretti
University of Rochester
Lorenzo Pandolfi
Sergio Schmukler
World Bank
German Villegas-Bauer
International Monetary Fund
Tomas Williams
George Washington University


We present new evidence of downward-sloping demand curves in international sovereign-debt markets and analyze their macroeconomic implications. Our methodology exploits high-frequency bond price movements around index rebalancings to identify exogenous shifts in the supply of sovereign bonds. We find that bond prices significantly respond to these rebalancings. For risky bonds, part of this response may be explained by changes in default risk and we cannot directly map these estimates into a demand elasticity. We use these price reactions to discipline a sovereign-debt model and we use the model to back out a demand elasticity that isolates the effects of default risk. Using the calibrated model, we show that a downward-sloping demand acts as a commitment device that reduces debt issuances and default risk.

Financial Fractures: Sovereign Borrowing and Private Access to International Capital Markets

Pablo Hernando-Kaminsky
Johns Hopkins University
Graciela Laura Kaminsky
George Washington University
Shiyi Wang
Southwestern University of Finance and Economics


The boom-bust cycles in international capital flows have been at the center of attention of academic
and policy circles. At the core of this focus is that capital flow bonanzas tend to turn into sudden
stops, with financial crises erupting. While factors behind the boom-bust cycles are many, the most
frequently mentioned are the cycles of monetary easing and tightening in the United States. But are
these cycles in the financial center reinforced in the periphery? Or, are they weakened? Our focus is
the link between public and private issuance in the periphery during monetary cycles in the financial
center. Using granular data, in part, collected from archives, we construct a database on capital flows
starting with the collapse of the Bretton Woods System in the early 1970s. This data allows us to study
the effects of government issuance on the ability of various types of firms to access international
capital markets.

Global Fund Flows and Emerging Market Tail Risk

Anusha Chari
University of North Carolina-Chapel Hill
Karlye Dilts Stedman
Federal Reserve Bank of Kansas City
Christian Lundblad
University of North Carolina-Chapel Hill


This paper shows that global risk and risk aversion shocks have distinct distributional impacts on
emerging market capital flows and returns. In particular, global risk-on risk-off shocks have salient
consequences for tail risk in emerging markets. Open-end mutual fund trading provides a key
mechanism linking shocks facing global investors to extreme capital flow and return realizations. The
effects are heterogeneous across asset class and fund type. The limited discretion and higher
conformity of passive fund investments, linked to benchmarking, create pass-through effects that
engender abnormal co-movements in emerging market flows and returns.

A Framework for Geoeconomics

Christopher Clayton
Yale University
Matteo Maggiori
Stanford University
Jesse Schreger
Columbia University


Governments use their countries’ economic strength from existing financial and trade
relationships to achieve geopolitical and economic goals. We refer to this practice as
geoeconomics. We build a framework based on three core ingredients: input output
linkages, limited contract enforceability, and externalities. Geoeconomic power arises
from the ability to jointly exercise threats arising from separate economic activities.
Being able to retaliate against a deviating country across multiple arenas, often involving
indirect threats from third parties also being pressured, increases the off equilibrium
threats and, thus, helps in equilibrium to increase enforceability. A world hegemon, like
the United States, exerts its power on firms and governments in its economic network
by asking these entities to take costly actions that benefit the hegemon. We characterize
the optimal actions and show that they take the form of mark-ups on goods or
higher rates on lending, but also import restrictions and tariffs. The input-output amplification
makes controlling some sectors more valuable for the hegemon since changes
in the allocation of these strategic sectors have a larger influence on the world economy.
This formalizes the idea of economic coercion as a combination of strategic pressure
and costly actions. We apply the framework to two leading examples: national security
externalities and the Belt and Road Initiative.

Walker Ray
London School of Economics
Valentina Bruno
American University
Mariassunta Giannetti
Stockholm School of Economics
Rosen Valchev
Boston College
JEL Classifications
  • F3 - International Finance
  • G3 - Corporate Finance and Governance