Xin Long (龙鑫)

Abstract: Dollar invoicing is prevalent in international trade, even when the United States is not involved; however, little is known about how access to dollar liquidity impacts trade flows of non-US firms. This paper examines how dollar financing affects firms’ trading behaviors using the cross-currency basis (CCB) as a country-specific indicator of the dollar borrowing cost for firms outside the United States. Exploiting disaggregated firm-level data from Chile between 2009 and 2022, I apply a multi-dimensional fixed effect model along with two shift-share style instruments to identify the effects of dollar financing on firms’ imports and exports. Intuitively, I find that easier access to dollar liquidity increases both imports and exports. However, this effect diminishes when exporting firms trade more intensively with the United States, suggesting that they rely less on the FX market for dollar liquidity when alternative sources of funding are available. Further analysis reveals that CCB works better as a dollar liquidity indicator than the more commonly utilized broad dollar index. Lastly, I conduct an analogous exercise with Chinese data, which echoes the finding from Chile while underscoring the conditioning role of different exchange rate regimes.

Abstract: We explore how covered interest parity deviations—measured by the cross-currency basis (CCB)—affects output growth. Using quarterly data from advanced economies (AE) and emerging markets (EM) in a panel VAR model and local projections, we find that positive shocks to the CCB typically lead to negative responses in output, implying that looser dollar funding conditions induce contractions. This counterintuitive result may be understood by recognizing that the effects of dollar access operates by altering the relative attractiveness of dollar versus non-dollar-denominated assets. During financial crises in AEs, the safe-haven demand for dollar assets is so pronounced that shortfalls in international liquidity become especially debilitating for growth. During normal times, however, easier dollar access induces agents in EMs to increase their purchases of local-currency assets, impairing domestic liquidity and hence growth; whereas in AEs, the exchange rate appreciates to compensate holders of local-currency assets, which erodes export competitiveness and growth.

Abstract: The large and persistent deviations in covered interest parity (CIP) observed after the global financial crisis presents a puzzle to international finance, given usual arbitrage opportunities. This paper suggests that a country’s political risk is an underexplored factor in determining the cross-currency basis (CCB), a measure of such deviations. Using data for 33 advanced economy (AE) and emerging market (EM) currencies, we introduce country-specific political risk into the CIP condition, and test if such risk matters for the CCB. To identify the effect of political risk, we employ two strategies: a duration-to-election indicator, which we also pair with democratic accountability as instruments; and, a regression discontinuity around close elections. We find that higher political risks do result in more negative CCBs, consistent with our modified theory. Further explorations reveal that political risks affect CIP deviations differentially in AEs versus EMs, and that international reserves and dollar swap lines can relieve the effects of political risk. We also show that the results are driven by the effect of unanticipated (rather than systematic) political risk, operating on the synthetic dollar rate.