International Finance and Banking
Session Chair: Mrinal Mishra, University of Melbourne
Safe Assets in Emerging Market Economies
Cristian Cuevas, Universidad de los Andes
Do local-currency sovereign bonds in emerging markets work as safe assets? I estimate convenience yields arising from safety/liquidity premia both from the perspective of a global and a domestic investor. In a sample of 9 middle-income EMEs, I find a large convenience yield robust to both measures. I characterize the dynamics of this premium along the local and global financial cycle. The main difference relative to the convenience yields of U.S. Treasuries is not only their smaller magnitude but also that the global investor's convenience yield is procyclical to the global financial cycle (drops during episodes of high global risk aversion). I analyze two exogenous shocks to EMEs (the Taper Tantrum and Covid-19) and find that the availability of alternative global safe assets like the U.S. Treasury drives this procyclicality. Results are consistent with a model of a small open economy facing endogenous borrowing constraints and where a foreign and a local sovereign bond serve as collateral (although with different qualities) and thus carry a convenience yield. I use the model to show that shocks to demand for safety have markedly different effects from the standard interest rate or risk premium shocks, accounting for a relevant portion of their impact on business cycle volatility.
Discussant: Xiang Fang, Hong Kong University
Nationalistic Labor Policies Hinder Innovation
Francesco D'Acunto; Georgetown University
Hengyi Huang; Tilburg University
Michael Weber; University of Chicago
Jin Xie; Peking University
Liu Yang; University of Maryland
Hiring restrictions for high-skilled foreign nationals hinder domestic firms' production of cutting-edge innovation. We document this fact using the Employ American Workers Act (EAWA), which banned US financial institutions participating in the Troubled Asset Relief Program (TARP) from hiring new high-skilled foreign nationals until the full repayment of TARP funding. We exploit the differential pre-crisis exposure of similarly-troubled TARP institutions to the unforeseen EAWA ban to show that the ban did not only hindered new foreign hires but also reduced the quantity and quality of patents filings, especially in fields such as FinTech, cybersecurity, and payment systems. In terms of labor market implications, instead of replacing new high-skilled foreign nationals with domestic employees---the stated goal of EAWA's proponents---banks paid higher wage premia to retain pre-crisis foreign hires relative to the prevailing wages of US workers in the same occupations and locations.
Discussant: Elvis Jarnecic, University of Sydney