Working Paper: CEPR ID: DP10926
Authors: Julian Caballero; Ugo Panizza; Andrew Powell
Abstract: Recent work suggests that non-financial firms have acted like financial intermediaries particularly in emerging economies. We corroborate these findings but then ask why? Our results indicate evidence for carry-trade activities but focused in countries with higher levels of capital controls, particular controls on inflows. We find little evidence for such activities given other potential motives. We posit that this phenomenon is due more to the reaction to low global interest rates and strong capital inflows than to incomplete markets or the retreat of global banks due to impaired balance-sheets or tighter regulations.
Keywords: bond issuance; capital controls; carry trade; corporate finance; currency mismatches
JEL Codes: E51; F30; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital controls (F38) | behavior of nonfinancial firms (G32) |
| Tighter capital controls (F38) | likelihood of nonfinancial firms acting as financial intermediaries (G20) |
| Presence of capital controls (F38) | likelihood of firms retaining liquid assets from foreign currency bond issuances (G15) |
| 10% increase in foreign bond issuances (G15) | 8% increase in liquid financial assets (G19) |
| Closed capital accounts (F32) | likelihood of firms engaging in carry trade activities (G15) |
| Regulatory environment (G38) | behavior of nonfinancial firms as financial intermediaries (G32) |