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External financing risks: How important is the composition of the international investment position?

Luis Cubeddu, Swarnali Ahmed Hannan and Pau Rabanal

Journal of International Money and Finance, 2023, vol. 131, issue C

Abstract: Building on the vast literature, this paper focuses on the role of the structure of the international investment position (IIP) in affecting countries’ external vulnerabilities. Using a sample of 73 advanced and emerging economies and new database on the IIP’s currency composition, we find that the size and structure of external liabilities and assets, especially with regards to currency denomination, matter in understanding balance-of-payments pressures. Specifically, and beyond the standard macroeconomic factors highlighted in other studies, higher levels of foreign-currency denominated external debt, both in gross and net terms, increase the likelihood of an external crisis and of a sudden stop with large growth impact. Foreign reserve assets play a mitigating role, although with diminishing returns, and the combination of flow and stock imbalances amplifies external risks, especially during periods of heightened global risk aversion. The results are especially strong for emerging economies, where the impact of flow and stock imbalances and foreign currency mismatches are larger and more robust across specifications.

Keywords: International investment positions; Foreign currency debt; Current account; Foreign reserves; Sudden stops with large output loss; External crises (search for similar items in EconPapers)
JEL-codes: E44 F32 F34 G15 H63 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622001759

DOI: 10.1016/j.jimonfin.2022.102772

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