Showing papers by "Matteo Maggiori published in 2022"
TL;DR: The authors empirically characterize how China is internationalizing the Renminbi by selectively opening up its domestic bond market and propose a dynamic reputation model to explain China's internationalization strategy, showing that the Chinese RMB was treated relatively more like a developed than emerging market currency.
Abstract: We empirically characterize how China is internationalizing the Renminbi by selectively opening up its domestic bond market and propose a dynamic reputation model to explain China’s internationalization strategy. While previously closed to foreign investors, there have recently been major increases in foreign investment in China’s domestic bond market. The Chinese government carefully controlled the entry of foreign investors into its market, first allowing in relatively stable long-term investors like central banks before allowing in flightier investors like mutual funds. By the time China allowed in flighty foreign investors, the Chinese RMB was treated relatively more like a developed than emerging market currency. Our framework explains these patterns as the result of a government strategy to build its reputation as an international currency issuer while minimizing the cost of potential capital flight as it gains credibility.
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TL;DR: In this paper , the authors propose a theory of international portfolio choice where trade networks play a key role, and solve in closed form for the optimal equity and bond portfolio investments in a multi-country model with arbitrary global input output linkages and taste differences.
Abstract: A BSTRACT . What determines the composition of international portfolio investments remains an open question in international finance. In this paper, I propose a theory of international portfolio choice where trade networks play a key role. I solve in closed form for the optimal equity and bond portfolio investments in a multi-country model with arbitrary global input output linkages and taste differences. I show that a measure of international demand exposure, called the “International Domar Weights” (IDWs), is key in determining international equity portfolios, and that a matrix measuring expenditure switching on network determines the bond portfolios. The IDWs extend the closed-economy “Domar weights” to the international setting and capture countries’ interdependence through both direct and indirect trade linkages. Using data from the World Input - Output Database (WIOD) and Coordinated Portfolio Investment Survey (CPIS), I apply the framework to a network of 43 major developed and emerging economies and obtain four main results. First, the theoretical network portfolio is a significant predictor and explains almost half of the variation in international bilateral portfolio investments. The significance of the network portfolio is robust to controlling for gravity factors (market capitalization, distance, EU membership, etc.). Second, including the network-based portfolio in a gravity model for assets resolves the puzzle of why distance matters for asset trade at all. Third, indirect trade linkages matter for portfolio determination, highlighting the need to explicitly account for trade in intermediate inputs. Finally, the model predicts both the levels and the changes in equity home bias that have occurred since 2000.