Essays on International Capital Flows

Abstract

My dissertation analyzes the conduits through which international capital flows are facilitated and factors that can affect them. The dissertation is divided into two chapters. In chapter 1, I show that European banks depend critically on US multinational firms for financing their large dollar loan portfolios. Following a large drop in the corporate bond holdings of US multinationals induced by the 2018 US tax code change, European banks are less able to lend in dollars. They are also less able to source dollar funding, with this inability being more amplified for those European banks more dependent on US multinationals for dollar funding at the time of the tax code change. Overall, I provide robust evidence that a large chunk of dollar credit intermediation globally passes through the unsupervised channel of US multinationals financing European banks in dollars. In chapter 2, I show that speculation is a significant driver of foreign investment into US Treasuries. During a time of of uncertainty on the trajectory of interest rates in the United States, foreigners drastically increase their holdings of long term treasuries, with no similar increase observed in their holdings of short term treasuries. At the same time, foreign investors forecast lower long-run federal funds rates than domestic investors do, while agreeing with them on short-run forecasts. These facts are consistent with a mechanism where foreigners are building their positions as a way to bet on their forecasts of future federal funds rates, seeking to earn an excess returns when the uncertainty gets resolved.