Research

• Abstract: This paper offers the first empirical evidence on how domestic media-driven narratives about a destination country shape cross-border institutional investment flows. Leveraging natural language processing techniques on over a million articles from 38 newspapers, we construct sentiment and risk indices based on media narratives about China across 15 economies between 2007 and 2022. Our findings reveal significant cross-country variation in these narratives, driven by differences in both topic coverage and within-topic sentiment. Crucially, media narratives significantly influence portfolio flows, even after controlling for macroeconomic and financial fundamentals. The impact of media narratives on flows is smaller for investors with greater familiarity or private information about China and more substantial during periods of heightened uncertainty. Political and environmental narratives influence investment flows as much as, or more than, economic narratives. These findings suggest that media narratives have a greater influence on investment flows when reliable market data is scarce or challenging to interpret. We also find that media narratives have an asymmetric impact on investment, with investors reacting more sharply to negative narratives than positive ones. These results underscore the important role of media-driven narratives in shaping global capital flows, particularly in an era of intensifying geopolitical and economic uncertainty.

Abstract: This paper investigates the impact of reserve tiering, which remunerates different reserve tiers at varying rates, on monetary policy transmission to the loan market. Data from Japan reveals a significant increase in low-interest-rate loans and a decline in medium-interest-rate loans. The analysis indicates that financial institutions’ diverse interest rate exposures to the tiered system drive these changes. Larger, more liquid, and less leveraged banks with lower deposit ratios hold a higher proportion of negative interest rate reserves, while non-depository institutions face de facto negative rates. This enables small banks to secure cheaper funding from non-depository institutions and larger banks through interbank trading, leading to lower-rate loans. Consequently, the loan market becomes riskier as small banks with lower negative rate ratios reduce loan rates, while larger banks with higher negative rate ratios engage in riskier lending practices. Using a heterogeneous agent model to link interbank and loan markets, the study decomposes reserve tiering transmission into liquidity, interest rate, bank interest margin, and loan risk channels, offering policy recommendations for effective transmission. The paper suggests that to cool an overheating economy, the central bank should implement reserve tiering with ascending interest rates, which proves more effective, less costly, and stabilizes the financial system compared to alternatives.

• Abstract: This paper studies monetary policy transmission in European countries with a significant share of lending and deposits in foreign currency, referred to as ‘euroized economies’. We find that the impact of monetary policy shocks on both inflation and GDP diminishes with the degree of euroization across countries: the effects are twice as high in non-euroized countries compared to countries in our sample with the highest level of euroization. We further examine the exchange rate, credit and interest rate transmission channels which are typically less effective in euroized economies. We show that monetary policy has at best limited effects on the exchange rate. In addition, during the post-pandemic monetary tightening episodes, an increase in foreign-currency loans often softened the decline in overall credit growth, and rates of foreign-currency loans have followed the ECB policy rate rather than the domestic ones. By contrast, our analysis suggests that the pass-through to interest rates of domestic currency loans is similar across countries with different levels of euroization.