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 studies how reserve tiering—where different tiers of reserves earn different interest rates—affects monetary policy transmission to the loan market. Using data from Japan, I find that reserve tiering leads to an increase in low-interest loans and a decline in medium-interest loans. These shifts are driven by heterogeneity in banks’ exposure to the tiered system: larger and more liquid banks hold more reserves at negative rates, while non-depository institutions effectively face negative rates. This allows small banks to obtain cheaper interbank funding from larger banks and non-depository institutions, enabling them to issue lower-rate loans. Meanwhile, larger banks, holding a greater share of negative-rate reserves, respond by taking on more risk in their lending. I develop a heterogeneous agent model linking interbank and loan markets, which identifies four transmission channels: liquidity, interest rate, bank interest margin, and loan risk. My analysis suggests that, to curb overheating, central banks should adopt tiering schemes with ascending rates—an approach that is more effective, less distortionary, and more stabilizing than flat-rate alternatives.

• Abstract: This paper studies domestic 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 domestic 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 domestic 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.