Markets and Housing Finance

We examine the extent to which markets enable the provision of housing finance across a wide range of countries. Housing is a major purchase requiring a long-term financing, and the factors that are associated with well functioning housing finance systems are those that enable the provision of long-term finance. Across all countries, controlling for country size, we find that countries with stronger legal rights for borrowers and lenders (through collateral and bankruptcy laws), deeper credit information systems, and a more stable macroeconomic environment have deeper housing finance systems. These same factors also help explain the variation in housing finance across emerging market economies. Across developed countries, which tend to have low macroeconomic volatility and relatively extensive credit information systems, variation in the strength of legal rights helps explain the extent of housing finance. We also examine another potential factor—the existence of sizeable government securities markets—that might enable the development of emerging markets’ housing finance systems, but we find no evidence supporting that.mortgage, housing finance, emerging markets

Markets and Housing Finance

We examine the extent to which markets enable the provision of housing finance across a wide range of countries. Housing is a major purchase requiring long-term financing, and the factors that are associated with well functioning housing finance systems are those that enable the provision of long-term finance. Across all countries, controlling for country size, we find that countries with stronger legal rights for borrowers and lenders (through collateral and bankruptcy laws), deeper credit information systems, and a more stable macroeconomic environment have deeper housing finance systems. These same factors also help explain the variation in housing finance across emerging market economies. Across developed countries, which tend to have low macroeconomic volatility and relatively extensive credit information systems, variation in the strength of legal rights helps explain the extent of housing finance. We also examine another potential factor--the existence of sizeable government securities markets--that might enable the development of emerging markets' housing finance systems, but we find no evidence supporting that.

International Capital Flows and U.S. Interest Rates

Foreign official purchases of U.S. government bonds have an economically large and statistically significant impact on long-term interest rates. Federal Reserve credibility, as evidenced by dramatic reductions in both long-term inflation expectations and the volatility of long rates, contributed much to the decline of long rates in the 1990s. More recently, however, foreign flows have become important. Controlling for various factors given by a standard macroeconomic model, we estimate that had there been no foreign official flows into U.S. government bonds over the past year, the 10-year Treasury yield would currently be 90 basis points higher. Our results are robust to a number of alternative specifications.

International Capital Flows and U.S. Interest Rates

Abstract: Foreign flows have an economically large and statistically significant impact on longterm interest rates. Controlling for various macroeconomic factors we estimate that had there been no foreign flows into U.S. bonds over the past year, the 10-year Treasury yield would currently be 150 basis points higher; even a step-down to average inflows would imply an increase of 105 basis points. The impact of the headline-making foreign official flows—a relatively small subset of total foreign accumulation of U.S. bonds—is also significant but markedly smaller. Our results are robust to a number of alternative specifications.bond yields, Japan, China

Emerging Local Currency Bond Markets

We assess the development of local currency bond markets in emerging market economies (EMEs). Supported by policies and laws that helped to improve macroeconomic stability and creditor rights, many local currency EME bond markets have grown substantially over the past decade and have also provided USD-based investors with attractive returns. U.S. investors have responded by increasing their holdings of EME local currency bonds from less than $2 billion in 2001 to over$27 billion by end-2008. While the increase in U.S. investment spanned many EMEs, empirical tests suggest that relatively more went to those with identifiable investor-friendly institutions and policies.

International diversification at home and abroad

We analyze foreigners' and domestic institutional investors' positions in U.S. equities. Controlling for many factors, we uncover a common preference for large firms and firms that are diversified internationally. The domestic preference for internationally diversified firms implies that investors might obtain substantial international diversification by investing at home. Using an international factor model, we show that exposure to foreign equity markets is indeed greater for domestic firms that are more diversified internationally, suggesting that at least some of the home-grown foreign exposure translates into international diversification benefits. After accounting for home-grown foreign exposure, the share of "foreign" equities in investors' portfolios nearly doubles, reducing (but not eliminating) the observed home bias. --home bias,international portfolio allocation,foreign exposure