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Cover IMF Working Papers
Front Matter
Jennifer Blouin, Harry Huizinga, Mr. Luc Laeven, and Gaetan Nicodeme

borrowing 4. Thin capitalization restrictions on total debt and total borrowing by US affiliates 5. Thin capitalization restrictions on internal debt and borrowing from the parent relative to equity 6. Thin capitalization restrictions on the share of internal debt and borrowing from the parent 7. Internal leverage restrictions and the total debt and total borrowing by US affiliates 8. The application of thin capitalization rules and US affiliate financing 9. The short-term impact of changes in thin capitalization rules on US affiliate financing 10. Impact of

Keywords:
WP; leverage restriction; interest expense; leverage ratio; interest deductibility; affiliate debt
Cover IMF Working Papers
Thin Capitalization Rules and Multinational Firm Capital Structure
Jennifer Blouin, Harry Huizinga, Mr. Luc Laeven, and Gaetan Nicodeme
This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules significantly affect multinational firm capital structure. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt-to-assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.
Keywords:
WP; leverage restriction; interest expense; leverage ratio; interest deductibility; affiliate debt; Thin capitalization rule; Multinational firm; Capital structure; Taxation; rate of inflation; Thin capitalization rules; Domestic debt; Transnational corporations; Stocks; Global
Cover IMF Working Papers
Thin Capitalization Rules and Multinational Firm Capital Structure1
Jennifer Blouin, Harry Huizinga, Mr. Luc Laeven, and Gaetan Nicodeme

existence and stringency of thin capitalization regimes to the total or internal leverage of foreign affiliates of US multinationals using confidential data from the US Bureau of Economic Analysis. Given the prevalence of restrictions on total leverage in 2004, we first consider how these restrictions affect the total leverage of foreign affiliates. On average, the existence of a total leverage restriction reduces an affiliate’s total leverage by 1.9%. Stricter regimes reduce total leverage more; we find that lower allowable total leverage ratios are associated with lower

Keywords:
WP; leverage restriction; interest expense; leverage ratio; interest deductibility; affiliate debt; expense bill; tax shield; ratio test; total leverage; assets ratio; debt measure
Cover IMF Staff Country Reports
Canada: Financial Sector Assessment Program-Technical Note-Systemic Liquidity
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note on Financial Safety Net and Crisis Management for the Canada examines systematic liquidity issues. The review evaluated the Bank of Canada’s (BOC’s) operational framework and its ability to manage liquidity conditions in normal times and in times of stress. The review also assessed the functioning and resilience of key funding markets in Canada. The paper highlights that the BOC’s framework for market operations and liquidity provision in normal times is comprehensive and well-articulated. System-wide liquidity conditions are stable, market rates are closely aligned with the announced policy rate, and the BOC has many channels to provide liquidity against a broad range of collateral. Foreign exchange markets appear liquid, and their resilience is increasingly important given the growing reliance on external, foreign-currency funding. Contingency plans for market-wide liquidity support regarding intervention in securities markets and provision of foreign-currency liquidity should be developed further and tested.
Cover IMF Working Papers
An Overview of Macroprudential Policy Tools
Mr. Stijn Claessens
Macroprudential policies – caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies – have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools’ costs ? by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools.
Keywords:
WP; externality; monetary policy; bank; credit crunch; Financial stability; financial intermediation; externalities; market failures; procyclicality; systemic risks; capital requirement; resource allocation; interconnectedness externality; market failures policy; bank leverage; house price inflation; assets bank; foreign currency; Macroprudential policy; Systemic risk; Financial sector stability; Credit; Global
Cover IMF Working Papers
Macro-Prudential Policies to Mitigate Financial System Vulnerabilities
Mr. Stijn Claessens, Swart R. Ghosh, and Miss Roxana Mihet
Macro-prudential policies aimed at mitigating systemic financial risks have become part of the policy toolkit in many emerging markets and some advanced countries. Their effectiveness and efficacy are not well-known, however. Using panel data regressions, we analyze how changes in balance sheets of some 2,800 banks in 48 countries over 2000–2010 respond to specific macro-prudential policies. Controlling for endogeneity, we find that measures aimed at borrowers––caps on debt-to-income and loan-to-value ratios––and at financial institutions––limits on credit growth and foreign currency lending––are effective in reducing asset growth. Countercyclical buffers are little effective through the cycle, and some measures are even counterproductive during downswings, serving to aggravate declines, consistent with the ex-ante nature of macro-prudential tools.
Keywords:
WP; country; bank; macro-prudential policy; policy; Systemic risk; Macropudential policies; Effectiveness; Banking vulnerabilities; asset growth; bank leverage; lending spiral; bank control variables; Adressing bank buffer; bank asset; leveraged bank; risk appetite; balance sheets behavior; financial institution; Emerging and frontier financial markets; Credit; Capital account; Reserve requirements; Financial statements; Global
Cover IMF Working Papers
The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma
Paolo Cavallino and Mr. Damiano Sandri
We provide a theory of the limits to monetary policy independence in open economies arising from the interaction between capital flows and domestic collateral constraints. The key feature of our theory is the existence of an “Expansionary Lower Bound” (ELB), defined as an interest rate threshold below which monetary easing becomes contractionary. The ELB can be positive, thus acting as a more stringent constraint than the Zero Lower Bound. Furthermore, the ELB is affected by global monetary and financial conditions, leading to novel international spillovers and crucial departures from Mundell’s trilemma. We present two models under which the ELB may arise, the first featuring carry-trade capital flows and the second highlighting the role of currency mismatches.
Keywords:
WP; monetary policy; exchange rate; central bank; collateral constraints; currency mismatches; carry trade; spillovers; ELB constraint; credit crunch; monetary policy stance; open economy; ELB call; ELB rise; monetary policy independence; existence of an Expansionary Lower Bound; policy rate response; monetary policy in EMs; monetary policy rate; Interest rate floor; Central bank policy rate; Sovereign bonds; Exchange rates; Capital flows; Global
Cover Policy Papers
Monetary Policy and Financial Stability
International Monetary Fund
The issue of using monetary policy for financial stability purposes is hotly contested. The crisis was a reminder that price stability is not sufficient for financial stability, financial crises are costly, and policy should aim to decrease the likelihood of crises, not only rely on dealing with their repercussions once they occur. It is clear that well-targeted prudential policies (including micro and macroprudential regulation and supervision) should be pursued actively to attenuate the buildup of financial risks. The question is whether monetary policy should be altered to contain financial stability risks. Should it lend a hand by temporarily raising interest rates more than warranted by price and output stability objectives? Keeping rates persistently higher is also possible, but more costly.
Keywords:
PP; monetary policy shock; transmission mechanism; interest rate hike; credit growth; prudential policy; basis point; asset price; financial system; interest rate shock; crisis risk; Financial sector stability; Credit; Inflation; Financial sector risk; Global
Cover IMF Staff Country Reports
Ireland: 2021 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
Ireland entered the COVID pandemic with reduced vulnerabilities and high growth, especially in multinational enterprises (MNEs)-dominated sectors. The pandemic has had a highly asymmetric impact on the economy. The domestic sectors contracted by about 10 percent in 2020 and unemployment reached 30 percent at the peak of the first wave, while MNEs continued to grow strongly, driving overall GDP growth to 3.4 percent. A swift policy response has been effective in mitigating the crisis impact and protecting households and firms. The domestic sectors are expected to partially recover in 2021, with GDP growth projected at 4.6 percent. Downside risks stem from uncertainties surrounding new COVID variants, post-Brexit trade arrangements, and likely changes in international taxation.
Keywords:
money market rate; liability positions vis-à-vis nonresident; income support; policy support; cost reduction; COVID-19; Credit; Income; Housing; Europe; Global; Loans