|
on International Finance |
|
Issue of 2011‒01‒30
twelve papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Vladimir Popov (New Economic School, Moscow) |
| Abstract: | If there is a negative terms of trade or financial shock leading to the deterioration in the balance of payments, there are two basic options for a country that has limited foreign exchange reserves. First, a country can maintain a fixed exchange rate (or even a currency board) and wait until the reduction of foreign exchange reserves leads to the reduction of money supply: this will drive domestic prices down and stimulate exports, raise interest rates and stimulate the inflow of capital, and finally will correct the balance of payments. Second, the country can allow the devaluation of national currency – flexible exchange rate will automatically bring the balance of payments back into the equilibrium. Because national prices are less flexible than exchange rates, the first type of adjustment is associated with the greater reduction of output. The empirical evidence on East European countries and other transition economies for 1998-99 period (outflow of capital after the 1997 Asian and 1998 Russian currency crises and slowdown of output growth rates) suggests that the second type of policy response (devaluation) was associated with smaller loss of output than the first type (monetary contraction). 2008-09 developments provide additional evidence for this hypothesis. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0154&r=ifn |
| By: | Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Michal Rubaszek (National Bank of Poland, Economic Institute; Warsaw School of Economics); Daria Taglioni (European Central Bank) |
| Abstract: | This paper investigates the channels through which the global crisis of 2008- 2009 spread to economic activity of an emerging, fast growing economy with sound macroeconomic fundamentals. On the basis of Polish firm-level data we find that a number of individual f irm characteristics account for a heterogeneous response. In p articular, foreign ownership appears to have provided a higher degree of resilience to the crisis. Our results indicate that this effect might be due to intra-group lending mechanisms supporting affiliates facing external credit constraints. |
| Keywords: | global crisis, firm-level data, foreign ownership, financial constraints, internal capital market |
| JEL: | C23 E44 F23 G32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:77&r=ifn |
| By: | Leonardo Morales-Arias (University of Kiel); Alexander Dross |
| Abstract: | This article investigates the statistical and economic implications of adaptive forecasting of exchange rates with panel data and alternative predictors. The candidate exchange rate predictors are drawn from (i) macroeconomic 'fundamentals', (ii) return/volatility of asset markets and (iii) cyclical and confidence indices. Exchange rate forecasts at various horizons are obtained from each of the potential predictors using single market, mean group and pooled estimates by means of rolling window and recursive forecasting schemes. The capabilities of single predictors and of adaptive techniques for combining the generated exchange rate forecasts are subsequently examined by means of statistical and economic performance measures. The forward premium and a predictor based on a Taylor rule yield the most promising forecasting results out of the macro 'fundamentals' considered. For recursive forecasting, confidence indices and volatility in-mean yield more accurate forecasts than most of the macro 'fundamentals'. Adaptive forecast combinations techniques improve forecasting precision and lead to better market timing than most single predictors at higher horizons. |
| Keywords: | exchange rate forecasting; panel data; forecast combinations; market timing |
| JEL: | C20 F31 G12 |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:285&r=ifn |
| By: | Michal Jurek (The Poznan University of Economics, Banking Department) |
| Abstract: | This paper verifies strong and weak versions of the vanishing interim regime hypothesis (so-called bipolar view). It is shown herein that the strong as well as weak version of this hypothesis can be discredited. Empirical observations support the bipolar view only for the advanced countries, but not for emerging and developing ones. On the contrary – the number of interim regimes, used by emerging and developing countries more than doubled in the 1999–2008 period. Results of the logistic regression analysis also challenge a bipolar view. Moreover, they provide a strong support for the view that the probability of the use of interim regimes in emerging and developing countries significantly differs in various regions of the world. This can be treated as an evidence of the existence of other factors that influence these countries’ choices concerning exchange rate regimes, partly resulting from differences in institutional fundamentals and different economic structures as well as macroeconomic policy stabilization programs. |
| Keywords: | bipolar view, exchange rate regimes, monetary policy |
| JEL: | E42 E52 F31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:78&r=ifn |
| By: | Marc Flandreau; Kim Oosterlinck |
| Abstract: | The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard. |
| Keywords: | Exchange rate regime; gold standard; bimetallism; credibility; silver risk |
| JEL: | F33 N20 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/73511&r=ifn |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | This paper finds statistically robust and economically important effects of fiscal policy, external financial policy, net foreign assets, and oil prices on current account balances. The statistical model builds upon and improves previous explanations of current account balances in the academic literature. A key advance is that the model captures the effect of external financial policies, including exchange rate policies, through data on net official financial flows. Based on current and expected future policies, current account imbalances in major G-20 economies are likely to widen much more in the next five years than projected by the International Monetary Fund (IMF). This paper concludes with a discussion of appropriate policies to prevent widening imbalances. |
| Keywords: | exchange rate, G-20, official financial flows, sterilized intervention |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp11-1&r=ifn |
| By: | Bruce A. Blonigen; Jeremy Piger |
| Abstract: | Empirical studies of bilateral foreign direct investment (FDI) activity show substantial differences in specifications with little agreement on the set of covariates that are (or should be) included. We use Bayesian statistical techniques that allow one to select from a large set of candidates those variables most likely to be determinants of FDI activity. The variables with consistently high inclusion probabilities are traditional gravity variables, cultural distance factors, parent-country per capita GDP, relative labor endowments, and regional trade agreements. Variables with little support for inclusion are multilateral trade openness, host country business costs, host-country infrastructure (including credit markets), and host-country institutions. Of particular note, our results suggest that many covariates found significant by previous studies are not robust. |
| JEL: | C52 F21 F23 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16704&r=ifn |
| By: | Thorbecke, Willem (Asian Development Bank Institute) |
| Abstract: | This paper considers how exchange rates affect East Asian trade. The evidence indicates that exports produced within regional production networks depend on exchange rates throughout the region while labor-intensive exports depend on exchange rates in the exporting country. These results make sense since the majority of the value-added of processed exports come from imported parts and components while most of the value-added of labor-intensive exports comes from the domestic economy. Recent findings also indicate that imbalances between the People’s Republic of China (PRC) and the United States are a major outlier and that an appreciation of the PRC yuan (CNY) is necessary to reduce these imbalances. |
| Keywords: | global imbalances exchange rate elasticities prc; exchange rate changes east asia |
| JEL: | F32 F41 |
| Date: | 2011–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0263&r=ifn |
| By: | Francesca Viani (Banco de España) |
| Abstract: | Whether cross-border financial market integration has raised global insurance, is still a controversial issue in the literature. If this is so, what should we observe in the data? The insurance literature emphasizes that efficient risk-sharing requires financial markets to channel resources to countries that have been made temporarily poorer by some negative conjuncture, net of physical capital accumulation. This standard condition, which provides the basis for virtually every test of international insurance, is however derived focusing on only one of the two channels of cross-border insurance, the financial flows channel, implicitly assuming no interaction between this and the other channel, international relative price fluctuations. This paper shows that testable conditions can only be derived theoretically placing the interaction between prices and financial flows centerstage in the analysis. Using a two-country general equilibrium model with endogenous portfolio diversification, I show that financial flows and relative prices can be either complements or substitutes in providing insurance. In the case of complementarity, financial inflows raise the international price of a country's output. This implies the standard condition. In the case of substitutability prices and flows transfer purchasing power in opposite directions. This implies a different condition: efficient financial markets are required to channel resources "upstream", from relatively poorer to relatively richer countries. The conditions for substitutability appear to be quantitatively and empirically plausible. |
| Keywords: | International financial flows, risk-sharing, terms of trade |
| JEL: | F3 F4 G1 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1038&r=ifn |
| By: | Robert Kollmann; Frédéric Malherbe |
| Abstract: | This paper provides an overview of recent theories of international financial contagion, with a focus on models in which the balance sheet constraints of global banks (and other financial institutions) are the key of international transmission. |
| Keywords: | global financial crisis; international financial contagion; international financial multiplier; global banks; bank balance sheets; capital ratio; leverage ratio; international interbank market; asset prices; credit losses; bank runs |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/73556&r=ifn |
| By: | Lestano; Jacobs, Jan; Dungey, Mardi (Groningen University) |
| Abstract: | Financial crises are high cost events which can transmit across international borders. Using data from 1883 to 2008 this paper develops a means of mapping changes in the degree of international synchronisation of banking and currency crises through a formal concordance index. This index speci cally accounts for the typically low incidence and potential serial correlation of crisis data. The results show that banking crises were highly internationalised at the beginning of the 20th century, and became far less so in the strong regulatory environment prevailing after the Depression until the 1980s. A strong increase in the synchronicity of international banking crises is revealed during the late 20th and early 21st century. Currency crises began the century as more idioysncratic, but have tended to become more synchronised over the 115 year sample. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:10002&r=ifn |
| By: | Didier, Tatiana; Rigobon, Roberto; Schmukler, Sergio L. |
| Abstract: | This paper studies how portfolios with a global investment scope are allocated internationally using a unique micro dataset on U.S. equity mutual funds. While mutual funds have great flexibility to invest globally, they invest in a surprisingly limited number of stocks, around 100. The number of holdings in stocks and countries from a given region declines as the investment scope of funds broadens. This restrictive investment practice has costs. A mean-variance strategy shows unexploited gains from further international diversification. Mutual funds investing globally could achieve better risk-adjusted returns by broadening their asset allocation, including stocks held by more specialized funds within the same mutual fund family (company). This investment pattern is not explained by lack of information or instruments, transaction costs, or a better ability of global funds to minimize negative outcomes. Instead, industry practices related to organizational factors seem to play an important role. |
| Keywords: | Mutual Funds,Debt Markets,Emerging Markets,Rural Development Knowledge&Information Systems,Access to Finance |
| Date: | 2011–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5524&r=ifn |