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on International Finance |
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Issue of 2011‒08‒02
eight papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks – key crisis events as well as changes to global liquidity and risk – have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors (“push” factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants (“pull” factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2010, in particular for emerging markets. JEL Classification: F3, F21, G11. |
| Keywords: | capital flows, factor model, common shocks, liquidity, risk, push factors, pull factors, emerging markets, advanced economies. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111364&r=ifn |
| By: | Marián Dinga (CERGE-EI); Vilma Dingová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper studies the effect of the euro introduction on international FDI flows. Using country-pair data on 35 OECD economies during 1997-2008 and adopting the propensity score matching as identification strategy, we investigate the impact of the euro on capital reallocation. In general, the euro exhibits no significant impact on FDI. However, the effect becomes significant on the subset of EU countries, increasing FDI flows by 14.3 to 42.5 percent. Furthermore, we find that the EU membership fosters FDI flows much more than the euro, increasing FDI flows by 55 to 166 percent. Among other FDI determinants, high gross domestic product, low distance between countries and low unit labor costs in target country have a positive effect on FDI. On the contrary, long-term exchange rate volatility deters FDI flows. |
| Keywords: | monetary union, foreign direct investment, common currency area, euro |
| JEL: | E42 F15 F21 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2011_25&r=ifn |
| By: | Katrin Forster (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Melina Vasardani (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main) |
| Abstract: | This paper analyses the impact of the global financial crisis on euro area cross-border financial flows by comparing recent developments with the main pre-crisis trends. Two prominent features of the period of turmoil were (i) the sizeable deleveraging of external financial exposures by the private sector and, in particular, the banking sector from 2008 and (ii) the significant changes in the composition of euro area cross-border portfolio flows, as investors shifted from equity to debt instruments, from long-term to short-term debt instruments and from private to public sector securities. Since 2009 such trends have started reversing. However, as balance sheet restructuring by financial and non-financial corporations continues, cross-border financial flows have remained well below pre-crisis levels. The degree of resumption and volatility of cross-border financial activity may have a major bearing on growth prospects for the euro area and may also matter from a financial stability perspective. We argue that the recent experience, first of extraordinary growth and then of scaling down of international financial activity, calls for enhanced monitoring of developments in cross-border financial flows so that the underlying risks to the domestic economy stemming from the financial sector can be better assessed. Looking forward, successful implementation of policy actions to promote macroeconomic discipline and enhance financial regulation and supervision could influence, inter alia, the composition and volume of cross-border capital flows, contributing to a more efficient and sustainable allocation of resources. JEL Classification: E44, E58, F33, F42 |
| Keywords: | Global financial crisis, euro area, capital flows. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20110126&r=ifn |
| By: | Aizenman, Joshua (Asian Development Bank Institute); Jinjarak, Yothin (Asian Development Bank Institute); Park, Donghyun (Asian Development Bank Institute) |
| Abstract: | Motivated by the unprecedented rise of swap agreements between the central banks of developed economies and their developing economy counterparts, this paper evaluates Asian swap arrangements and their association with the build-up of foreign reserves prior to the 2008–2009 global financial crisis. The evidence suggests that there is a limited scope for swaps to substitute for reserves. Furthermore, the selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation. |
| Keywords: | reserves; swaps; dollar standard; asia; trade and financial linkages |
| JEL: | F15 F31 F32 |
| Date: | 2011–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0297&r=ifn |
| By: | Popov, Vladimir |
| Abstract: | While developing countries as a group did better than developed countries in 2008-09 recession, transition economies – former communist countries – experienced the largest reduction of output. Out of 42 countries that experienced negative growth in 2007-09, 13 were transition economies. In fact, 4 out of 5 most affected economies were former communist countries (Latvia, Estonia, Ukraine, Lithuania). The hypothesis is that these transition countries (1) suffered more than the others from the sudden outflow of capital and (2) did not manage this outflow particularly well. The rule of thumb was that large outflows of capital, especially coupled with negative trade shocks, suppressed economic activity. But if the shocks were relatively small (up to 3% of GDP change in trade and capital account from Q2 2008 to an average of subsequent 3 quarters), it was possible to mitigate them through devaluation (not allowing foreign exchange reserves to drop by the same amount). If the shocks were large, even devaluation did not allow to avoid output fall. |
| Keywords: | Recession 2008-09; capital outflow; trade shocks; devaluation |
| JEL: | F42 F40 F41 F43 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32388&r=ifn |
| By: | JINJI Naoto; ZHANG Xingyuan; HARUNA Shoji |
| Abstract: | In this paper, we investigate empirically how firms' choices of globalization mode differ according to their productivity and Tobin's q using firm-level data of Japanese firms. Our findings support predictions by Helpman, Melitz, and Yeaple (2004) and by Chen, Horstmann, and Markusen (2008). That is, we find that firms with higher productivity tend to choose more foreign direct investment (FDI) and less exporting. We also find that firms with higher Tobin's q tend to choose more FDI and less foreign outsourcing of production. The difference in productivity is relatively less important for the choice between FDI and foreign outsourcing, and the difference in Tobin's q is relatively less important for the choice between exporting and FDI. Because the indexes of globalization activities have a strong negatively skewed distribution, our results indicate that quantile regression would be appropriate to analyze the relationship between firm characteristics and choice of globalization mode. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:11061&r=ifn |
| By: | Yougbaré, Lassana |
| Abstract: | The paper studies the misalignment2-exchange rate regime linkages by pursing three avenues. First, does misalignment vary across alternative de jure and de facto exchange rate systems? Second, can these misalignment-effects be explained by different probabilities of undervaluation and overvaluation episodes? Lastly, does delivering the promised exchange rate regime pay off? The regression analysis reveals that misalignment is larger in fixed systems, with middle income and the CFA countries displaying the largest effect. This result likely stems from more (less) frequent overvaluation (undervaluation) episodes. Intermediate regimes are found to be associated with a smaller misalignment in middle income countries and a larger misalignment in low and high income countries. But only in the latter does this misalignment-impact appear to result from more frequent overvaluation episodes. In the other groups of countries it may come from over and undervaluation episodes with different magnitudes. |
| Keywords: | equilibrium real exchange rate; misalignment; exchange rate regimes |
| JEL: | E42 F41 F31 |
| Date: | 2011–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32362&r=ifn |
| By: | Anders Aslund (Peterson Institute for International Economics) |
| Abstract: | In the fall of 2008, Central and Eastern Europe became a flashpoint in the global financial crisis. The positive surprise, however, is that after about two years, the crisis in the region had more or less abated. Public attention moved from Latvia, Estonia, and Lithuania to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). The issue was no longer why Latvia must devalue but what Greece could learn from Latvia. What lessons can be drawn from the resolution of the financial crisis in Eastern Europe for the rest of the European Union and the world at large? |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb11-09&r=ifn |