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on International Finance |
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Issue of 2011‒09‒16
eleven papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Aizenman, Joshua; Pinto, Brian |
| Abstract: | The accumulated experience of emerging markets over the past two decades has laid bare the tenuous links between external financial integration and faster growth, on the one hand, and the proclivity of such integration to fuel costly crises on the other. These crises have not gone without learning. During the 1990s and 2000s, emerging markets converged to the middle ground of the policy space defined by the macroeconomic trilemma, with growing financial integration, controlled exchange rate flexibility, and proactive monetary policy. The OECD countries moved much faster toward financial integration, embracing financial liberalization, opting for a common currency in Europe, and for flexible exchange rates in other OECD countries. Following their crises of 1997-2001, emerging markets added financial stability as a goal, self-insured by building up international reserves, and adopted a public finance approach to financial integration. The global crisis of 2008-2009, which originated in the financial sector of advanced economies, meant that the OECD"overshot"the optimal degree of financial deregulation while the remarkable resilience of the emerging markets validated their public finance approach to financial integration. The story is not over: with capital flowing in droves to emerging markets once again, history could repeat itself without dynamic measures to manage capital mobility as part of a comprehensive prudential regulation effort. |
| Keywords: | Debt Markets,Emerging Markets,Currencies and Exchange Rates,Banks&Banking Reform,Economic Theory&Research |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5786&r=ifn |
| By: | Karen K. Lewis |
| Abstract: | Financial markets have become increasingly global in recent decades, yet the pricing of internationally traded assets continues to depend strongly upon local risk factors, leading to several observations that are difficult to explain with standard frameworks. Equity returns depend upon both domestic and global risk factors. Further, local investors tend to overweight their asset portfolios in local equity. The stock prices of firms that begin to trade across borders increase in response to this information.> ; Foreign exchange markets also display anomalous relationships. The forward rate predicts the wrong sign of future movements in the exchange rate, implying that traders can make profits by borrowing in lower interest rate currencies and investing in higher interest rate currencies. Furthermore, the sign of the foreign exchange premium changes over time, a fact difficult to reconcile with consumption variability. In this review, I describe the implications of the current body of research for addressing these and other global asset pricing challenges. |
| Keywords: | Asset pricing ; Financial markets |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:88&r=ifn |
| By: | Rose, Andrew K; Spiegel, Mark |
| Abstract: | While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness. |
| Keywords: | dollar; exchange rate; Federal Reserve; financial crisis; illiquidity; swap; TAF |
| JEL: | E44 E58 F31 F33 F41 F42 G15 O24 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8557&r=ifn |
| By: | Brown, Martin; Lane, Philip R. |
| Abstract: | This paper assesses the extent to which debt overhang poses a constraint to economic activity in Emerging Europe, as the region emerges from the recent financial and economic crisis. At the macroeconomic level, it finds that the external imbalance problem for Emerging Europe has been in most cases more one of flows (high current account deficits in the pre-crisis years) rather than large stocks of external debt. A high reliance on equity funding means that net external debt is far lower than net external liabilities. Domestic balance sheets have expanded quite rapidly but sector liabilities remain relatively low compared with advanced economies. With the important exception of Hungary, public debt levels also remain relatively low in Emerging Europe. At the microeconomic level, the potential for debt overhang in the corporate sector is limited to a few countries: Latvia, Lithuania, Estonia, and Slovenia. Due to the low incidence of household debt, hardly any country, except Estonia, seems to face a threat of debt overhang in the household sector. The strong increase in non-performing loans compared with pre-crisis bank profitability suggests that debt overhang in the banking sector is a threat in Ukraine, Latvia, Lithuania, Hungary, Georgia, and Albania. Financial integration of Emerging Europe seems to have contributed to the transmission of the crisis to the region. At the same time, this integration is helping the region in managing the crisis by concerted actions of the major players. |
| Keywords: | Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Emerging Markets |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5784&r=ifn |
| By: | Christoph Fischer |
| Abstract: | Based on a classification of countries and territories according to their regime and anchor currency choice, the study considers the two major currency blocs of the present world. A nested logit regression suggests that long-term structural economic variables determine a given country's currency bloc affiliation. The dollar bloc differs from the euro bloc in that there exists a group of countries that peg temporarily to the U.S. dollar without having close economic affinities with the bloc. The estimated parameters are consistent with an additive random utility model interpretation. A currency bloc equilibrium in the spirit of Alesina and Barro (2002) is derived empirically. |
| Keywords: | Foreign exchange ; International finance |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:87&r=ifn |
| By: | Jorg Bibow |
| Abstract: | Currency market intervention-cum-reserve accumulation has emerged as the favored "self-insurance" strategy in recipient countries of excessive private capital inflows. This paper argues that capital account management represents a less costly alternative line of defense deserving renewed consideration, especially in the absence of fundamental reform of the global monetary and financial order. Mainstream arguments in favor of financial globalization are found unconvincing; any indirect benefits allegedly obtainable through hot money inflows are equally obtainable without actually tolerating such inflows. The paper investigates the experiences of Brazil, Russia, India, and China (the BRICs) in the global crisis and subsequent recovery, focusing on their respective policies regarding capital flows. |
| Keywords: | Capital Flows; Self-Insurance; Capital Controls; Financial Regulation |
| JEL: | F02 F32 F33 F39 G28 O23 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_683&r=ifn |
| By: | Wang, Xiaozu; Xu, Lixin Colin; Zhu, Tian |
| Abstract: | This paper develops a self-enforcing contract model to show that better economic fundamentals can help when there is weak rule of law -- but with order -- to attract foreign direct investment, whereas lowering taxes does not necessarily help. Using a cross-region Chinese dataset, the analysis finds evidence consistent with the theoretical analysis. Regional variations in tax rates and the perceived quality of formal contracting institutions are not correlated with regional inflows of foreign direct investment, but leadership characteristics are. Most conventional economic factors have the predicted effects on foreign direct investment. The finding that foreign direct investment is lower in locations where domestic private firms have better access to finance and where the air quality is poor is new to the literature. |
| Keywords: | Debt Markets,Emerging Markets,Investment and Investment Climate,Bankruptcy and Resolution of Financial Distress,Access to Finance |
| Date: | 2011–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5790&r=ifn |
| By: | Michael D Bordo; Owen F Humpage; Anna J Schwartz |
| Abstract: | If official interventions convey private information useful for price discovery in foreign-exchange markets, then they should have value as a forecast of near-term exchange-rate movements. Using a set of standard criteria, we show that approximately 60 percent of all U.S. foreign-exchange interventions between 1973 and 1995 were successful in this sense. This percentage, however, is no better than random. U.S. intervention sales and purchases of foreign exchange were incapable of forecasting dollar appreciations or depreciations. U.S. interventions, however, were associated with more moderate dollar movements in a manner consistent with leaning against the wind, but only about 22 percent of all U.S. interventions conformed to this pattern. We also found that the larger the size of an intervention, the greater was its probability of success, although some interventions were inefficiently large. Other potential characteristics of intervention, notably coordination and secrecy, did not seem to influence our success rates. |
| Keywords: | Board of Governors of the Federal Reserve System (U.S.) ; Foreign exchange |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1118&r=ifn |
| By: | Jayasuriya, Dinuk |
| Abstract: | The World Bank's Ease of Doing Business reports have been ranking countries since 2006. However, do improvements in rankings generate greater foreign direct investment inflows? This study is the first to test such a proposition empirically with Arellano-Bond dynamic panel estimators using the official rankings from 2006 to 2009. The paper shows this relationship is significant for the average country. However, when the sample is restricted to developing countries, the results suggest an improved ranking has, on average, an insignificant (albeit positive) influence on foreign direct investment inflows. Although robust, this result should be taken with caution given that it refers to the average developing country using data across a four-year time period. Finally, the paper demonstrates that, on average, countries that undertake large-scale reforms relative to other countries do not necessarily attract greater foreign direct investment inflows. This analysis may have important ramifications for developing country governments wanting to improve their Doing Business Rankings in the hope of attracting foreign direct investment inflows. |
| Keywords: | Debt Markets,Competitiveness and Competition Policy,Business in Development,Business Environment,Emerging Markets |
| Date: | 2011–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5787&r=ifn |
| By: | Michael R. King (Richard Ivey School of Business, University of Western Ontario); Carol Osler (Brandeis International Business School, Brandeis University); Dagfinn Rime (Norges Bank (Central Bank of Norway)) |
| Abstract: | Electronic trading has transformed foreign exchange markets over the past decade, and the pace of innovation only accelerates. This formerly opaque market is now fairly transparent and transaction costs are only a fraction of their former level. Entirely new agents have joined the fray, including retail and high-frequency traders, while foreign exchange trading volumes have tripled. Market concentration among dealers has risen reflecting the heavy investments in technology. Undeterred, some new non-bank market participants have begun to make markets, challenging the traditional foreign exchange dealers on their own turf. This paper outlines the players in this market and the structure of their interactions. It also presents new evidence on how that structure has changed over the past two decades. Throughout, it highlights issues relevant to exchange rate modelling. |
| Keywords: | exchange rates, algorithmic trading, market microstructure, electronic trading, high frequency trading |
| JEL: | F31 G12 G15 C42 C82 |
| Date: | 2011–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_10&r=ifn |
| By: | Laura Alfaro; Sebnem Kalemli-Ozcan; Vadym Volosovych |
| Abstract: | We decompose capital flows – both debt and equity – into public and private components and study their relationship with productivity growth. This exercise reveals that international capital flows are mainly shaped by government decisions and sovereign to sovereign transactions. Specifically, we show: (i) international capital flows net of government debt are positively correlated with growth and allocated according to the neoclassical predictions; (ii) international capital flows net of official aid flows, which are mostly accounted as debt, are also positively correlated with productivity growth consistent with the predictions of the neoclassical model; (iii) public debt flows are negatively correlated with growth only if government debt is financed by another sovereign and not by private lenders. Our results show that the failure to consider official flows as the main driver of uphill flows and global imbalances is an important shortcoming of the recent literature. |
| JEL: | F2 F41 O1 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17396&r=ifn |