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on International Finance |
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Issue of 2011‒10‒22
fourteen papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Eswar S. Prasad |
| Abstract: | I document that emerging markets have cast off their “original sin”--their external liabilities are no longer dominated by foreign-currency debt and have instead shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves held in advanced economy government bonds. Given the enormous and rising public debt burdens of reserve currency economies, this means that the long-term risk on emerging markets’ external balance sheets is shifting to the asset side. However, emerging markets continue to look for more insurance against balance of payments crises, even as self-insurance through reserve accumulation itself becomes riskier. I discuss a possible mechanism for global liquidity insurance that would meet emerging markets’ demand for insurance with fewer domestic policy distortions while facilitating a quicker adjustment of global imbalances. I also argue that emerging markets have become less dependent on foreign finance and more resilient to capital flow volatility. The main risk that increasing financial openness poses for these economies is that capital flows exacerbate vulnerabilities arising from weak domestic policies and institutions. |
| JEL: | F3 F4 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17497&r=ifn |
| By: | Joshua Aizenman; Yothin Jinjarak; Donghyun Park |
| Abstract: | We investigate the relationship between economic growth and lagged international capital flows, disaggregated into FDI, portfolio investment, equity investment, and short-term debt. We follow about 100 countries during 1990-2010 when emerging markets became more integrated into the international financial system. We look at the relationship both before and after the global crisis. Our study reveals a complex and mixed picture. The relationship between growth and lagged capital flows depends on the type of flows, economic structure, and global growth patterns. We find a large and robust relationship between FDI – both inflows and outflows – and growth. The relationship between growth and equity flows is smaller and less stable. Finally, the relationship between growth and short-term debt is nil before the crisis, and negative during the crisis. |
| JEL: | F21 F32 F43 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17502&r=ifn |
| By: | Jarko Fidrmuc (Zeppelin University Friedrichshafen, CESifo Munich, Institute for Eastern European Studies,); Mariya Hake (Oesterreichische Nationalbank); Helmut Stix (Oesterreichische Nationalbank, Economic Studies Division Central and Eastern Europe) |
| Abstract: | Foreign currency loans represent an important feature of recent financial developments in CEECs. This might pose a serious challenge for macroeconomic stability. Against this background, the authors study the determinants of foreign currency loans of households, using data on the behavior of households in nine CEECs. Their results reveal that foreign currency loans are driven by households’ lack of trust in the stability of the local currency and in domestic financial institutions. Moreover, special factors including remittances and expectations of euro adoption play an important role in selected regions. The financial crisis reduced foreign currency borrowing, but there is some indication this effect might be only temporary. JEL classification: G18, G21, C25 |
| Keywords: | Foreign currency loans, dollarization, euroization, monetary credibility, trust, CEEC |
| Date: | 2011–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:171&r=ifn |
| By: | Fedorova, Elena (BOFIT) |
| Abstract: | With the rise of interconnected global financial systems, there is an increased risk that a financial crisis in one country may spread to others. The contagion effects of the 2008 global financial crisis hit advanced economies fast and hard while sparing less developed and less integrated financial systems. The present study focuses on the contagion effects at Eastern European stock markets and changes in their interconnections after EU accession in 2004. Specifically, we investigate the relationship among the stock market sectors of Poland, Hungary and the Czech Republic during 19982009 and their exposure to on-shored financial risk. The evidence suggests direct linkages between different stock market sectors with respect to returns and volatilities with increased equity-shock transmission between markets after EU accession in 2004. Of particular note is the intra-industry contagion in emerging Europe. Our findings have implications for asset pricing and portfolio selection for international financial institutions and financial managers. |
| Keywords: | GARCH-BEKK; international risk transfer; emerging Eastern Europe; spillovers; intra- and inter-industry contagion |
| JEL: | C32 F36 G12 G15 |
| Date: | 2011–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_024&r=ifn |
| By: | Nagayasu, Jun |
| Abstract: | This paper analyzes the stationarity of forward premiums in the foreign exchange markets. Considering a wide range of countries and contract periods and taking into account cross-sectional correlations and heterogeneities in nonstationary environments, we confirmed mixed evidence of stationary forward premiums. However, mounting evidence to support the stationarity is provided when regime shifts which likely reflect the effects of the Lehman Shock and changing monetary policies are considered. Thus these events seem to have increased the nonstationary element in the premiums, and our further analysis suggests the effect of these events can be captured by interest rates, leaving the covered interest parity condition as a valid long-run concept. |
| Keywords: | Panel unit root tests; structural shifts; forward premiums; Lehman shock |
| JEL: | F31 |
| Date: | 2011–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34265&r=ifn |
| By: | Fratzscher, Marcel; Mehl, Arnaud; Vansteenkiste, Isabel |
| Abstract: | This paper investigates the empirical link between fiscal vulnerabilities and currency crashes in advanced economies over the last 130 years, building on a new dataset of real effective exchange rates and fiscal balances for 21 countries since 1880. We find evidence that crashes depend more on prospective fiscal deficits than on actual ones, and more on the composition of public debt (i.e. rollover/sudden stop risk) than on its level per se. We also uncover significant nonlinear effects at high levels of public debt as well as significantly negative risk premia for major reserve currencies, which enjoy a lower probability of currency crash than other currencies ceteris paribus. Yet, our estimates indicate that such premia remain small in size relative to the conditional probability of a currency crash if prospective fiscal deficits or rollover/sudden stop risk are high. This suggests that a currency’s international status is not necessarily sufficient to shelter it from collapse. |
| Keywords: | advanced economies; banking crises; currency crashes; exchange rates; fiscal vulnerability; foreign debt; reserve currencies; total debt level |
| JEL: | F30 F31 N20 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8612&r=ifn |
| By: | Elena-Ivona Dumitrescu (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Bertrand Candelon (Economics - Maastricht University); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Franz C. Palm (Maastricht University - univ. Maastricht) |
| Abstract: | The recent financial turmoils in Latin America and Europe have led to a concatenation of several events from currency, banking and sovereign debt crises. This paper proposes a multivariate dynamic probit model that encompasses the three types of crises 'currency, banking and sovereign debt' and allows us to investigate the potential causality between all three crises. To achieve this objective, we propose a methodological novelty consisting of an exact maximum likelihood method to estimate this multivariate dynamic probit model, extending thus Huguenin, Pelgrin and Holly (2009). Using a large sample of data for emerging countries, which experienced financial crises, we find that mutations from banking to currency (and vice-versa) are quite common. More importantly, the trivariate model turns out to be more parsimonious in the case of the two countries which suff ered from the 3 types of crises. These findings are strongly confi rmed by a conditional probability and an impulse-response function analysis, highlighting the interaction between the di fferent types of crises and advocating hence the implementation of trivariate models whenever it is feasible. |
| Keywords: | Financial crisis, Multivariate dynamic probit models, Emerging countries |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00630036&r=ifn |
| By: | Brunnschweiler, Christa N.; Valente, Simone |
| Abstract: | We analyze the effects of different regimes of control rights over critical resources on the total domestic income of open economies. We consider home control, foreign control, and international partnerships in a theoretical model where contracts are incomplete, resource exploitation requires local capital, and foreign technologies are more efficient. Enacting foreign control is never optimal, and assigning complete residual rights to foreign fi rms reduces domestic income. Two testable predictions are derived. First, international partnerships tend to generate higher domestic income than foreign control. Second, the typical regime choice is either partnership or foreign control when the international relative pro fitability of the domestic resource endowment is high or intermediate, and home control with low relative pro fitability. We test these predictions using a new dataset on petroleum ownership structures for up to 68 countries between 1867-2008, finding strong empirical support for the theoretical results. |
| Keywords: | Property rights; control rights; income; oil; panel data |
| JEL: | D23 F20 O13 |
| Date: | 2011–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34222&r=ifn |
| By: | Cheung , Yin-Wong (BOFIT); Fujii, Eiji (BOFIT) |
| Abstract: | We study the differences in currency misalignment estimates obtained from alternative datasets derived from two International Comparison Program (ICP) surveys. A decomposition exercise reveals that the year 2005 misalignment estimates are substantially affected by the ICP price revision. Further, we find that differences in misalignment estimates are systematically affected by a country’s participation status in the ICP survey and its data quality – a finding that casts doubt on the economic and policy relevance of these misalignment estimates. The patterns of changes in estimated degrees of misalignment across individual countries, as exemplified by the BRIC economies, are highly variable. |
| Keywords: | Penn effect regression; data revision; PPP-based data; measurement factors; economic factors |
| JEL: | C31 E01 F31 F40 |
| Date: | 2011–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_025&r=ifn |
| By: | Godart, Olivier; Görg, Holger; Hanley, Aoife |
| Abstract: | Starting from the observation that all firms in Ireland (foreign and domestic in manufacturing and services industries) were hit by the crisis, the paper asks whether there is a difference in the behaviour of foreign and domestic firms. One hypothesis is that foreign multinationals are less linked into the Irish economy, so more likely to leave once the economy is hit by a negative shock. The paper discusses background hypotheses before giving empirical evidence from firstly aggregate data, and secondly firm-level observations. The analysis of the latter suggests that foreign firms are not more likely to leave during the crisis than Irish firms. Some policy conclusions are offered in the paper. |
| Keywords: | financial crisis; firm survival |
| JEL: | F23 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8596&r=ifn |
| By: | Georg H. Strasser (Department of Economics, Boston College) |
| Abstract: | The macroeconomic evidence on the short-term impact of exchange rates on exports and prices is notoriously weak. In this paper I examine the micro-foundations of this disconnect by looking at firm export and price setting decisions in response to exchange rate fluctuations and changing credit conditions. A unique German firm survey dataset allows me to study the impact of the EUR/USD exchange rate during the years 2003-2010. Its information on pricing and export expectations at the firm-level enables me to measure the instantaneous response of a firm to changing financial constraints and exchange rates, which avoids endogeneity issues. I find that primarily large firms cause the exchange rate "puzzles" in aggregate data. The exchange rate disconnect disappears for financially constrained firms. For these firms, the pass-through rate of exchange rate changes to the prices is more than twice the rate of unconstrained firms. Similarly, their exports are about twice as sensitive to exchange rate fluctuations. Credit therefore affects not only exports via trade finance, but also international relative prices by constraining the scope of feasible pricing policies. The effect of borrowing constraints is particularly strong during the recent financial crisis. |
| Keywords: | exchange rate pass-through, exchange rate disconnect, financing constraints, pricing to market, exports, credit crunch, trade collapse, law of one price, trade finance |
| JEL: | F31 E44 F40 E32 G21 |
| Date: | 2010–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:788&r=ifn |
| By: | Menzie D. Chinn; Barry Eichengreen; Hiro Ito |
| Abstract: | We examine whether the behavior of current account balances changed in the years preceding the global crisis of 2008-09, and assess the prospects for global imbalances in the post-crisis period. Changes in the budget balance are an important factor affecting current account balances for deficit countries such as the U.S. and the U.K. The effect of the “saving glut variables” on current account balances has been relatively stable for emerging market countries, suggesting that those factors cannot explain the bulk of their recent current account movements. We also find the 2006-08 period to constitute a structural break for emerging market countries, and to a lesser extent, for industrialized countries. We attribute the anomalous behavior of pre-crisis current account balances to stock market performance and real housing appreciation; fiscal procyclicality and the stance of monetary policy do not matter as much. Household leverage also appears to explain some of the standard model’s prediction errors. Looking forward, U.S., fiscal consolidation alone cannot induce significant deficit reduction. For China, financial development might help shrink its current account surplus, but only when it is coupled with financial liberalization. These findings suggest that unless countries implement substantially more policy change, global imbalances are unlikely to disappear. |
| JEL: | F32 F41 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17513&r=ifn |
| By: | Jarle Møen (Department of Finance and Management Science, Norwegian School of Economics, 5045 Bergen, Norway); Dirk Schindler (Department of Economics, University of Konstanz, Germany); Guttorm Schjelderup (Department of Finance and Management Science, Norwegian School of Economics, 5045 Bergen, Norway); Julia Tropina (Department of Economics, Norwegian School of Economics, 5045 Bergen, Norway) |
| Abstract: | We examine the capital structures of multinational companies. Multinational companies can exploit the tax advantage of debt more aggressively than national companies by shifting debt from affiliates in low-tax countries to affiliates in high-tax countries. Previous papers have omitted either internal debt or external debt from the analysis. We are the first to model the companies’ choice between internal and external debt shifting, and show that it is optimal to use both types of debt in order to save taxes. Using a large panel of German multinationals, we find strong empirical support for our model. The estimated coefficients suggest that internal and external debt shifting are of about equal relevance. |
| Keywords: | Corporate taxation, multinationals, capital structure, international debt-shifting, tax avoidance |
| JEL: | H25 G32 F23 |
| Date: | 2011–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1140&r=ifn |
| By: | Joshua Aizenman; Brian Pinto; Vladyslav Sushko |
| Abstract: | We examine how financial expansion and contraction cycles affect the broader economy through their impact on 8 real economic sectors in a panel of 28 countries over 1960-2005, paying particular attention to large, or sharp, contractions and magnifying and mitigating factors. Overall, the construction sector is the most responsive to financial sector growth, with a number of others such as government, public utilities, and transportation also exhibiting significant sensitivity to lagged financial sector growth. Sharp fluctuations in the financial sector have asymmetric effects, with the majority of real sectors adversely affected by contractions but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively by the financial openness channel with foreign reserves mitigating these effects with a sizeable (10 to 15 times greater) impact during sharp financial contractions. Both effects are magnified during particularly large financial contractions (with coefficients on interaction terms 2 to 3 times greater than when all contractions are considered). Consequent upon a financial contraction, the most severe real sector contractions occur in countries with high financial openness, relative predominance of construction, manufacturing, and wholesale and retail sectors, and low international reserves. Finally, we find that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of “up by the stairs, down by the elevator dynamics.” |
| JEL: | F15 F31 F36 F4 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17530&r=ifn |