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on International Finance |
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Issue of 2012‒07‒08
seven papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.) |
| Abstract: | The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. JEL Classification: F30, F31. |
| Keywords: | Capital controls, capital flows, exchange rates, financial stability, economic policy, G20. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121415&r=ifn |
| By: | Enzo Cassino; Michelle Lewis (Reserve Bank of New Zealand) |
| Abstract: | In recent years there have been high profile currency interventions by the Swiss National Bank (SNB) and the Bank of Japan (BoJ). In this note, we review these interventions, with a focus on the profitability of currency intervention, along with the relationship between profitability and the degree of exchange rate stabilisation. We also highlight the ways in which these interesting international episodes are of only limited direct relevance to thinking about current New Zealand exchange rate issues. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2012/03&r=ifn |
| By: | Livia Chitu (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Barry Eichengreen (University of California, 603 Evans Hall, Berkeley, 94720 California, USA.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper offers new evidence on the emergence of the dollar as the leading international currency, focusing on its role as currency of denomination in global bond markets. We show that the dollar overtook sterling much earlier than commonly supposed, as early as in 1929. Financial market development appears to have been the main factor helping the dollar to surmount sterling’s head start. The finding that a shift from a unipolar to a multipolar international monetary and financial system has happened before suggests that it can happen again. That the shift occurred earlier than commonly believed suggests that the advantages of incumbency are not all they are cracked up to be. And that financial deepening was a key determinant of the dollar’s emergence points to the challenges facing currencies aspiring to international status. JEL Classification: F30, N20 |
| Keywords: | foreign public debt, international monetary system, international currencies, role of the US dollar, network externalities, path dependency |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121433&r=ifn |
| By: | Renee Fry-McKibbin; Sumila Wanaguru |
| Abstract: | Using a unique dataset on daily foreign exchange intervention and a new methodological framework of a latent factor model of central bank intervention, this paper addresses the effects of intervention in an emerging market. Events in financial markets from 2002 to 2010 provide a natural experiment to evaluate the short and medium term objectives of the central bank to contain excessive exchange rate volatility and to accumulate foreign reserves respectively. In the low volatility period in the first part of the sample, the central bank is successful in influencing the currency when pressure is to appreciate, accumulating international reserves. The same model estimated for the global volatility period in the second part of the sample shows the central bank intervening to mitigate excessive exchange rate volatility in line with the short-term objective. |
| JEL: | F31 F36 F41 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-32&r=ifn |
| By: | Martin Brown; Steven Ongena; Pinar Yesin |
| Abstract: | We model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs. Under perfect information, if foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and/or low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firm revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. Thus information asymmetry between banks and firms can be a potential driver of "dollarization" in credit markets. |
| Keywords: | foreign currency borrowing, competition, banking sector, market structure |
| JEL: | G21 G30 F34 F37 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2012-05&r=ifn |
| By: | Ceballos, Francisco; Didier, Tatiana; Schmukler, Sergio L. |
| Abstract: | Financial globalization has gathered attention since the early 1990s because of its macro-financial implications and growing importance. But financial globalization has taken shape via different forms over time. This paper examines two important, concurrent dimensions of financial globalization: diversification and offshoring. The diversification dimension refers to the increase in foreign assets and liabilities in countries'portfolios. Offshoring is related to the reallocation of financial activities to international markets. The former focuses on who holds the assets, the latter on where transactions take place. The authors find that globalization via the diversification channel expanded throughout the world during the 2000s, as domestic residents invested more abroad and foreigners increased their investments at home, generating more cross-border holdings. However, financial globalization via offshoring displays more mixed patterns, with variations across markets and countries. The paper also shows that the nature of financing through both diversification and offshoring has improved for emerging countries. |
| Keywords: | Debt Markets,Emerging Markets,Mutual Funds,Economic Theory&Research,Banks&Banking Reform |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6105&r=ifn |
| By: | Goh , Soo Khoon; Wong, Koi Nyen; Tham , Siew Yean |
| Abstract: | Developing and transition economies are an increasingly important source of outward foreign direct investment (OFDI). The objective of this paper is to fill the gap in the literature regarding outward foreign direct investment by adopting the well known gravity model to examine the relationship between trade (export and import), inward and outward FDI using Malaysia as a case. This contributes to the literature as previous studies on OFDI in Malaysia have focused primarily on the determinants of these outward flows, and there are no studies examining the impact of OFDI on trade. Our findings reveal that inward foreign direct investment (IFDI) conforms to the observed pattern of a complementary relationship between FDI and trade while OFDI and trade linkages are not significant. The empirical results also indicate that Malaysia has yet to follow the trajectory of developed economies in its shift from being a net capital importer to a capital exporter due to the lack of trade linkages between OFDI and trade. This further implies that the country may not be able to reap the potential benefits of OFDI that accrue through efficiency gains from specialization and scale advantages that are generated through trade channels. |
| Keywords: | Outward FDI; trade; multinationals; Malaysia |
| JEL: | F23 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39715&r=ifn |