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on International Finance |
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Issue of 2012‒09‒16
seven papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Kristin Forbes (MIT-Sloan School of Management, 50 Memorial Drive, Cambridge, Massachusetts 02142, USA and NBER); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR); Thomas Kostka (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany); Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany) |
| Abstract: | We use changes in Brazil’s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil’s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling —i.e. changes in investor expectations about future policies— rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries. JEL Classification: F3, F4, F5, G0, G1 |
| Keywords: | Capital controls, externalities, spillovers, portfolio effects, signalling, mutual funds, Brazil, emerging markets |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121456&r=ifn |
| By: | Julien Bengui; Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | This paper investigates whether the international globalization of financial markets allows for significant cross-country risk-sharing at the business cycle frequency. We find that cross-country risk-sharing is still limited and this is unlikely to be the result of financial frictions that limit state-contingent contracts. Part of the limited international risk sharing could be the consequence of frictions that de-facto reduce the short-term mobility of financial capital. But even with these frictions we find significant divergence between model predictions and the data. |
| JEL: | F36 F44 G15 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18372&r=ifn |
| By: | Martin Schmitz (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany) |
| Abstract: | In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short and medium term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets. JEL Classification: F21, F30, G15 |
| Keywords: | International risk sharing, capital gains, cross-border investment, financial globalisation, emerging market economies |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121451&r=ifn |
| By: | Jacob Gyntelberg; Subhanij Tientip; Mico Loretan |
| Abstract: | We demonstrate empirically that not all capital flows influence exchange rates equally: Capital flows induced by foreign investors’ stock market transactions have both an economically significant and a permanent impact on exchange rates, whereas capital flows induced by foreign investors’ transactions in government bond markets do not. We relate these differences in the price impact of capital flows to differences in the amounts of private information conveyed by these flows. Our empirical findings are based on novel, daily-frequency datasets on prices and quantities of all transactions of foreign investors in the stock, bond, and onshore FX markets of Thailand. |
| Date: | 2012–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/213&r=ifn |
| By: | Saurabh Ghosh; Stefan Reitz |
| Abstract: | In this paper we empirically investigate the relationship between capital flows and exchange rates in India based on a new index of real effective exchange rates for the Indian Rupiah. Instead of using consumer price indices we deflate exchange rates by MSCI asset price indices. The cointegration analysis indicates a long-run equilibrium relationship between our real financial market exchange rate and the net outstanding equity investment in India. In the short run capital inflows are accompanied by an appreciation of real financial exchange rate of the Rupiah |
| Keywords: | Real Exchange Rate, Capital Flows, Financial Asset Prices, Emerging Financial Markets,India. |
| JEL: | F31 G15 E58 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieasw:461&r=ifn |
| By: | Jacob Gyntelberg; Subhanij Tientip; Mico Loretan |
| Abstract: | We present empirical evidence that the Thai baht’s value is driven in part by investors’ cross-border equity portfolio rebalancing decisions. Our results are based on comprehensive datasets of FX and stock market transactions undertaken by nonresident investors in Thailand in 2005 and 2006. Higher returns in the stock market relative to a reference stock market are associated with net sales of equities by these investors and a depreciation of the Thai baht. Net purchases of Thai equities lead to an appreciation of the Thai baht. Foreign investors do not appear to hedge the foreign exchange risk related to their stock market positions. |
| Date: | 2012–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/214&r=ifn |
| By: | Nkunde Mwase |
| Abstract: | This paper investigates the drivers of reserves in emerging markets (EMs) and small island (SIs) and develops an operational metric for estimating reserves in SIs taking into account their unique characteristics. It uses quantile regression techniques to allow the estimated factors driving reserves holdings to vary along the reserves’ holding distribution and tests for equality among the slope coefficients of the various quantile regressions and the overall models. F-tests comparing the inter-quantile differences could not reject the null that the models for the different quantiles of SIs reserve distribution were similar but this was rejected for EMs distribution suggesting that models explaining drivers of reserve holdings should take into account the country’s reserve holdings. Empirical analysis suggests that the metric performs better than existing metrics in reducing crisis probabilities in SIs. |
| Keywords: | Economic models , Emerging markets , Reserves accumulation , Reserves adequacy , Small states , |
| Date: | 2012–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/205&r=ifn |