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on International Finance |
| By: | Cesa-Bianchi, Ambrogio (Bank of England); Ferrero, Andrea (University of Oxford); Rebucci, Alessandro (John Hopkins University Carey Business School) |
| Abstract: | House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fuelling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit. |
| Keywords: | Cross-border claims; capital flows; credit supply shock; leverage; exchange rates; house prices; international financial intermediation |
| JEL: | C32 E44 F44 |
| Date: | 2017–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0680&r=ifn |
| By: | Gurnain Pasricha |
| Abstract: | This paper attempts to borrow the tradition of estimating policy reaction functions in monetary policy literature and apply it to capital controls policy literature. Using a novel weekly dataset on capital controls policy actions in 21 emerging economies over the period 1 January 2001 to 31 December 2015, I examine the mercantilist and macroprudential motivations for capital control policies. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. There is clear evidence that past emerging-market policy systematically responds to both mercantilist and macroprudential motivations. The choice of instruments is also systematic: policy-makers respond to mercantilist concerns by using both instruments — inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. I also find that policy is acyclical to foreign debt but is countercyclical to domestic bank credit to the private non-financial sector. The adoption of explicit financial stability mandates by central banks or the creation of inter-agency financial stability councils increased the weight of macroprudential factors in the use of capital controls policies. Countries with higher exchange rate pass-through to export prices are more responsive to mercantilist concerns. |
| Keywords: | Exchange rate regimes, Financial stability, Financial system regulation and policies, International topics |
| JEL: | F3 F4 F5 G0 G1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:17-42&r=ifn |
| By: | Steiner, Andreas |
| Abstract: | Central banks invest their foreign exchange reserves predominantly in government securities. By means of a panel data analysis we examine the relationship between reserve currency status and public budget balance during different constellations of the international monetary system: the sterling period (1890-1935) and the dollar dominance (since World War II). We show for both periods that reserve currency status significantly lowers the public budget balance of the center countries. |
| JEL: | F31 F33 F41 H62 E62 C23 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168184&r=ifn |
| By: | Sergio de Ferra (Stockholm University) |
| Abstract: | The experience of the European monetary union has been characterized by three distinctive facts. First, core and periphery countries ran widening current account surplus and deficit positions, after the inception of the union. Second, core countries intermediated gross capital flows from the rest of the world, which in turn financed deficits in the periphery. Finally, a sovereign debt crisis took place, affecting multiple countries and causing severe recessions. I argue that institutional features of the European Economic and Monetary Union are responsible for the observation of imbalances, intermediation and pervasive crises. First, I show in a theoretical model that subsidies on holdings of euro-denominated assets contribute to all three phenomena. Second, I build a dynamic model of an economic union with trade in goods and financial assets. In the model, the introduction of a subsidy on cross-border asset holdings generates predictions for net and gross asset flows that quantitatively replicate the euro area experience. The model features a novel theoretical mechanism magnifying the severity of a debt crisis in an economic union, due to the joint presence of financial and trade linkages among union members. This mechanism is likely to have exacerbated the recent recession in the euro area periphery. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:726&r=ifn |