nep-ifn New Economics Papers
on International Finance
Issue of 2004‒12‒20
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Flexible Exchange Rate Regime and Forex Interventions: The Chilean Case By José De Gregorio; Andrea Tokman R.
  2. Own interest and foreign need: Are bilateral investment treaty programmes similar to aid allocation? By Eric Neumayer
  3. Taylor Rules and the Deutschmark-Dollar Real Exchange Rate By Charles Engel; Kenneth D. West
  4. Covered Interest Arbitrage: Then vs. Now By Ted Juhl; William Miles; Marc D. Weidenmier
  5. Large Devaluations and the Real Exchange Rate By Ariel Burstein; Martin Eichenbaum; Sergio Rebelo
  6. Measuring the Economic Impact of Monetary Union: The Case of Okinawa By Shinji Takagi; Mototsugu Shintani; Tetsuro Okamoto
  7. An Assignment Theory of Foreign Direct Investment By Volker Nocke; Stephen Yeaple
  8. A Framework for Macroeconomic Stability in Emerging Market Economies By Javier Gómez Pineda
  9. The FTAA And The Location Of FDI By Eduardo Levy Yeyati; Ernesto Stein; Christian Daude
  10. Asset Prices and Exchange Rates By Pavlova, Anna; Rigobon, Roberto
  11. On the Causal Links between FDI and Growth in Developing Countries By Henrik Hansen; John Rand

  1. By: José De Gregorio; Andrea Tokman R.
    Date: 2004–12
  2. By: Eric Neumayer
    Abstract: Bilateral investment treaties (BITs) have become the most important legal mechanism for the encouragement of foreign direct investment (FDI) in developing countries. Yet practically no systematic evidence exists on what motivates capital-exporting developed countries to sign BITs earlier with some developing countries than with others, if at all. The theoretical framework from the aid allocation literature suggests that developed countries pursue a mixture of own interest and foreign need. It also suggests differences between the big developed countries and a group of smaller ones known as like-minded countries. We find evidence that both economic and political interests determine the scheduling of BITs. However, with one exception, foreign need as measured by per capita income is also a factor. These results suggest that BIT programmes can be explained employing the same framework successfully applied to the allocation of aid. At the same time, own interest seems to be substantively more important than developing country need when it comes to BITs and the like-minded countries make no exception.
    JEL: F3 F4
    Date: 2004–12–15
  3. By: Charles Engel; Kenneth D. West
    Abstract: We explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate. The interest rate rule, in conjunction with some standard assumptions, implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials. The weights are functions of the parameters of the interest rate rule. An initial look at German data yields some support for the model.
    JEL: F41 E52
    Date: 2004–12
  4. By: Ted Juhl; William Miles; Marc D. Weidenmier
    Abstract: We introduce a new weekly database of spot and forward US-UK exchange rates as well as interest rates to examine the integration of forward exchange markets during the classical gold standard period (1880-1914). Using threshold autoregressions (TAR), we estimate the transactions cost band of covered interest differentials (CIDs) and compare our results to studies of more recent periods. Our findings indicate that CIDs for the US-UK rate were generally larger during the classical gold standard than any period since. We argue that slower information and communications technology during the gold standard period led to fewer short-term financial flows, higher transactions costs, and larger CIDs.
    JEL: F3 N2
    Date: 2004–12
  5. By: Ariel Burstein; Martin Eichenbaum; Sergio Rebelo
    Abstract: In this paper we argue that the primary force behind the large drop in real exchange rates that occurs after large devaluations is the slow adjustment in the price of nontradable goods and services. Our empirical analysis uses data from five large devaluation episodes: Argentina (2001), Brazil (1999), Korea (1997), Mexico (1994), and Thailand (1997). We conduct a detailed analysis of the Argentina case using disaggregated CPI data, data from our own survey of prices in Buenos Aires, and scanner data from supermarkets. We assess the robustness of our findings by studying large real-exchange-rate appreciations, medium devaluations, and small exchange-rate movements.
    JEL: F31
    Date: 2004–12
  6. By: Shinji Takagi (Independent Evaluation Office, International Monetary Fund, Washington, D.C.); Mototsugu Shintani (Department of Economics, Vanderbilt University); Tetsuro Okamoto (Faculty of Economics, Osaka Sangyo University)
    Abstract: Data from Okinawa's monetary union with the United States in 1958 and with Japan in 1972 are used to obtain a quantitative indication of how monetary union might affect the behavior of nominal and real shocks across two economies. With monetary union, the variance of the real exchange rate between two economies declines, and their business cycle linkage becomes stronger. A VAR analysis of output and price data for Okinawa and Japan further indicates that the contribution of asymmetric nominal shocks in business cycles becomes smaller. Monetary union thus seems to facilitate both nominal and real convergence.
    Keywords: Currency union, foreign exchange rates, Japanese economy, price convergence, San Francisco Peace Treaty, vector autoregressions
    JEL: E42 F15 F33 F36
    Date: 2003–07
  7. By: Volker Nocke; Stephen Yeaple
    Abstract: We develop an assignment theory to analyze the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves building a new plant in the foreign market. In equilibrium, greenfield FDI and cross-border acquisitions co-exist, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when factor price differences between countries are small, while greenfield investment plays a more important role for FDI from high-wage into low-wage countries. These results capture important features of the data.
    JEL: F12 F14 F23 L11
    Date: 2004–12
  8. By: Javier Gómez Pineda
    Abstract: In this paper, sectoral balance sheets and sectoral stock and flow consistency are embedded into a new open economy model based on the financial accelerator. The framework has nominal inertia, real rigidities and market frictions, and it is designed to evaluate exchange rate risk in the economy and across sectors. The model is perturbed by a shock to investor sentiment and a sudden stop to capital inflow. It is used to evaluate the claims that usually back the fear of floating strategy: the effect of the exchange rate on foreign debt, and the pass-through of exchange rate depreciation to inflation. We conclude that fear of floating, the policy that intends to stabilize foreign debt, is precisely the policy that leads to a higher increase in the government debt to GDP ratio. The reason is that, in order to control the exchange rate, the authorities have to increase interest rates. While a lower depreciation does contain the level of debt, it increases the cost of interest on the debt, and this increases the change in the debt to GDP ratio. The pass-through does not seem an important argument for fear of floating either. We also find that under fear of floating the transfer problem is solved by the private sector alone in the midst of a recession; and that under floating, the government balance is in surplus thereby contributing to the transfer..
    JEL: E F H
  9. By: Eduardo Levy Yeyati; Ernesto Stein; Christian Daude
    Abstract: The role of regional integration agreements as a determinant of the location of FDI has become an increasingly relevant issue for emerging economies. In Latin America, the largest effects are likely to be associated with the Free Trade Area of the Americas (FTAA). In this regard, there are a number of highly relevant questions: For instance, what effect will the FTAA have on FDI from the US and Canada to Latin American countries? How will it affect FDI from the rest of the world? What are the implications for a country such as Mexico, whose preferential access to the US may be diluted? Should we expect to see winners and losers, and if so, what determines whether a particular country wins or loses? To address these questions, in this paper we look at the impact of regional integration on FDI, and attempt to derive conclusions regarding the likely impact of the FTAA on countries in Latin America
    Date: 2004–12
  10. By: Pavlova, Anna; Rigobon, Roberto
    Abstract: This paper develops a simple two-country, two-good model, in which the real exchange rate, stock and bond prices are jointly determined. The model predicts that stock market prices are correlated internationally even though their dividend processes are independent, providing a theoretical argument in favor of financial contagion. The foreign exchange market serves as a propagation channel from one stock market to the other. The model identifies interconnections among stock, bond and foreign exchange markets and characterizes their joint dynamics as a three-factor model. Contemporaneous responses of each market to changes in the factors are shown to have unambiguous signs. These implications enjoy strong empirical support. Estimation of various versions of the model reveals that most of the signs predicted by the model indeed obtain in the data, and the point estimates are in line with the implications of our theory. Moreover, the factors we extract from daily data on stock indexes and exchange rates explain a sizable fraction of the variation in a number of macroeconomic variables, and the estimated signs on the factors are consistent with our model's implications. We also derive agents' portfolio holdings and identify economic environments under which they exhibit a home bias, and demonstrate that an international CAPM obtaining in our model has two additional factors.
    Keywords: Asset Pricing, Exchange Rate, Contagion, International Finance, Open Economy Macroeconomics,
    Date: 2004–11–30
  11. By: Henrik Hansen (Institute of Economics, University of Copenhagen); John Rand (Institute of Economics, University of Copenhagen)
    Abstract: We analyse the Granger-causal relationships between foreign direct investment (FDI) and GDP in a sample of 31 developing countries covering the period 1970-2000. Using estimators for heterogeneous panel data we find bi-directional causality between the FDI/GDP ratio and the level of GDP. FDI is found to have a lasting impact on the level of GDP, while GDP has no long run impact on the FDI/GDP ratio. In that sense FDI causes growth. Furthermore, in a model for GDP and FDI as a fraction of gross capital formation (GCF) we also find long run effects of shifts in the mean level of FDI/GCF. We interpret this finding as evidence in favour of the hypotheses that FDI has an impact on GDP via knowledge transfers and adoption of new technology.
    Keywords: economic growth; foreign direct investment; Granger causality; panel data
    JEL: O4 F21 C33
    Date: 2004–12

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