nep-ifn New Economics Papers
on International Finance
Issue of 2005‒06‒05
four papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. International Borrowing, Capital Controls and the Exchange Rate: Lessons from Chile By Kevin Cowan; José De Gregorio
  2. Capital Flows and Exchange Rate Volatility: Singapore's Experience By Basant K. Kapur
  3. India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Defecit By Ajay Shah; Ila Patnaik
  4. Monetary Policy Shocks in a Tri-Polar Model of Foreign Exchange By Martin Melecky

  1. By: Kevin Cowan; José De Gregorio
    Abstract: This paper analyzes the Chilean experience with capital flows. We discuss the role played by capital controls, financial regulations and the exchange rate regime. The focus is on the period after 1990, the period when Chile returned to international capital markets. We also discuss the early 80s, where a currency collapse triggered a financial crisis in Chile, despite stricter capital controls on inflows than the 90s and tighter currency matching requirements on the banking sector. We conclude that financial regulation and the exchange rate regime are at the center of capital inflows experiences and financial vulnerabilities. Rigid exchange rates induce vulnerabilities, which may lead to sharp capital account reversals. We also discuss three important characteristics of the Chilean experience since the 90s. The first is the fact that most international borrowing is done directly by corporations and it is not intermediated by the banking system. The second is the implication of the free trade agreement of Chilean and the US regarding capital controls. Finally, we examine the Chilean experience following the Asian-Russia crisis, showing that Chile did not suffer a sudden-stop, but a current account reversal due to policy reactions and a sudden-start in capital outflows.
    Date: 2005–05
  2. By: Basant K. Kapur
    Abstract: Singapore%u2019s experience with international capital flows over the past two decades or so has been a rather %u2013 although not completely %u2013 benign one, owing to strong fundamentals and generally well-conceived macro-economic policies. We begin by briefly discussing the experience in 1998 of Hong Kong, another city-state with a well-developed banking system and equities market, and operating on a Currency Board (CB) system (although with some differences from Singapore%u2019s CB system). The discussion serves to identify some %u2018areas of vulnerability%u2019 in the Hong Kong set-up at that time. We next discuss Singapore%u2019s policy background and early experience, and in the light of Hong Kong%u2019s experience are better able to appreciate how Singapore%u2019s policy framework served to circumvent or minimize important vulnerabilities. Particular attention is paid to Singapore%u2019s exchange-rate policy and its policy of non-internationalization of the Singapore dollar. Equity- and currency- market interactions are also considered. We next show how Singapore emerged relatively unscathed from the 1997 Asian Crisis. Lastly, we discuss Singapore%u2019s debt markets, and show how under the imperative of promoting the development of its bond markets the non-internationalization policy has been progressively relaxed, while retaining key safeguards.
    JEL: F4 F3
    Date: 2005–05
  3. By: Ajay Shah; Ila Patnaik
    Abstract: From the early 1990s onwards, India has engaged in policies involving trade liberalisation, strong controls on debt flows, and encouragement for portfolio flows and FDI, under a pegged exchange rate regime. Domestic institutional factors have led to relatively little FDI and substantial portfolio flows. There has been significant tension between capital flows and the currency regime. Many tactical details of the intricate reforms to the capital controls derive from the interlocking relationships between monetary policy, the currency regime and capital flows. In the recent period, pegging has given a capital outflow through reserves accumulation which was larger than the substantial net private capital inflows. In March 2004, difficulties of pegging appear to have led to a near-tripling of the nominal rupee-dollar returns volatility, which has reduced outward capital flows. The goal of the early 1990s - of finding a consistent way to augment investment using current account deficits - has remained elusive.
    JEL: F3
    Date: 2005–05
  4. By: Martin Melecky (School of Economics, University of New South Wales)
    Abstract: This paper investigates effects of third-currency monetary policy shocks on exchange rates. For this purpose we setup a structural VAR model containing the exchange rates of the three major currencies – the U.S. dollar, the euro and the Japanese yen – and short-term interest rates on the three currencies. In addition, we include the medium-term interest rates and price levels as control variables. Long-run restrictions in accord with tested hypotheses and the existing literature are used to identify the structural VAR. The impulse response analysis of the co- integrated VAR reveals that third-currency monetary policy shocks not only significantly impact on the considered exchange rates but their impacts are comparable to those of MP shocks associated with the quoted currencies in terms of their magnitude.
    Keywords: Exchange Rates, Currency Substitution, Third-Currency Effects, SVAR
    JEL: F02 F31 F36 F42
    Date: 2005–05–31

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