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on International Finance |
| By: | Santiago Rodriguez Feijoo; Alejandro Rodriguez Caro; Carlos Gonzalez Correa |
| Abstract: | This paper studies the convergence in the European Union on Purchasing Power Parity. Firstly, we develop a method for the estimation of PPP series and then, we put it into practice and estimate the monthly Purchasing Power Parity for the period January 1995 to July 2003. Secondly, convergence is studied using distribution dynamics from the continuous and discrete approximations. Results show some slow convergence in the European Union. Keywords: Purchasing Power Parity, Convergence, Distribution Dynamics, Markov Chains |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa04p369&r=ifn |
| By: | Carlos J. Rodriguez-Fuentes; Antonio Olivera-Herrera; David Padron-Marrero |
| Abstract: | The primary goal of the European Central Bank’s (ECB) monetary policy is to achieve price stability. Whereas during the 1980s and 1990s there was a rapid and strong convergence in terms of price differential among the Euro countries, particularly in those countries with higher inflation rates in the past, single monetary policy has proved to be quite inefficient in continuing this trend and has not achieved further reductions in inflation rate differentials within the euro zone. Since the ECB sets the official interest rate according to the average inflation of the euro area, the persistence of such price differentials within the area would mean that the “one size interest rate policy” would not fit all. This paper studies empirically the inflation rate differentials and their persistence in some currency unions with the aim to draw some conclusions for the working of the ECB monetary policy. KEYWORDS: monetary policy; inflation persistence; currency unions |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa04p218&r=ifn |
| By: | Raffaello Bronzini |
| Abstract: | A number of empirical works analyzed the effect of agglomeration on multinational investment verifying whether agglomerated areas attract foreign direct investment. Despite the large amount of studies, there has been no systematic attempts to disentangle whether FDI are drawn by the concentration of firms within the same sector (specialization) or within different sectors (diversity). Furthermore, the question whether firms’ size of the host area influences multinational investment is still unanswered. This paper provides an empirical evidence on the role of agglomeration economies in attracting foreign direct investments within Italian regions and provinces, distinguishing between specialization and diversity externalities, and on the role of firms’ size in affecting foreign investors’ choices. We employ a new territorial data set on foreign direct investment collected by the Italian Foreign Exchange Office for industrial and service sectors. We find a strong evidence that specialized geographic areas attract FDI, whereas diversified areas draw FDI only for industrial sectors; finally there is little evidence that firm size has an impact on FDI, if anything, only big firms in Southern regions would seem to affect positively foreign investor decisions. |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa04p321&r=ifn |
| By: | Georg Mosburger (University of Vienna); Paul Schneider (Vienna University of Economics & Business Administration) |
| Abstract: | This paper investigates the performance of international affine term structure models (ATSMs) that are driven by a mutual set of global state variables. We discuss which mixture of Gaussian and square root processes is best suited for modelling international bond markets. We derive necessary conditions for the correlation and volatility structure of mixture models to accommodate various empirical stylized facts such as the forward premium puzzle and differently shaped yield curves. Using UK-US data we estimate international ATSMs taking into account the joint transition density of yields and exchange rates without assuming normality. We find strong empirical evidence for negatively correlated global factors in international bond markets. Further, the empirical results do not support the existence of local factors in the UK-US setting, suggesting that diversification benefits from holding currency- hedged bond portfolios in these markets are likely to be small. Altogether, we find that mixture models greatly enhance the performance of ATSMs. |
| Keywords: | International affine term structure models, Estimation, Exchange rate, Model Selection |
| JEL: | C33 E43 F31 G12 |
| Date: | 2005–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0509003&r=ifn |
| By: | Kirby Adam J.R. Faciane (Kirby Faciane / KAJR Faciane) |
| Abstract: | What is the extent to which financial markets are too volatile when left to themselves and, consequently, the extent to which the authorities should intervene to change the situation? Notice that I have referred to “volatility” and not to “inefficiency.” One of the interesting questions is the degree to which volatility reflects inefficiency, but I shall have more to say about that below. Notice also that the central question is probably not one which can be answered purely by reference to empirical evidence. The evidence is relevant, but it is usually impossible to say how alternative systems would have coped with particular events. Most importantly, students who are relatively new to the study of markets should be aware that debates for and against free markets have been going on for a very long time - in fact, as long as markets have existed. We should not, therefore, expect a quick resolution of the issue, but neither should we forget that much as been learned from previous rounds of the debate. A majority of the prior academic literature is concerned with markets in general and attempts to explain why there appeared to be booms and slumps in real activity. Could some method of central government intervention improve the situation - the most extreme form of such intervention being central planning? Dramatic evidence on this question has recently been provided by the collapse of central planning regimes in Eastern Europe. These countries have decided to adopt market economies as quickly as possible and to introduce a full range of financial markets. Thus the overwhelming benefits of a market economy over a planned economy are clearly demonstrated. However, the failure of “command” economies does not establish that market economies work best with a total absence of government intervention. Indeed, in contrast to the enthusiasm for free markets expressed in Eastern Europe, there is still a widespread suspicion of unbridled market forces in most Western economies. This is especially true in relation to those financial markets which have proved to be the most volatile. In many aspects of financial-market regulation there are ongoing debates about restrictions on trading activity which may make the market outcome “better.” The grounds for interference differ from area to area, but there is a common theme based upon market “failure” of some kind. This paper will first outline the argument for greater intervention as it has come up in three different areas of the financial system - foreign-exchange market, stock markets and retail financial markets. The detail is slightly different in each case but the issue is basically the same - can the market be left alone or do we need intervention? I shall then argue that in almost all cases government intervention makes things worse not better. The one exception to this is the foreign exchange market where it is arguable that an acceptable solution may be to do away with foreign-exchange markets entirely. |
| Keywords: | financial markets, foreign exchange, stock, financial retail markets, government intervention, kirby faciane |
| JEL: | G G0 G00 |
| Date: | 2005–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0508022&r=ifn |
| By: | Karlo Kauko (Bank of Finland) |
| Abstract: | This paper presents econometric analyses on the determination of bank deposit and lending rates using longitudinal Finnish data. Interest rate pass-through is very strong, possibly complete, in the case of lending rates; in the case of deposit rates the pass-through is far from complete, even in the long term. The monetary union has benefited customers by decreasing the average rate on new loans. Credit and interest rate risk premiums are clearly observable in banks' lending rates. The impact of money market rates on loan stock rates seems to have been non-linear; no obvious explanation for this phenomenon has been found. |
| Keywords: | G21, E43, E44 |
| JEL: | G21 E43 E44 |
| Date: | 2005–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0508020&r=ifn |
| By: | Aikaterini Kokkinou; Ioannis Psycharis |
| Abstract: | The aim of this paper is to analyze the Foreign Direct Investment (FDI) activity in Greece. The paper starts with defining the main FDI terms and giving a general literature review corresponding to the FDI allocation. Then, there is a description of recent trends in FDI activity both worldwide and Greece. Especially FDI investments in Greece are analyzed presenting the magnitudes of inflows, outflows, inward stock, outward stock, as well as foreign mergers and acquisitions, in terms of sales and purchases. The second part of the paper describes the regional and sectoral allocation of FDI in Greece, emphasizing whether the investment incentive scheme contributes to the attraction of FDI in specific regions, or the growth rate of each region is the main motive for locating foreign investment capital. The analysis is based on the most recent statistical data covering magnitudes until 2002. |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa04p559&r=ifn |
| By: | Maurício Yoshinori Une (Banco Itaú S.A.); Marcelo Savino Portugal (PPGE/UFRGS) |
| Abstract: | In the literature, little role is attributed to the country risk conditional volatility in the determination of the macroeconomic equilibrium in a developing small open economy (DSOE). This paper posits the prime hypothesis that, in the presence of multiple equilibria and self-fulfilling prophecies, one of the reasons why investors prefer to speculate in a determined country’s sovereign bonds, raising its country risk levels, is the switch of the expected macroeconomic fundamentals’ conditional variance towards a higher regime. Non-linear GARCH models are applied to monitor different switching regimes of the Brazilian country risk conditional volatility, with special emphasis on Markov switching regimes. Results indicate that the high volatility regime periods, better identified by the latter, coincide with all the severe liquidity crisis episodes suffered by Brazil from May 1994 through September 2002. Thus, although not free of limitations, the country risk’s high conditional volatility regime might determine a bad equilibrium and its monitoring might work as a practical tool to assess the duration of liquidity crises in a DSOE highly dependent on foreign capital inflows such as Brazil. |
| Keywords: | Markov switching, non-linear GARCH, conditional volatility, country risk, multiple equilibria, self-fulfilling prophecies, liquidity crisis. |
| JEL: | C22 E44 F41 G15 |
| Date: | 2005–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpem:0509005&r=ifn |
| By: | J. Andrés Faíñaa; Jesús López-Rodríguez |
| Abstract: | In this paper we use a generalized entropy index such as the Theil index to analyze regional inequalities in Europe. We proved that there is a synchronization between the convergence and catching-up process of objective 1 regions towards the EU15 average with the reform of the EU regional policy. During the period 1982-1988 the Theil index shows that inequalities between objective 1 regions and non-objective 1 regions have increased while from 1989 onwards the reduction in the inequalities between these two groups has been the norm. We also remark the fact that there are high disparate rates of growth among objective 1 regions both within countries and across countries but our computations show also a trend towards a more balanced growth among objective 1 regions within and across EU countries. This success of the European Union regional policy in objective 1 regions will mean a big opportunity for Central and Eastern European countries and hence the increases in competition arising from an enlarged European market combined with a suitable regional development policy should in the future boost the growth of those countries. In the last part of the paper we made a simulation for the funding envelope from 2007, based on the 2000-2006 budget. We show that the figures of the Agenda 2000 provide enough financial support for 90% of the total CEEC population and for 75% of “current” objective 1 population. Key Words: Regional Policy, European Enlargement, Central and Eastern European Countries, Strategic Planning, Regional Growth, Regional Development |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa04p32&r=ifn |
| By: | Deokho Cho; Seungryu Ma |
| Abstract: | The goal of this study is to identify the long-term relationship between housing value and interest rate in the Korean housing market, using the Cointegration Test and Spectral Analysis. The result shows the long-term negative (-) equilibrium relationship between housing values and interest rate. Moreover, the Granger Causality Test for confirming the short-term dynamic relationship between these variables notes the one-way causality from interest rate to the change rate of housing and the transfer function model certifies concretely the causal structure of this relationship. The result of this study suggests that the interest rate adjustment policy in the Korean housing market can work very effectively and it will contribute to forecast the change of future housing values hereafter. Keywords: Dynamic relationship; Housing value; Interest rate; Cointegration and spectral analysis; Long term equilibrium |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa04p323&r=ifn |
| By: | Raquel Díaz |
| Abstract: | Since the middle 1980's, as consequence of the worldwide process of liberalization, there has been an important rise in international capital flows, especially Foreign Direct Investment (FDI). In particular, during the second half of 1990’s, worldwide FDI inflows grew four times faster than domestic output, twice as fast as domestic investment and three times as fast as exports. However, the geographical distribution of these flows of international capital was highly uneven. The main receivers of these FDI inflows were the most-developed countries. The developing countries only received approximately 30% of the worldwide FDI inflows. At the same time, there has been a decrease in the speed of economic convergence among countries and regions. Between 1950 and 1990 the rate of convergence has been around 2% annually, but from the mid 1980’s, this rate decreased to the 0.2%-0.5% level on an annual basis. Immediately, a question arises: could the very high share of international capital directed to the most-developed countries, be one reason for the slowdown in the rate of economic convergence?. Most studies on the effects of the internationalization of production processes in economic growth have identified the liberalization process with international trade, excluding the effects of FDI and its consequences on regional convergence. However, the liberalization process has increased not only trade, but also international capital flows. In this paper we address this last point. The main objective is to analyze the possible relationship among FDI and economic convergence. In particular, we present arguments which support the hypothesis that FDI inflows could be one of the elements helping to slowdown the speed of convergence in recent years. We show, on one hand, that FDI is an "engine of growth", the same as international trade. The main reason is that FDI is not merely a transfer of capital. FDI contributes to strengthening the economic structure on the host country, modernizes and internationalises it as well. FDI is usually accompanied by specific intangible assets of the transnational corporation, changes in production systems and/or technological innovations, among others. There is not doubt that all these factors generate positive growth effects in the target destination. On the other hand, we show that the main receivers of this FDI are not the developing countries. The developed countries, with more than two-thirds of the worldwide FDI inflows dominate the global picture. So, if these facts are analysed together, it is possible to show that the positive effects of FDI on economic growth are concentrated mainly in the most developed countries. From this point, the negative effect of FDI on economic convergence is an obvious result. |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa04p374&r=ifn |
| By: | Shrestha, Min B. (University of Wollongong); Chowdhury, Khorshed (University of Wollongong) |
| Abstract: | It is a stylised fact that financial "repression" retards economic growth. Hence, financial liberalisation is advocated to remove the stranglehold on the economy. Financial liberalisation policy argues that deregulation of interest rate would result into a higher real interest rate which would lead to increased savings, increased investment and achieve efficiency in financial resource allocation. Past studies have reported inconclusive results regarding the interest rate effects on savings and investment. This paper examines the financial liberalisation hypothesis by employing autoregressive distributed lag (ARDL) modelling approach on Nepalese data. Results show that the real interest rate affects both savings and investment positively. |
| Keywords: | Financial Liberalisation, Interest Rate Effects, Unit Roots, Cointegration, ARDL Modelling |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp05-15&r=ifn |