nep-ifn New Economics Papers
on International Finance
Issue of 2006‒03‒11
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. How tight should one's hands be tied? Fear of floating and credibility of exchange regimes. By Jesús Rodríguez López; Hugo Rodríguez Mendizábal
  2. Cointegration and the stabilizing role of exchange rates By Alexius, Annika; Post, Erik
  3. Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises By Andreas Röthig; Willi Semmler; Peter Flaschel
  4. The Australian Dollar's Long-Term Fluctuations and Trend: The Commodity Prices-cum-Economic Cycles Hypothesis By Sanidas, Elias
  5. Hot money inflows in China : How the people's bank of China took up the challenge. By Vincent Bouvatier
  6. Do special economic areas matter in attracting FDI? Evidence from Poland, Hungary and Czech Republic By Claudia Guagliano; Stefano Riela
  7. The Determinants of Multinational Banking during the First Globalization, 1870-1914 By Stefano Battilossi

  1. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); Hugo Rodríguez Mendizábal (Department of Economics, Universidad Autónoma de Barcelona)
    Abstract: The literature on exchange regimes has recently observed that officially self-declared free floaters strongly intervene their nominal exchange rates to maintain them within some unannounced bands. In this paper, we provide an explanation for this behavior, labeled by Calvo and Reinhart (2002) as fear of floating. First, we analyze the linkages between the credibility of the exchange regime, the volatility of the exchange rate and the band width of fluctuation. Second, the model is used to understand the reduction in volatility experienced by most ERM countries after their target zones were widened on August 1993. Finally, solving the model for a subgame perfect equilibrium, fear of floating can be viewed as the credible choice of a finite non-zero band
    Keywords: Fear of floating, target zones, exchange rate arrangements, credibility
    JEL: E52 E58 F31 F33
    Date: 2006–03
  2. By: Alexius, Annika (Department of Economics); Post, Erik (Department of Economics)
    Abstract: We show that empirical results concerning the behavior of floating exchange rates differ between otherwise identical cointegrated and non-cointegrated VAR models. In particular, virtually all ten-year movements in nominal exchange rates are due to fundamental supply and demand shocks when long run equilibrium relationships between the levels of the variables are included in the empirical specification. Another major difference between the models with the opposite implication for the shock creation versus shock absorption debate is that non-fundamental exchange rate shocks have much larger effects on output and inflation in the cointegrated models. Finally, impulse response functions in the first difference specification die out within a year whereas adjustment to long run equilibrium continues for up to ten years in the cointegrated models. Hence a correct specification of the long-run equilibrium dynamics of exchange rates is essential for capturing also short-run behavior of exchange rates.
    Keywords: Exchange rates; asymmetric shocks; structural VAR; cointegration
    JEL: C32 F31
    Date: 2006–02
  3. By: Andreas Röthig (Institute of Economics, Darmstadt University of Technology and Center for Empirical Marcroeconomics, University of Bielefeld); Willi Semmler (Center for Empirical Marcroeconomics, University of Bielefeld and New School University New York); Peter Flaschel (Center for Empirical Marcroeconomics, University of Bielefeld)
    Abstract: This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure ? caused by balance sheet effects as in Krugman (2000) ? and therefore their investments? sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.
    Keywords: Mundell-Fleming-Tobin model; foreign-debt financed investment; currency crises; real crises; currency futures; hedging; speculation
    JEL: E32 E44 F31 F34
    Date: 2006–02–01
  4. By: Sanidas, Elias (University of Wollongong)
    Abstract: The Australian dollar’s exchange rate (mainly in relation to the American dollar) has received a considerable attention in research and several models have been proposed to explain its trend and fluctuations. Thus, as a conclusion of this research we can say that this commodity currency very much depends on the terms of trade which in turn depend on commodity prices. The present paper is based on this conclusion and hence proposes the possibility that the Australian dollar’s behavior is overwhelmingly explained by a handful of cycles of mainly harmonic frequencies. Using the principles of Fourier analysis, a simple regression provides considerable evidence about the existence of these cycles. In addition, and as important, a search into the commodity realm demonstrates that these cycles are for example related to various cycles of mining and producing minerals. If the proposition of the present paper is true, we have a very simple yet substantial explanation of the long term trend and fluctuations of the Australian dollar exchange rate and probably of exchange rates of many other commodity currencies.
    Keywords: Australian dollar, Fourier, cycles, minerals
    JEL: C12 C22 C52
    Date: 2005
  5. By: Vincent Bouvatier (CES-TEAM)
    Abstract: This paper investigates hot money inflows in China. The financial liberalization comes into effect and the effectiveness of capital controls tends to diminish over time. As a result, China is fuelled by hot money inflows. The US interest rate cut since 2001 and expectations of exchange rate adjustments are the main factors explaining these capital inflows. This study use the Bernanke and Blinder (1988) model extended to an open economy to examine implications of hot money inflows for the Chinese economy. A Vector Error Correction Model (VECM) on monthly data from March 1995 to March 2005 is estimated to investigate the recent upsurge in foreign reserves and shows that the interaction between domestic credit and foreign reserves was stable and consistent with monetary stability. Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this result.
    Keywords: Hot money inflows, domestic credit, VECM, Granger causality.
    JEL: C32 E5 F32 F33
    Date: 2006–02
  6. By: Claudia Guagliano; Stefano Riela (ISLA, Universita' Bocconi, Milano)
    Abstract: Among the instruments aimed to attract internationally mobile investors, “special economic areas” can be considered as well-defined zones where usually offering low rates of taxation, and infrastructures and services accessible on preferential basis. Are those instruments effective in attracting FDI? The first empirical evidence based on Poland, Hungary and Czech Republic suggests a positive answer. However, according to a survey on research and development intensity in special economic areas in our sample countries, it is not possible to confirm clearly that scientific and technology parks were capable in attracting high-tech FDIs, even though due to global competition, international agreements and EU membership, fiscal incentives are nowadays not enough while technology and an “innovation-friendly” environment are emerging as competitive advantages.
    Keywords: foreign direct investment, location choice, transition countries
    JEL: F23 R38
    Date: 2005–11
  7. By: Stefano Battilossi (Department of Economic History and Institutions, Universidad Carlos III Madrid)
    Abstract: What determined the multinational expansion of European banks in the pre-1914 era of globalization? And how were banks’ foreign investments related to other facets of the globalizing world economy such as trade and capital flows? The paper reviews both the contemporary and historical literature, and empirically investigates these issues by using an original panel data based on a sample of more than 50 countries. The dependent variable, aiming at measuring the intensity of cross-border activities operated by banks from foreign locations, is the number of foreign branches and subsidiaries of British, French and German banks. Explanatory variables are mainly selected on the base of the eclectic theory of multinational banking, but also include geographical factors (as suggested by gravity models) and institutional indicators advanced by recent studies inspired by new institutional economics, such as legal families and adherence to the Gold Standard. These regressors captures the impact of economic integration (trade and capital flows), informational development, institutional and economic characteristics of the host-market, as well as exchange rate and country risk factors, on banks’ foreign investment decisions. The results suggest that, due to its prevailing ‘colonial’ features, pre-1914 multinational banking does not fit easily into augmented gravity models. The role of trade as a key determinant of banks expansion overseas is qualified, and both institutional factors as well as competitive interaction emerge as critical determinants of banks’ decisions to invest in foreign countries. Moreover, the systematic comparison of determinants of foreign investiments of banks from major core countries reveals that multinational banking was not a homogenous phenomenon, as banks of different nationality responded differently to economic, geographical and institutional factors.
    Date: 2006–08–02

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