nep-ifn New Economics Papers
on International Finance
Issue of 2009‒09‒05
five papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Credit Rationing and Exchange-Rate Stabilization: Examining the Relation between Financial Frictions, Exchange-Rate Volatility, Lending Rates, and Capital Inflows By Gabriel Martinez
  2. How do different models of foreign exchange settlement influence the risks and benefits of global liquidity management? By Schanz, Jochen
  3. Exchange-rate regime and economic growth: a review of the theoretical and empirical literature By Petreski, Marjan
  4. International portfolio rebalancing and exchange rate fluctuations in Thailand By Jacob Gyntelberg; Mico Loretan; Tientip Subhanij; Eric Chan
  5. Competitiveness and the real exchange rate: the standpoint of countries in the CEMAC zone By Lendjoungou, Francis

  1. By: Gabriel Martinez (Department of Economics, Ave Maria University)
    Abstract: This paper develops and tests a model of the relation between the volatility of the exchange rate, default rates, the level of interest rates on loans, and the availability of credit, laying emphasis on frictions in the financial market, specifically foreclosure costs to collecting bad debts. On the assumption that foreign sources of funds are crucial for domestic finance, the paper tests the hypothesis of a high positive relation between the volatility of the exchange rate and the lending rate, and between the volatility of the exchange rate and capital inflows, on a sample of 54 countries over 1980-2000. The paper finds that exchange-rate and macroeconomic volatility are strong predictors of capital inflows (but not of lending rates) and that there may be an important role for financial frictions in the transmission process. Moreover, the paper finds that episodes of disinflation that rely on a reduction of the rate of depreciation tend to be accompanied by lower exchange rate volatility (in addition to simply lower rates of devaluation). Both effects, but principally the latter through financial frictions, suggest a solution to the lack of connection between the theory and the stylized facts of exchange rate-based stabilizations: ERBS programs may lead to initial booms through should cause a significant rise in the availability of credit, even if the cost of credit does not fall by much.
    Keywords: interest rates, exchange rate volatility, financial frictions, creditor rights, exchange rate based stabilization
    JEL: E43 E44 E50 F41 G14 E31 E63
    Date: 2009–08
  2. By: Schanz, Jochen (Bank of England)
    Abstract: Large, international banking groups have sought to centralise their cross-currency liquidity management: liquidity shortages in one currency are financed using liquidity surpluses in another currency. The nature of risks to financial stability emerging from global liquidity management depends on how these foreign exchange transactions settle. I analyse these risks in a game of asymmetric information. The main result is that the transition from local to global liquidity management, and better co-ordination in settlement of foreign exchange transactions, have two effects. On the one hand, the likelihood rises that payments are delayed beyond their due date. On the other hand, solvency shocks are less likely to be passed on to other banks. The main assumption is that lending between subsidiaries of the same banking group takes place under symmetric information, while external interbank market loans are extended under asymmetric information. More co-ordinated settlement increases the exposure of the intragroup lender relative to the interbank lender and leads to more informed lending.
    Keywords: Liquidity risk; foreign exchange settlement
    JEL: D82 F36 G20 G32
    Date: 2009–08–24
  3. By: Petreski, Marjan
    Abstract: The aim of this paper is to examine the theoretical and empirical arguments for the relationship between the exchange-rate regime and economic growth. As a nominal variable, the exchange rate (regime) might not affect the long-run economic growth. However, there is no unambiguous theoretical evidence what impacts the exchange-rate target exhibits on growth. The channel through which the regime might influence growth is trade, investment and productivity. Theoretical considerations relate the exchange-rate effect on growth to the level of uncertainty imposed by flexible option of the rate. However, while reduced policy uncertainty under a peg promotes an environment which is conductive to production factor growth, trade and hence to output, such targets do not provide an adjustment mechanism in times of shocks, thus stimulating protectionist behaviour, price distortion signals and therefore misallocation of resources in the economy. Consequently, the relationship remains blurred and requires in-depth empirical investigation. The empirical research offers divergent result though. A big part of the studies focuses on the parameter of the exchange-rate dummy, but does not appropriately control for other country-characteristics nor apply appropriate growth framework. Also, the issue of endogeneity is not treated at all or inappropriate instruments are repeatedly used. Very few studies disgracedly pay small attention to the capital controls, an issue closely related to the exchange-rate regime and only one study puts the issue in the context of monetary regimes. Overall, the empirical evidence is condemned because of growth-framework, endogeneity, sample-selection bias and the so-called peso problem. An empirical investigation which will consider all those aspects might reveal clear and robust suggestion of the relationship between exchange-rate regime and growth.
    Keywords: Exchange rate regime,economic grow
    JEL: E42 F31
    Date: 2009
  4. By: Jacob Gyntelberg; Mico Loretan; Tientip Subhanij; Eric Chan
    Abstract: We present empirical evidence that the Thai exchange rate is driven in part by international investors' cross-border portfolio rebalancing decisions. Our results are based on two comprehensive, daily-frequency datasets of foreign exchange and equity market capital flows undertaken by nonresident investors in Thailand in 2005 and 2006. We find that net purchases of Thai equities by nonresident investors lead to an appreciation of the Thai baht. In addition, higher returns in the Thai equity market relative to a reference stock market are associated both with net sales of Thai equities by these investors and with a depreciation of the Thai baht. Foreign investors do not appear to hedge the foreign exchange risk related to their equity market positions. Despite this, we find that exchange rate movements were not key drivers of nonresident investors' equity market investment choices in our sample period.
    Keywords: foreign exchange market, capital flows, Thailand, equity market, nonresident investors, portfolio rebalancing
    Date: 2009–08
  5. By: Lendjoungou, Francis
    Abstract: This paper focuses on real exchange rate in the case of CEMAC countries. To analyze the situation in Cameroon, Central African Republic, Congo, Gabon and Chad we used annual data from 1979 to 2008. Two approaches were used related to equilibrium real exchange rate model based on fundamentals and calculations show that terms of trade, public expenditure, the degree of openness of the economy and productivity are the most important variables which influence the equilibrium of real exchange rate. Based on the estimated paths, there was a clear pattern of overvaluation before 1994, suggesting that the exchange rate adjustment was needed. Despite a relative appreciation trend during last years, the real exchange rate of CEMAC countries has not experienced an important overvaluation.
    Keywords: Equilibrium real exchange rate; CEMAC; FEER
    JEL: C53 O55 F41 C22 F31
    Date: 2009–09–02

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