nep-ifn New Economics Papers
on International Finance
Issue of 2010‒03‒13
thirteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Forward Exchange Rate Puzzle: Joining the Missing Pieces in the Rand-US Dollar Exchange Market By Lumengo Bonga-Bonga
  2. Difficulties of the Chinese and Indian exchange rate regimes. By Patnaik, Ila; Shah, Ajay
  3. Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia By Kosta Josifidis; Jean-Pierre Allegret; Emilija Beker Pucar
  4. Asia confronts the impossible trinity. By Patnaik, Ila; Shah, Ajay
  5. Estimation of Consistent Multi-Country FEERs By Benjamin Carton; Karine Herve
  6. "Regional and Global Short-term Financial Market Integration in Asia: Evidence from the Interbank Markets" By Shin-ichi Fukuda
  7. Regional Monitoring of Capital Flows and Coordination of Financial Regulation: Stakes and Options for Asia By Plummer, Michael
  8. The Financial Crisis: A Wake-Up Call for Strengthening Regional Monitoring of Financial Markets and Regional Coordination of Financial Sector Policies? By Winkler, Adalbert
  9. Why India choked when Lehman broke. By Patnaik, Ila; Shah, Ajay
  10. International Reserves and Swap Lines in Times of Financial Distress: Overview and Interpretations By Aizenman, Joshua
  11. The Role of Headquarters in Multinational Profit Shifting Strategies By Matthias Dischinger; Nadine Riedel
  12. What explains stock markets'vulnerability to the 2007-2008 crisis ? By Didier, Tatiana; Love, Inessa; Peria, Maria Soledad Martinez
  13. The Elusive Impact of Investing Abroad for Japanese Parent Firms: Can Disaggregation According to FDI Motives Help? By Laura Hering; Tomohiko Inui; Sandra Poncet

  1. By: Lumengo Bonga-Bonga
    Date: 2009
  2. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Date: 2009–08
  3. By: Kosta Josifidis (University of Novi Sad, Serbia; Faculty of Economics in Subotica, Department of European Economics and Business, Novi Sad); Jean-Pierre Allegret (Universit 0064e Nice Sophia-Antipolis (France)); Emilija Beker Pucar (University of Novi Sad, Serbia; Faculty of Economics in Subotica, Department of European Economics and Business, Novi Sad)
    Abstract: The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.
    Keywords: Exchange rate targeting, Inflation targeting, Intermediate exchange rate regimes, Monetary transmission channels
    JEL: E42 E52 F41
    Date: 2009–03
  4. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: In this paper, we examine capital account openness and exchange rate exibility in 11 Asian countries. Asia has made slow progress on de jure capital account openness, but has made much more progress on de facto capital account openness. While there is a slow pace of increase in exchange rate exibility, most Asian countries continue to have largely inexible exchange rates. This combination { of moving forward with de facto capital account integration without bringing in exchange rate exibility { has lead to procyclicality of monetary policy when capital ows are procyclical. The paper emphasises the case for a consistent monetary policy framework.
    Date: 2010–01
  5. By: Benjamin Carton; Karine Herve
    Abstract: Most studies on equilibrium exchange rates focus on a limited number of G7 countries. But in a situation of world imbalances, emerging countries can no longer be excluded. The study of all equilibrium exchange rates is delicate. First, the trade model has to be balanced at the aggregate level. This paper suggests a method to achieve world balance both in volume and in value. Second, the N-1 bilateral exchange rates cannot ensure that the N areas will reach their macroeconomic equilibrium simultaneously. This paper examines the existing solutions to solve the N-1 problem and proposes an alternative which minimizes the distance to the current-account targets. Finally, in order to compare the relevance of the different methodologies, FEERs are calculated for 19 industrialized and developing countries.
    Keywords: Exchange rates; current account adjustment
    JEL: F31 F32
    Date: 2010–02
  6. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo)
    Abstract: In this paper, we explore how the Asian money markets have been integrated with the London money market since the 1990s. The Asian money markets we explore in the paper are the interbank markets in Tokyo, Singapore, and Hong Kong as well as those in Malaysia and Thailand. After matching the currency denomination, we investigate how each of Asian interbank rates has been synchronized with the London Interbank Offered Rate (LIBOR) since the 1990s. The sample period of our analysis is noteworthy because it includes two crisis periods, that is, 1997-1999 when the Asian financial crisis happened and 2007-2009 when the global financial crisis happened. We find that both Tokyo and Hong Kong markets as well as offshore markets in Singapore and Malaysia were highly synchronized with the London market in non-crisis periods. However, onshore markets in Singapore, Malaysia, and Thailand were less correlated with the London market and their interbank offered rates frequently showed substantial deviations from the covered interest parity. More interestingly, each Asian interbank rate showed substantially different degree of integration with the LIBOR in the two crisis periods. During the global financial crisis in 2007-2009, we find that the SIBOR remained to be highly integrated with the dollar-denominated LIBOR. However, there were remarkable asymmetric responses in the other Asian markets in how to reflect regional risk premium under the global financial crisis. The asymmetric impacts in the dollar-denominated and local currency-denominated markets had a feature of "home bias" reflecting different liquidity premia under the financial crisis.
    Date: 2010–02
  7. By: Plummer, Michael (Asian Development Bank Institute)
    Abstract: The ongoing global economic crisis has punished Asian economies severely, despite the fact that its origins derive from outside the region. The global economic crisis was transmitted through real and financial channels, underscoring how vulnerable the region is to external shocks. This paper explores the microeconomic origins of the financial crisis and endeavors to ascertain how crises might be mitigated in the future through better regulation, supervision, and institution-building. Moreover, it makes the case for closer economic cooperation in order to internalize key externalities associated with modern global finance. This cooperation, in turn, should take place at the appropriate level, with incentives for cooperation at the global, regional, and subregional levels. It explores the potential for the creation of an Asian Financial Stability Board and deepening other initiatives in Association of Southeast Asian Nations (ASEAN)+3 and ASEAN forums. However, it stresses that the most important financial reforms in Asia will need to take place at the national level.
    Keywords: asian regional capital flows; mitigate future financial crises; financial regulation; capital flows
    JEL: F33 F36 G28
    Date: 2010–02–25
  8. By: Winkler, Adalbert (Asian Development Bank Institute)
    Abstract: How much can regional monitoring of financial markets and coordination of financial sector policies contribute to preventing and mitigating financial crises? This paper reviews and compares the experiences of Europe and Asia, which have taken different routes and have achieved different levels of regional financial integration. The analysis suggests that the harmonization and coordination of regulation and supervision, with a strong focus on maturity and currency mismatch problems, would constitute an important step toward mitigating the risk of crisis. However, regional monitoring and coordination will remain difficult as long as lender-of-last-resort activities and fiscal support packages are organized on a national level. Against this background, the crisis is a wake-up call for further progress on monetary integration in Asia along the lines of the reformed Chiang Mai Initiative. In Europe, the crisis reveals the need to establish a sustainable regulatory and supervisory structure that properly defines and reflects the responsibilities of regional and national authorities in crisis management, including its fiscal
    Keywords: regional financial integration; european lessons; asian financial policies; financial crisis; financial markets; financial sector policies
    JEL: F15 F33 F36 G38
    Date: 2010–02–24
  9. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: India has an elaborate system of capital controls which impede capital mobility and particularly short-term debt. Yet, when the global money market fell into turmoil after the bankruptcy of Lehman Brothers on 13/14 September 2008, the Indian money market immediately experienced considerable stress, and the operating procedures of monetary policy broke down. We suggest that Indian multinationals were using the global money market and were short of dollars on 15 September. They borrowed in India and took capital out of the country. We make three predictions that follow from this hypothesis, and nd that the evidence matches these predictions. This suggests an important role for Indian multinationals in India's evolution towards de facto convertibility.
    Date: 2010–01
  10. By: Aizenman, Joshua (Asian Development Bank Institute)
    Abstract: In this paper the author reviews the use of precautionary measures aimed at mitigating emerging markets' exposure to fragility associated with financial integration. The discussion draws possible lessons from the ongoing global liquidity crisis. The fear of losing international reserves (IR) constrained most emerging markets more than the fear of floating. The fear of using IR during a crisis suggests that emerging markets (EMs) opt to revisit the gains from financial globalization. High levels of IR may be required for the self insurance offered by those reserves to be effective. Under such circumstances, countries may benefit by supplementing the hoarding of IR with Pigovian tax-cum-subsidy policies. These policies would reduce external borrowing, and would fund the marginal hoarding of IR. The fear of losing IR also suggests a greater demand for regional pooling arrangements and swap lines as well as possible new roles for international financial institutions (IFI).
    Keywords: deleveraging; fire-sale congestion externality; swap lines; tax-cum-subsidy; international reserves; Financial Distress
    JEL: F15 F21 F32 F36 G15
    Date: 2010–02–05
  11. By: Matthias Dischinger (University of Munich); Nadine Riedel (Oxford University Centre for Business Taxation, CESifo Munich)
    Abstract: This paper stresses the special role of multinational headquarters in corporate profit shifting strategies. Using a large panel of European firms, we show that multinational enterprises (MNEs) are reluctant to shift profits away from their headquarters even if these are located in high-tax countries. Thus, shifting activities in response to corporate tax rate differentials between parents and subsidiaries are found to be significantly larger if the parent observes a lower corporate tax rate than its subsidiary and profit is thus shifted towards the headquarters firm. This result is in line with recent empirical evidence suggesting that MNEs bias the location of profits and highly profitable assets in favor of the headquarters location (for agency cost reasons among others).
    Keywords: Multinational Firm, Profit Shifting, Headquarters Location
    JEL: H25 H26 C33
    Date: 2010
  12. By: Didier, Tatiana; Love, Inessa; Peria, Maria Soledad Martinez
    Abstract: This paper examines the determinants of stock markets'vulnerability to the 2007-2008 crisis. Given that the United States (US) was the crisis epicenter, the authors analyze the factors driving the co-movement between US returns and stock returns in 83 countries. The analysis distinguishes between the period before and after the collapse of Lehman Brothers. The findings indicate that the main channel of transmission was financial. There is also evidence of a"wake-up call"or"demonstration effect"in the first stage of the crisis, because countries with vulnerable banking and corporate sectors exhibited higher co-movement with the US market. However, despite a collapse in trade across countries, the analysis does not find support for this channel of transmission.
    Keywords: Debt Markets,Mutual Funds,Markets and Market Access,Economic Theory&Research,Emerging Markets
    Date: 2010–03–01
  13. By: Laura Hering; Tomohiko Inui; Sandra Poncet
    Abstract: In the present paper, we investigate whether previous findings of limited effects of investing abroad on the firm’s performance can be explained by the aggregation of heterogeneous effects depending on the FDI motives, sectors and locations. Results suggest, in line with previous work, that on average Japanese outward FDI has limited effects (whether positive or negative) on the activity of internationalizing firms. Fears of “Hollowing out” effects seem to be more justified in the case of FDI to low income countries, for which a contraction of employment and investment and exports is observed. By contrast, we observe a significant positive employment effect for FDI in services, presumably reflecting the operational complementarities between the affiliate and the parent. There is also some evidence of positive labour productivity gains deriving essentially from FDI in manufacturing in high GDP countries.
    Keywords: FDI; multinationals; offshoring; propensity score matching
    JEL: F14 F21 F23
    Date: 2010–01

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