|
on International Finance |
|
Issue of 2010‒04‒04
twenty papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Melecky, Martin |
| Abstract: | Starting from the constraints and incentives that cause countries to issue debt in foreign currency, this paper provides an overview of policy approaches for choosing the optimal currency structure of sovereign foreign-currency debt. The objective of sovereign debt managers generally includes both risk and cost minimization, while constraints to foreign-currency debt allocation originate in the parameters of the domestic macroeconomy, the shocks it faces, and the initial conditions. Overall, the main parameters that drive the solutions for optimal currency allocation of foreign-currency debt are the covariances of macrovariables with exchange rates and the variances of different exchange rates. Both the covariances and the exchange rate volatility can be deceptive when a fixed exchange rate regime is maintained, however. To adequately capture the expected covariances in the context of managed exchange rate regimes, we suggest that sovereign debt managers work with equilibrium instead of actual exchange rates. For the same reason and because the estimates of relative exchange rate variances should be forward looking, we suggest using synchronization indicators in the policy analysis to better capture the underlying drivers of exchange rate volatility across currencies. |
| Keywords: | Sovereign Debt Management; Foreign-Currency Debt; Exchange Rates and Exchange Rate Volatility; External Shocks; Developing Countries. |
| JEL: | G11 H63 F36 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21268&r=ifn |
| By: | Rashid , Abdul |
| Abstract: | This study examines the economic exchange rate exposure for 22 industries in Pakistan. The key findings of the study are as follows. Firstly, it shows that industry-level share values are statistically significantly influenced by changes in the PKR/US-dollar exchange rate in general. Secondly it reports a statistically significant lagged response of stock values to exchange rate change. Finally, the highly capital intensive industries are, however, more exposed to changes in exchange rate as compared to less capital intensive industries. The robustness of the exchange rate exposure does not fall over time. |
| Keywords: | Exchange rate exposure; Small open economy; Capital intensive industries |
| JEL: | F23 G15 |
| Date: | 2009–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7305&r=ifn |
| By: | roman Horvath; Radovan Fiser |
| Abstract: | We examine the effects of the Czech National Bank communication, macroeconomic news and interest rate differential on exchange rate volatility using generalized autoregressive conditional heteroscedasticity model. Our results suggest that central bank communication has a calming effect on exchange rate volatility. The timing of central bank communication seems to matter, too, as financial markets respond more to the communication before the policy meetings than after them. Next, macroeconomic news releases are found to reduce exchange rate volatility, while interest rate differential seems to increase it. |
| Keywords: | central bank communication, exchange rate, GARCH |
| JEL: | E52 E58 F31 |
| Date: | 2009–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2009-962&r=ifn |
| By: | Christophe RAULT; Guglielmo Maria CAPORALE; Thouraya HADJ AMOR |
| Abstract: | The aim of this paper is to provide new empirical evidence on the impact of international financial integration on the long-run Real Exchange Rate (RER) in 39 developing countries belonging to three different geographical regions (Latin America, Asia and MENA). It covers the period 1979-2004, and carries out "second-generation" tests for non-stationary panels. Several factors, including international financial integration, are shown to drive the long-run RER in emerging countries. It is found that the new financial environment characterised by international financial integration leads to a depreciation of the RER in the long run. Further, RER misalignments take the form of an under-valuation in most MENA countries and an over-valuation in most Latin American and Asian countries |
| Keywords: | emerging economies, real exchange rate, financial integration, misalignment, second-generation panel unit-root and cointegration tests |
| JEL: | E31 F0 F31 C15 |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2009-970&r=ifn |
| By: | Gilles Duffrenot; Kimiko Sugimoto |
| Abstract: | This paper compares different nominal anchors in the case of a fixed exchange rate regime for the future single regional currency of the Economic Community of the West African States (ECOWAS). We study the anchor choice when the countries focus the exchange rate policy to promote internal and external competitiveness. We consider four foreign anchor currencies: the us dollar, the euro, the yen and the yuan. Using a counterfactual analysis, we find little support for a dominant peg in the ECOWAS zone. In attempting to select an anchor currency, as regards internal and external competitiveness, several aspects need to be taken into consideration: the variability of the commodity prices, adverse downward trend movements, the stability of export revenues and the invoicing currency. A discriminating element is the direction toward which the anchor currency moves, while the world price of commodities evolves in the opposite direction. Our simulations show that the countries would not agree on the same anchor if they pursue several goals: maximizing the export revenues, minimizing their variability, stabilizing them and minimizing the real exchange rate misalignments from its fundamental value. |
| Keywords: | West Africa, peg, counterfactual analysis, commodity prices |
| JEL: | F31 O11 O55 |
| Date: | 2010–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-974&r=ifn |
| By: | Cerdeiro, Diego A. |
| Abstract: | The paper extends Bernanke and Mihov's [6] closed-economy strategy for identification of monetary policy shocks to open-economy settings, accounting for the simultaneity between interest-rate and exchange-rate innovations. The methodology allows a separate treatment of two distinct monetary policy shocks, one that operates through open market operations, and another one that takes place through interventions in the foreign exchange market. Implementation of this strategy to the case of Argentina provides the stylized facts necessary to choose among competing theoretical models of this economy. In addition to studying the effects of monetary policy innovations, the present study sheds light on the endogenous component of monetary policy. In this regard, the paper finds that, notwithstanding the relative stability of the exchange rate and the accumulation of large amounts of international reserves, the central bank in Argentina has been far from absorbing balance of payments shocks in a currency-board fashion. The growing level of international reserves can be rationalized, instead, as the monetary authority's response to terms of trade, supply and domestic currency demand shocks. |
| Keywords: | Currencies and Exchange Rates,Debt Markets,Economic Stabilization,Emerging Markets,Economic Theory&Research |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5252&r=ifn |
| By: | Dai, Meixing |
| Abstract: | This paper investigates the dynamic implications of Krugman’s (1999) model of financial crises with balance-sheet effects, which has a considerable impact on the literature as well as the teaching of international financial crisis. By explicitly taking account of wealth accumulation and external equilibrium condition, it is shown that a financial crisis in emerging market economies, instead of being interpreted as a jump from a good to a bad equilibrium with zero investment and zero foreign debt, could be explained as a jump from an unstable dynamic trajectory to a stable one. The dynamic framework illustrates well the analysis of different factors at the origin of financial vulnerability and crisis. By discriminating the financial crises according to the severity of their negative impacts on the domestic economy, the present study also adds some insights in the analysis of policy implications. |
| Keywords: | Financial crisis; currency crisis; balance sheet effect; external solvency constraint. |
| JEL: | F34 F32 F41 F31 |
| Date: | 2010–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21625&r=ifn |
| By: | Guidi, Francesco; Gupta, Rakesh |
| Abstract: | This paper aims to examine the long term relationship between German and three Central and Eastern Europe (CEE) equity markets. Application of Johansen as well as Engle-Granger cointegration tests show that there is no long-term relationship among these markets while the Gregory-Hansen cointegration test rejects the null hypothesis of no cointegration with structural break. An additional objective is to capture the time-varying correlation among these markets through the dynamic conditional correlation models. Empirical results suggest that correlations increased after the accession of the CEE countries into the European Union. |
| Keywords: | Equity markets; Cointegration; Dynamic conditional correlation models. |
| JEL: | C53 G15 C22 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21732&r=ifn |
| By: | Moore, Winston |
| Abstract: | The 1990s were a turbulent time for Latin American and Caribbean countries. During this period, the region suffered from no less than sixteen banking crises. One of the most important determinants of the severity of banking crises is commercial bank liquidity. Banking systems, which are relatively liquid, are better able to deal with the large deposit withdrawals that tend to accompany bank runs. This study provides an assessment of the main determinants of bank liquidity as well as an evaluation of the impact of banking crises on liquidity. The results show that on average, bank liquidity is about 8% less than what is consistent with economic fundamentals during financial crises. |
| Keywords: | Liquidity; Financial Crisis; Banks |
| JEL: | E44 G21 |
| Date: | 2009–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21473&r=ifn |
| By: | Joel Stiebale |
| Abstract: | This paper provides empirical evidence on the relationship between cross-border acquisitions and innovation activities at the fi rm level. In contrast to previous studies that analyze the eff ects on innovation in target fi rms, this paper investigates the eff ects on the investing fi rms. For the empirical analysis a unique fi rm-level data set is constructed that combines survey data for German fi rms with a merger and acquisition database. After a cross-border acquisition, investing fi rms display a higher rate of domestic expenditures for research and development. After controlling for endogeneity of foreign acquisitions by estimating a two-equation system with limited dependent variables and applying instrument variable techniques it is found that part of this correlation stems from a causal eff ect. The estimated eff ects are robust towards alternative identifi cation strategies and are higher in industries with high knowledge intensity. The analysis is complemented by an investigation of the eff ects on tangible investment spending and by a comparison of the eff ects of cross-border acquisitions to those of Greenfi eld foreign direct investments and domestic M&As. |
| Keywords: | Multinational enterprises; mergers and acquisitions; innovation |
| JEL: | D21 F23 G34 C31 O31 O33 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0161&r=ifn |
| By: | Borek Vasicek |
| Abstract: | This paper has three objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authorities of 12 new EU members. Using estimation of an augmented Taylor rule, we find that this setting was not always consistent with the official monetary policy. Second, we seek to shed light on the inflation process of these countries. To this end, we carry out an estimation of an open economy Philips curve (PC). Our main finding is that inflation rates were not only driven by backward persistency but also held a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability. The analysis of the conditional inflation variance obtained from GARCH estimation of PC is used for this purpose. We conclude that inflation targeting is preferable to an exchange rate peg because it allowed decreasing the inflation rate and anchored its volatility. |
| Keywords: | open emerging economies, CEE countries, monetary policy rules, open economy Phillips curve, conditional inflation variance |
| JEL: | E31 E52 E58 P24 |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2009-968&r=ifn |
| By: | Waldkirch, Andreas; Tekin-Koru, Ayca |
| Abstract: | We investigate how economic integration in North America has altered the pattern of foreign direct investment (FDI) to and from Canada. The theoretical analysis suggests that while the Canadian-U.S. free trade agreement should generate less FDI, the addition of Mexico in the North American Free Trade Agreement (NAFTA) produces the opposite effect. The fall in trade costs results in investment diversion from the U.S. and Canada, yet lower fixed costs may increase FDI even in those countries via an increased incentive to locate production facilities abroad rather than only domestically. Using a difference-in-differences estimator, we find that U.S. FDI in Canada as well as Canadian FDI in the U.S. have expanded disproportionately since NAFTA, suggesting that the latter effect dominates. |
| Keywords: | Foreign Direct Investment; Multinationals; NAFTA; Canada |
| JEL: | F15 F23 F21 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21482&r=ifn |
| By: | Kubelec, Chris (Bank of England); Sa, Filipa (Trinity College, University of Cambridge) |
| Abstract: | This paper constructs a data set on stocks of bilateral external assets and liabilities for a group of 18 countries, including developed and emerging economies. The data set covers the years 1980 to 2005 and distinguishes between four asset classes: foreign direct investment, portfolio equity, debt, and foreign exchange reserves. A number of stylised facts emerge from it. There has been a remarkable increase in interconnectivity over the past two decades. Financial links have become larger and more frequent and countries have become more open. The global financial network is centred around a small number of nodes, which have many and large links. In addition, the network exhibits ‘small-world’ properties, such as high clustering and low average path length. The combination of high interconnectivity, a small number of hubs, and ‘small-world’ properties makes for a robust-yet-fragile system, in which disturbances to the key hubs would be rapidly and widely transmitted. The global financial network is centred around the United States and the United Kingdom, which have large links and are connected to most other countries. This contrasts with the global trade network, which is arranged in three clusters: a European cluster (centred on Germany), an Asian cluster (centred on China), and an American cluster (centred on the United States). |
| Keywords: | International financial networks; international investment; financial liberalisation |
| JEL: | F20 F30 |
| Date: | 2010–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0384&r=ifn |
| By: | Dierk Herzer (Johann Wolfgang Goethe-University, Frankfurt am Main / Germany) |
| Abstract: | This paper examines the long-run relationship between outward foreign direct investment (FDI) and total factor productivity for a sample of 33 developing countries over the period 1980-2005. Using panel cointegration techniques, we find that: (i) outward FDI has, on average, a positive long-run effect on total factor productivity in developing countries, (ii) increased factor productivity is both consequence and a cause of increased outward FDI, and (iii) there are large differences in the long-run effects of outward FDI on total factor productivity across countries. Cross-sectional regressions indicate that these cross-country differences in the productivity effects of outward FDI are significantly negatively related to cross-country differences in labor market regulation, whereas there is no statistically significant association between the productivity effects of outward FDI and the level of human capital, the level of financial development, or the degree of trade openness in the home country. |
| Keywords: | Outward FDI; total factor productivity; developing countries; panel cointegration |
| JEL: | F21 O11 F23 C23 |
| Date: | 2010–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:got:iaidps:199&r=ifn |
| By: | Tekin-Koru, Ayca |
| Abstract: | Standard foreign direct investment (FDI) theory suggests that falling trade costs should discourage horizontal FDI. Most FDI is horizontal. Yet, the world witnessed an FDI boom in 1990s, a period of striking falls in trade barriers. This paper carries out an empirical analysis with rich, firm-level data on the activities of Swedish multinationals around the globe in manufacturing sectors from 1987 to 1998 to shed light on this apparent conflict. The analysis is based on the predictions of a recent literature with an industrial organization (IO) angle: Trade costs have asymmetric effects on foreign expansion modes. This view posits that falling trade costs encourage entry realized as mergers and acquisitions (M&As), one of the potential explanations for the conflict between received theory and recent trends in FDI. Empirical results confirm the findings of this recent literature and add to it by testing its extensions. |
| Keywords: | foreign direct investment; entry modes; and trade liberalization |
| JEL: | F23 G34 F21 L22 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21483&r=ifn |
| By: | Smith, Constance (University of Alberta, Department of Economics) |
| Abstract: | Large current account deficits have become a policy concern. The trend toward international capital market liberalization has improved access to foreign pools of saving which has allowed the expansion of current account deficits. There are minimal barriers to capital flows within a country, so an understanding of the determinants of within-country regional external balances could illustrate the likely path of external balances between countries as international economic integration proceeds. This study investigates the determinants of external balances for the regions within a single country— Canada—in order to provide a benchmark for country-level comparisons. The estimates show that the short run response of the external balance to disturbances, such as a deterioration in the terms of trade,is typically larger for Canadian provinces than for a sample of 18 OECD countries. The larger response at the regional level is consistent with greater financial market integration which facilitates the movement of capital and goods. The empirical results also reveal a much greater speed of adjustment of the external balance in the Canadian provinces. This faster adjustment speed, combined with the larger response of net exports, suggests that economic integration may promote the quicker resolution of external imbalances, but it may also allow larger deficits to emerge before they are addressed by market adjustments. |
| Keywords: | current account; external balance; economic integration; financial market liberalization |
| JEL: | E60 F32 F36 F41 |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2010_008&r=ifn |
| By: | Moore, Winston |
| Abstract: | Economic theory suggests that opening the capital account should allow a country to diversify away economic shocks, increase capital inflows, expand economic growth and efficiency and encourage governments to pursue good policies, the empirical evidence with regard to these theoretical predictions are in some instances debatable. Many studies, for example, have reported mixed results as it relates to the impact of capital account integration on growth, exchange rates, trade and policy discipline. This paper provides a review of this literature as well as some policy for policymakers in relation to managing the process of removing capital controls. |
| Keywords: | Capital Controls; Liberalisation; Policy Options |
| JEL: | F4 F3 O2 |
| Date: | 2010–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21584&r=ifn |
| By: | Pierre Blanchard; Carl Gaigné; Claude Mathieu |
| Abstract: | We study the impact of trade liberalization on the international strategy of firms (to export and/or invest abroad as well as the number of products to be produced and exported) when product differentiation is endogenous. By considering product differentiation as a strategic variable, our analysis sheds new light on the impact of trade barriers on the decision to produce abroad and on the choice of product range, in accordance with recent empirical evidence. Indeed, we show that, even though technology exhibits the same productivity for each variety, firms drop some varieties with trade integration. In addition, our results reveal that, contrary to the standard theoretical literature, the relationship between the decision to export and trade costs is non-linear. When trade costs are relatively high, each firm export and is multi-product. Then, when trade costs take intermediate values, firms may invest abroad and the choice of producing abroad results from a prisoner's dilemma game. Finally, when trade costs are low, firms export but become single-product. |
| Keywords: | Foreign direct investment, exports, multi-product competition, endogenous differentiation product, trade integration |
| JEL: | F12 F23 L11 L25 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:rae:wpaper:201002&r=ifn |
| By: | Buch, Claudia M.; Kesternich, Iris; Lipponer, Alexander; Schnitzer, Monika |
| Abstract: | The crisis on international financial markets that started in 2007 has shown the potential links between the financial sector and the real economy. Exports and foreign direct investment (FDI) have declined, presumably not only because of a lack of demand, but also because of restricted access of firms to external finance. In this paper, we explore the impact of access to external finance on firms' choices to export or to engage in FDI. We simultaneously model a firm's decision to engage in FDI and in exports, and we assess the importance of financial factors for this choice (the extensive margin) as well as for the volume of activities (the intensive margin). We find that financial frictions matter, in particular for the decision to engage internationally. -- |
| Keywords: | Multinational firms,exports versus FDI,financial constraints,heterogeneity,productivity |
| JEL: | F2 G2 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201003&r=ifn |
| By: | Hsieh, Kunlin; Hsieh, Yuching; Hamori, Shigeyuki |
| Abstract: | This paper empirically analyzes the relationship among the prices of Taiwanese stocks, Japanese stocks, and crude oil from January 1980 to July 2008. It provides some interesting results: (1) crude oil prices made an impact on Japanese stock prices, while the latter exerted a strong influence on Taiwanese stock prices during the period of Japan’s economic growth; (2) however, no causality was observed among the variables during the Japanese economy’s "lost decade"; and (3) causality from Japanese stock prices and crude oil prices to Taiwanese stock prices was observed during the period of Japan’s economic recovery. |
| Keywords: | Taiwanese stock prices; Japanese stock prices; LA-VAR |
| JEL: | O11 F41 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21475&r=ifn |