nep-ifn New Economics Papers
on International Finance
Issue of 2010‒04‒24
six papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Assessing Co-ordinated Asian Exchange Rate Regimes By Raj Aggarwal; Cal B. Muckley
  2. The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma By Aizenman, Joshua; Chinna, Menzie; Ito, Hiro
  3. Inflation, Growth and Exchange Rate Regimes in Small Open Economies By Paula Hernandez-Verme
  4. Are Small Countries Able to Set their Own Interest Rates? Assessing the Implications of the Macroeconomic Trilemma By Helmut Herwartz; Jan Roestel
  5. Foreign Direct Investment and Civil Rights:  Testing Decreasing Returns to Civil Rights By Ponce, Aldo
  6. Stock and Bond Relationships in Asia By Johansson, Anders C.

  1. By: Raj Aggarwal (College of Business Administration, University of Akron); Cal B. Muckley (Smurfit Business School, University College Dublin)
    Abstract: This study assesses alternative Asian exchange rate regimes and finds short- and long-run currency dynamics more conducive to the possibility of introducing a common peg based on a basket of the European euro, the United States dollar and the Japanese yen than the alternative of re-introducing a United States dollar peg exchange rate regime. Exchange rate systems of 3- 4- and 5- Asian currencies are examined and the dynamics in a set of 4 European currencies prior to the introduction of the Euro provides benchmark evidence. The evidence for an Asian basket peg regime is strengthened when, unlike in prior studies, the long-run parameters are estimated while accounting for generalised autoregressive conditional heteroscedasticity effects.
    Keywords: Exchange Rate Regimes, Asia, Currency Pegs, Basket Exchange Rates
    JEL: F33 F31 F42 F02
    Date: 2010–04–13
  2. By: Aizenman, Joshua (Asian Development Bank Institute); Chinna, Menzie (Asian Development Bank Institute); Ito, Hiro (Asian Development Bank Institute)
    Abstract: This paper extends our previous paper (Aizenman, Chinn, and Ito 2008) and explores some of the unexplored questions. First, we examine the channels through which the trilemma policy configurations affect output volatility. Secondly, we investigate how trilemma policy configurations affect the output performance of the economies under severe crisis situations. Thirdly, we look into how trilemma configurations have evolved in the aftermath of economic crises in the past. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of international reserves (IR). Greater financial openness helps reduce real exchange rate volatility. These results indicate that policymakers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. We also find that the "crisis economies" could end up with smaller output losses if they entered the crisis situation with more stable exchange rates or if they continue to hold a high level of IR and maintain greater exchange rate stability during the crisis period. Lastly, we find that developing countries are often found to have decreased the level of monetary independence and financial openness, but increased the level of exchange rate stability in the aftermath of a crisis, especially for the last two decades. This finding indicates how vulnerable developing countries, especially emerging market ones, are to volatile capital flows as a result of global financial liberalization.
    Keywords: trilemma policy; capital outflows; investment channel; asia regional
    JEL: F15 F21 F31 F36 F41 O24
    Date: 2010–04–19
  3. By: Paula Hernandez-Verme (Department of Economics and Finance, Universidad de Guanajuato)
    Abstract: This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –with high rates of domestic inflation- increases the scope for indeterminacy and economic fluctuations.
    Keywords: Currency Board, Endogenously Arising Volatility, Fixed exchange rates, Floating exchange rates, Growth, Indeterminacy, Inflation, Multiple Reserve Requirements, Private Information, Stabilization
    JEL: E31 E32 E42 E44 F31 F33 G14 G18 O16
    Date: 2009–07
  4. By: Helmut Herwartz; Jan Roestel
    Abstract: According to the ’macroeconomic trilemma’ the ability of small economies to pursue an independent monetary policy is jointly determined by country specific foreign exchange (FX) rate flexibility and capital mobility. In particular, free floating economies should be able to isolate domestic interest rates even under globalized capital markets. Recent evidence casts doubts if this gain in independence is substantial. Taking advantage of semiparametric functional regression models we study the trade-off among FX stability, capital mobility and monetary autonomy for a panel of 20 developed small economies. Confirming the macroeconomic trilemma, the exposure to foreign interest rates is found to increase with country specific states of exchange rate stability and capital mobility. Gains in monetary independence appear substantial for countries that abdicate to peg their FX rates, but the marginal benefit of tolerating higher exposure to FX volatility quickly vanishes. Free floating economies might therefore be able to moderately stabilize FX rates at little cost.
    Keywords: monetary independence, macroeconomic trilemma, monetary policy, exchange rate regime, interest rates, functional coefficients, semiparametric models
    JEL: F31 F33 F36
    Date: 2010
  5. By: Ponce, Aldo
    Abstract: In this paper, I examine the effectiveness of improvements in political and civil rights for attracting foreign direct investment flows (FDI) into democracies. I contend that advances in the quality of democracy – specifically those concerning civil rights – present positive but decreasing marginal returns in attracting FDI inflows. I empirically prove this proposition by using panel data regressions within the Latin American and Eastern European contexts from periods following their democratization (1991-2003).
    Keywords: foreign direct investment; civil rights; democratization; developing nations; Latin America; Eastern Europe
    JEL: K12 K00 F21 K11 K31 P52
    Date: 2010–03–15
  6. By: Johansson, Anders C. (China Economic Research Center)
    Abstract: This paper analyzes the relationship between stocks and bonds in nine Asian countries. Using a bivariate stochastic volatility model, we show that there are significant volatility spillover effects between stock and bond markets in several of the countries. Furthermore, dynamic correlation patterns show that the relationship between stock and bond markets changes considerably over time in all countries. Stock-bond correlation increases during periods of turmoil in several countries, indicating that there is a cross-asset contagion effect. Therefore, if there is a flight to quality effect in Asian markets, it seems to occur across countries or regions rather than across domestic assets. The results have direct and important implications for regional policy makers as well as domestic and international investors that invest in multiple asset classes.
    Keywords: Asia; stock markets; bond markets; stochastic volatility; Markov Chain Monte Carlo; spillover effects; dynamic correlation
    JEL: C32 F30 G12 G15
    Date: 2010–04–01

This nep-ifn issue is ©2010 by Ajay Shah. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.