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on International Finance |
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Issue of 2010‒05‒08
twelve papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Giorgio Barba Navaretti (University of Milan and Centro Studi Luca d’Agliano); Giacomo Calzolari (University of Bologna, CEPR and Centro Studi Luca d’Agliano); Alberto Franco Pozzolo (University of Molise, Centro Studi Luca d’Agliano and MoFiR); Micol Levi (Centro Studi Luca d’Agliano) |
| Abstract: | This paper examines whether multinational banks have a stabilising or a destabilising role during times of financial distress. With a focus on Europe, it looks at how these banks‟ foreign affiliates have been faring during the recent financial crisis. It finds that retail and corporate lending of these foreign affiliates have been stable and even increasing between 2007 and 2009. This pattern is related to the functioning of the internal capital market through which these banks funnel funds across their units. The internal capital market has been an effective tool to support foreign affiliates in distress and to isolate their lending from the local availability of financial resources, notwithstanding the systemic nature of the recent crisis. This effect has been particularly large within the EU integrated financial market and for the EMU countries, thus showing complementarity between economic integration and multinational banks‟ internal capital markets. In light of these findings, this paper supports the call for an integration of the European supervisory and regulatory framework overseeing multinational banks. The analysis is based on an analytical framework which derives the main conditions under which the internal capital market can perform this support function under idiosyncratic and systemic stresses. The empirical evidence uses both aggregate evidence on foreign claims worldwide, and firm-level evidence on the behaviour of banking groups‟ affiliates, compared to standing alone national banks. |
| Keywords: | multinational banking, financial stability, regulation and supervision, internal capital markets, financial crises |
| JEL: | G15 G18 |
| Date: | 2010–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:292&r=ifn |
| By: | Marzo, Massimiliano; Zagaglia, Paolo |
| Abstract: | We investigate how the relation between gold prices and the U.S. Dollar has been affected by the recent turmoil in financial markets. We use spot prices of gold and spot bilateral exchange rates against the Euro and the British Pound to study the pattern of volatility spillovers. We estimate the bivariate structural GARCH models proposed by Spargoli e Zagaglia (2008) to gauge the causal relations between volatility changes in the two assets. We also apply the tests for change of co-dependence of Cappiello, Gerard and Manganelli (2005). We document the ability of gold to generate stable comovements with the Dollar exchange rate that have survived the recent phases of market disruption. Our findings also show that exogenous increases in market uncertainty have tended to produce reactions of gold prices that are more stable than those of the U.S. Dollar. |
| Keywords: | gold; exchange rates; GARCH; quantile regressions |
| JEL: | C22 F31 F33 |
| Date: | 2010–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22407&r=ifn |
| By: | Carlos Garcimartín (Universidad Rey Juan Carlos); Luis Rivas (IE University); Pilar García Martínez (Universidad de Salamanca) |
| Abstract: | Broadly speaking, the balance-of-payments constraint hypothesis as developed by Thirlwall has been empirically supported. Yet, it shows some shortcomings highlighted in the literature. In our opinion, two of them must be analysed. First, temporary disequilibria and capital flows must be incorporated into the balance-of-payments constrained growth models. Second, the role of relative prices must be made explicit, since it can be relevant even in an external constraint framework. This study is aimed at developing a model that incorporates both possibilities: temporary external disequilibria and a the impact of relative prices. This model is subsequently used to analyse the evolution of the Spanish and Portuguese economies in last decades, and, in particular, the different path shown by both countries since their accession to the Eurozone. |
| Keywords: | Growth, Balance of payments constraint, Exchange rate. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:wpaper:05-10&r=ifn |
| By: | Hongyi Chen; Lars Jonung; Olaf Unteroberdoerster |
| Abstract: | This study brings out policy lessons for China today, a financially repressed country, from the financial liberalization process in Denmakr, Finland, Norway and Sweden in the 1980s and early 1990s. This report identifies a set of policy lessons for China today from the experience of financial deregulation, financial crisis and recovery in Scandinavia during the period 1985-2000. Although there are considerable differences between the huge Chinese economy and the small Nordic countries, there are enough similarities to make lesson-drawing a worthwhile exercise. Based on the Scandinavian experience and the added complexity of China’s status as a transition economy, financial reforms should strike a proper balance between being gradual (to avoid costly mistakes) and substantive (to secure efficiency gains in the longer term) with due consideration being given to initial conditions concerning regulation, taxes and exchange rate arrangements. A well managed process of financial deregulation requires that policy-makers and market participants fully understand the interlinkages between financial reforms and the rest of the economy. In addition, the supervisory and management systems in the financial sector should move in step with the liberalization process. |
| Keywords: | Financial liberalization,financial crisis,transition,financial regulation,banking,boom-bust,China,Scandinavia,the Nordics |
| JEL: | E52 E58 F31 F32 G21 G28 G32 P52 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0383&r=ifn |
| By: | Matthias Busse; Peter Nunnenkamp; Mariana Spatareanu |
| Abstract: | The paper analyses the impact of fundamental labor rights on bilateral FDI flows to 82 developing countries. The results indicate that investments by multinationals are significantly higher in countries that adhere to labor rights, thereby refuting the hypothesis that repression of these rights fosters FDI. |
| Keywords: | FDI, Labor Rights, Developing Countries |
| JEL: | F21 F23 J50 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:run:wpaper:2010-002&r=ifn |
| By: | Thomas Richter (GIGA German Institute of Global and Area Studies) |
| Abstract: | This paper argues that trade and capital account reforms within autocracies underlie the primacy of foreign currency procurement. A longitudinal comparison of four countries (Morocco, Tunisia, Egypt and Jordan) in the Middle East and North Africa region shows a historical sequencing of reforms. In the 1960s and 1970s, the foreign exchange scarcity was managed primarily by rising restrictions, accumulation of debt and a number of unilateral country-specific strategies, including broader economic openings (infitah) and isolated capital account liberalizations. However, IMF-friendly reforms (orthodox trade liberalization) only became a political option in the context of the extreme fiscal scarcity of the 1980s and 1990s, after the failure of these earlier policies and the drying up of alternative unconditional finance. Additionally, the time differences regarding when orthodox reforms are implemented within autocracies mainly relate to global and regional cycles of different external windfall gains. These findings complement recent debates about the rush to free trade in at least two regards. First, they point to distinct causal mechanisms depending on the type of political regime (for example, autocracy versus democracy), explaining the beginning of trade and capital account liberalizations among developing countries. Second, they reveal the conditional historical influence of neoliberal ideas among structurally similar autocracies. |
| Keywords: | Autocracy, trade and capital account liberalization, Morocco, Tunisia, Egypt,Jordan |
| JEL: | F23 L14 O14 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:gig:wpaper:131&r=ifn |
| By: | Lars Jonung; Eoin Drea |
| Abstract: | This study of approximately 170 publications shows (a) that US academic economists concentrated on the question "Is the EMU a good or bad thing?", usually adopting the paradigm of optimum currency areas as their main analytical vehicle, (b) that they displayed considerable scepticism towards the single currency, (c) that economists within the Federal Reserve System had a less analytical and a more pragmatic approach to the single currency than US academic economists, and (e) that US economists adjusted their views and analytical approach as European monetary unification progressed. In particular, the traditional optimum currency approach was gradually put into question. |
| Keywords: | The euro, optimum currency area, ECB, EMU, Federal Reserve System, monetary unification, Europe, United States, Jonung, Drea |
| JEL: | B22 E E5 F02 F33 F41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0395&r=ifn |
| By: | Borgy, V.; Idier, I.; Le Fol, G. |
| Abstract: | Even though the FX market is one of the most liquid financial market, it would be an error to consider that it is immune against any liquidity problem. This paper analyzes on a long sample (2000-2009), the all set of quotes and transactions in three main currency pairs (EURJPY, EURUSD, USDJPY) on the EBS platform. To characterize the FX market liquidity, we consider the spread, the traded volume, the number of transactions and the Amihud (2002) statistic for illiquidity. We also propose the computation of a new liquidity indicator, BIL, that solely relies on price series availability. The main benefit of such measure is to be easily calculated on almost any financial market as well as to have a clear interpretation in terms of liquidity costs. Using all these advanced liquidity analyses, we finally test the accuracy of these measures to detect liquidity problems in the FX market. Our analysis, based on a signaling approach, shows that liquidity problems have arisen during specific episodes in the early 2000's and more generally during the recent financial turmoil. |
| Keywords: | FX market, Liquidity, financial crisis. |
| JEL: | G15 F31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:279&r=ifn |
| By: | Balli, Faruk; Basher, Syed Abul; Ozer-Balli, Hatice |
| Abstract: | Following the launch of the Euro in 1999, integration among Euro area financial markets increased considerably. As a result, portfolio home bias declined across the European financial markets. However, greater market integration has generated a new bias: portfolio Euro bias, a situation where Euro investors tend to hold large proportion of assets issued within the Euro region. The first part of this paper presents an empirical analysis of the economic factors at play behind the switch from home bias to Euro bias. We find that decline in default risk and transaction cost are two key determinants of the rise in portfolio Euro bias. The second part of the paper goes deeper into the effects of Euro bias on Euro area bond and equity markets. We observe that both government and corporate bond markets revealed clear signs of strain during the recent financial turmoil. Our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification. |
| Keywords: | Financial integration; home bias; Euro bias; transaction costs. |
| JEL: | G11 G12 F21 F36 |
| Date: | 2010–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22430&r=ifn |
| By: | Riccardo De Bonis (Banca d'Italia, Economics and International Relations Area); Giovanni Ferri (Universit… degli Studi di Bari); Zeno Rotondi (UniCredit Group, Head of Research and Competitors Benchmarking,, Retail Division) |
| Abstract: | We show that a longer relationship length with the main bank fosters Italian firms' foreign direct investment (FDI) and, weakly, production off-shoring abroad. Possibly, longer bank relationships help secure external financing for these companies, which have become more opaque because of their internationalization. In contrast, other than for smaller-sized companies, we detect no impact on firms' propensity to export, suggesting that exporting alters enterprises' financial set-up less than shifting production internationally. We also find a link between the internationalization of the main creditor bank and firm FDIs. Our evidence suggests that reexisting strong bank-firm relationships support manufacturing firms' production internationalization. |
| Keywords: | bank-firm relationships, export, external finance, foreign direct investments, internationalization, off-shoring |
| JEL: | D21 F10 F21 F23 G21 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:37&r=ifn |
| By: | Subramanian Ravi; Sachdeva Charu; Morris Sebastian |
| Abstract: | This paper discusses the trends in India's outward FDI over the last decade and then attempts to identify the driving factors for the same. The aim is to provide policy makers with insights regarding levers which would help in encouraging FDI outflows and to stimulate further research in foreign investment from emerging economies. The analysis is based on 287 instances of foreign investment from India by top Indian companies across 17 sectors. The paper draws on the "eclectic" paradigm to study the impact of ownership, location and internalization variables on India's foreign investment. A sector wise analysis of mode of entry, intent of entry and geographic concentration has been performed. At an aggregate level, it has been found that acquisitions have been the predominant mode of entry for Indian firms investing abroad and seeking new markets the primary intent of investment. A regression model was also developed to understand the impact and relative importance of owndership variables such as distribution system, need for resources, factor of production, post sales service requirement, presence of IP and brand on foreign investment from India. It was found that high distribution expenses and need for resources had a very positive influence on foreign investment. The paper also discusses the key policy changes that impacted outward FDI from India in the last decade and relationship of outward FDI with other macroeconomic indicators such as GDP and Fischer Open Differential. |
| Date: | 2010–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:wp2010-03-01&r=ifn |
| By: | Johansson, Anders C. (China Economic Research Center) |
| Abstract: | We use structural VAR models with short-run restrictions to analyze the potential transmission of China’s monetary policy shocks to equity markets in Southeast Asia. Our results show that several of the markets in the region are influenced by China’s monetary policy, even though the effect is modest. The impact of a monetary expansion in China is significant and positive for four of the five Southeast Asian equity markets, indicating an increase in demand for goods and services in both China and abroad, which in turn shows up in the foreign equity market. The results provide evidence of China’s growing influence in Southeast Asia and its financial markets. The transmission effect is still quite small, but can be expected to increase if the current trends of deepening economic integration between China and Southeast Asia and a maturing Chinese central bank continue. |
| Keywords: | Monetary policy; stock market; structural vector autoregressive model; monetary transmission; China; Southeast Asia |
| JEL: | C32 E44 E52 F42 G10 |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hacerc:2010-016&r=ifn |