nep-ifn New Economics Papers
on International Finance
Issue of 2010‒05‒29
fifteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. On the nonlinear influence of Reserve Bank of Australia interventions on exchange rates By Reitz, Stefan; Ruelke, Jan C.; Taylor, Mark P.
  2. Testing the asset pricing model of exchange rates with survey data By Anna Naszodi
  3. A double-edged sword. High interest rates in capital-control regimes By Gylfi Zoega
  4. Does Foreign Exchange Reserve Decumulation Lead to Currency Appreciation? By Kathryn M.E. Dominguez; Rasmus Fatum; Pavel Vacek
  5. The Yuan's Exchange Rates and Pass-through Effects on the Prices of Japanese and US Imports By Xing, Yuqing
  6. The euro and the volatility of exchange rates By Amalia Morales-Zumaquero; Simón Sosvilla-Rivero
  7. The Global Credit Crunch and Foreign Banks' Lending to Emerging Markets: Why Did Latin America Fare Better? By Herman Kamil; Kulwant Rai
  8. Should larger reserve holdings be more diversified? By Roland Beck; Sebastian Weber
  9. Powerful Multinational or Persecuted Foreigners: ‘Foreignness’ and Influence over Government By Emma Aisbett
  10. Foreign Ownership and Corporate Restructuring: Direct Investment by Emerging-Market Firms in the United States By Anusha Chari; Wenjie Chen; Kathryn M.E. Dominguez
  11. Implementing Official Dollarization By Luis Ignacio Jácome; Åke Lönnberg
  12. International Reserves and Underdeveloped Capital Markets By Kathryn M.E. Dominguez
  13. How do firms’ outward FDI strategies relate to their activity at home? Empirical evidence for the UK By Helen Simpson
  14. Determinants of Investment Grade Status in Emerging Markets By Laura Jaramillo
  15. Value-at-Risk for Country Risk Ratings By Michael McAleer; Bernardo da Veiga; Suhejla Hoti

  1. By: Reitz, Stefan; Ruelke, Jan C.; Taylor, Mark P.
    Abstract: This paper applies nonlinear econometric models to empirically investigate the effectiveness of the Reserve Bank of Australia (RBA) exchange rate policy. First, results from a STARTZ model are provided revealing nonlinear mean reversion of the Australian dollar exchange rate in the sense that mean reversion increases with the degree of exchange rate misalignment. Second, a STR-GARCH model suggests that RBA interventions account for this result by strengthening foreign exchange traders' confidence in fundamental analysis. This in line with the so-called coordination channel of intervention effectiveness. --
    Keywords: Foreign exchange intervention,market microstructure,smooth transition,nonlinear mean reversion
    JEL: C10 F31 F41
    Date: 2010
  2. By: Anna Naszodi (Magyar Nemzeti Bank, 1054 Szabadság tér 8/9, 1850 Budapest, Hungary.)
    Abstract: This paper proposes a new test for the asset pricing model of the exchange rate. It examines whether the way market analysts generate their forecasts is closer to the one implied by the asset pricing model, or to any of those implied by some alternative models. The asset pricing model is supported by the test since it has significantly better out-ofsample fit on survey data than simpler models including the random walk. The traditional test based on forecasting ability is applied as well. The asset pricing model proves to have better forecast accuracy in case of some exchange rates and forecast horizons than the random walk. JEL Classification: F31, F36, G13.
    Keywords: asset pricing exchange rate model, present value model of exchange rate, survey data.
    Date: 2010–05
  3. By: Gylfi Zoega
    Abstract: This paper derives the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rate may strengthen the currency by reducing consumption and imports and by inducing foreign owners of local currency assets not to sell local currency off shore. There is also an effect that goes in the opposite direction: Higher interest rates increase the flow of interest income to foreigners through the current account which makes the exchange rate fall. The historical financial crisis now under way in Iceland provides excellent testing grounds for the analysis. Overall, the experience does not suggest that cutting interest rates moderately from a very high level is likely to make a currency depreciate in a capital control regime but highlights the importance of effective enforcing of the controls.
    Date: 2009–11
  4. By: Kathryn M.E. Dominguez (University of Michigan & NBER); Rasmus Fatum (University of Alberta); Pavel Vacek (University of Alberta)
    Abstract: Many developing countries have increased their foreign reserve stocks dramatically in recent years, in large part motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every day these sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency.
    Keywords: foreign exchange reserves, exchange rate determination, high- frequency volatility modeling
    JEL: E58 F31 F32
    Date: 2010–05
  5. By: Xing, Yuqing (Asian Development Bank Institute)
    Abstract: This paper estimated the pass-though effects of yuan's exchange rates on prices of the US and Japanese imports from the People's Republic of China (PRC). Empirical results show that, a 1% nominal appreciation of the yuan would result in a 0.23% increase in prices of the US imports in the short run and 0.47% in the long run. Japanese import prices were relatively more responsive to changes of the bilateral exchange rates between the yuan and the yen. For a 1% nominal appreciation of the yuan against the yen, Japanese import prices would be expected to rise 0.55% in the short run and 0.99%, a complete pass-through, in the long run. The high degree of pass-through effects were also found at the disaggregated sectoral level: food, raw materials, apparel, manufacturing, and machinery. However, further analysis indicated that the high pass-through effects in the case of Japan were mainly attributed to the PRC's policy to peg the yuan to the United States (US) dollar, and that the dollar is used as a dominant invoicing currency for the PRC's exports to Japan. After controlling the currency invoicing factor, I found no evidence that the yuan's cumulative appreciation since July 2005 was passed on to prices of Japanese imports at either the aggregate or disaggregated levels. The estimated low pass-through effects of the yuan's appreciation suggest that a moderate appreciation of the yuan would have very little impact on the PRC's trade surplus.
    Keywords: exchange rate pass-through; prc; japan; usa
    JEL: F31 F32
    Date: 2010–05–18
  6. By: Amalia Morales-Zumaquero (Universidad de Málaga); Simón Sosvilla-Rivero (Universidad Complutense de Madrid)
    Abstract: This paper attempts to determine whether or not the introduction of the euro affected the volatility of bilateral exchange rates all over the world. To that end, we examine the exchange rate behaviour for a set of OECD and non-OECD countries during the 1993-2007 period. Two econometric methods are implemented for this purpose: the OLS-based tests to detect multiple structural breaks, as proposed by Bai and Perron (1998, 2003), and several procedures based on Information Criterion together with the so-called sequential procedure suggested by Bai and Perron (2003). Although results suggest evidence of structural breaks in volatility across investigated variables, there is high heterogeneity regarding the located dates. Moreover, the realignments in the Exchange Rate Mechanism seem to play a significant role in the reduction of volatility in some European countries and transition economies.
    Keywords: Exchange rates, volatility
    JEL: F3
    Date: 2010–05
  7. By: Herman Kamil; Kulwant Rai
    Abstract: The recent global financial turmoil raised questions about the stability of foreign banks' financing to emerging market countries. While foreign banks' lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks' lending to LAC countries-whether extended directly by their headquarters abroad or by their local affiliates in host countries-we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks' lending was channeled in domestic currency. We also show that foreign banks' involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks' lending.
    Keywords: Bank credit , Caribbean , Credit restraint , Cross country analysis , Economic models , Emerging markets , International banking , International banks , International capital markets , Latin America , Liquidity ,
    Date: 2010–04–19
  8. By: Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Sebastian Weber (Graduate Institute of International and Development Studies, Avenue de la Paix 11A, CH-1202 Geneva, Switzerland.)
    Abstract: The notable increase in international reserve holdings over the past decade and their use during the global …financial crisis of 2008/2009 has sparked renewed interest in the analysis of the optimal level of reserve holdings, in particular in countries which are subject to sudden stops. Less attention has been given to the optimal composition of reserves and even less to the joint determination of level and composition. In light of current developments, we show that despite the common belief that higher reserve levels should go along with higher diversifi…cation to minimize the opportunity costs from holding reserves, the opposite may even be true. It depends on the factors that stand behind the increase in reserves whether increased diversifi…cation is optimal or not. We estimate for a panel of 20 countries the determinants of the currency composition of reserves and show how it is affected by the different motives of reserve accumulation. In line with the recent literature on reserve levels we …find that reserve accumulation is primarily driven by precautionary motives, which in turn underpins the allocation of reserves to safe assets. While we fi…nd primarily evidence of the allocation being a function of precautionary motives, we also fi…nd some weak evidence for reserve accumulation to lead to more diversifi…ed portfolios if reserve accumulation is driven by other factors than precautionary motives. JEL Classification: F31, F33, E42, G11.
    Keywords: Reserve Accumulation, Currency Composition, Precautionary Motives.
    Date: 2010–05
  9. By: Emma Aisbett
    Abstract: One of the enduring themes of the globalization debate is whether international law should be strengthened to protect foreign firm from discriminatory host governments, or rather strengthened to protect host governments from powerful multinational firms. This paper uses firm-level data from the World Business Environment Survey (WBES) to lend some empirical evidence to the debate. In doing so it contributes to academic understanding of what a `foreign firm' is, and challenges the notion that institutional superiority makes OECD governments less prone to anti-foreign bias. Although the terms `foreign firm' and `multinational subsidiary' are often used interchangeably, in the WBES data the managers of only about half of the firms with more than ten percent foreign ownership view themselves as part of a multinational. This distinction between multinational and non-multinational foreign firms was important in regression analysis of self-reported influence over government. In non- OECD countries - where we find no evidence of anti-foreign bias - multinationals appear significantly more influential than other firms. Meanwhile, in OECD countries, foreign non-multinationals do appear at a disadvantage in terms of influence relative to domestic firms, but this `liability of foreignness' does not appear to extend to foreign-multinational affiliates.
    Keywords: Multinational Firms, Foreign Firms, Political Economy, Government
    JEL: F02 F23 F52 P16
    Date: 2010–04
  10. By: Anusha Chari (University of North Carolina & NBER); Wenjie Chen (George Washington University); Kathryn M.E. Dominguez (University of Michigan & NBER)
    Abstract: This paper examines the recent upsurge in foreign direct investment by emerging-market firms into the United States. Traditionally, direct investment flowed from developed to developing countries, bringing with it superior technology, organizational capital, and access to international capital markets, yet increasingly there is a trend towards Òcapital flowing uphillÓ with emerging market investors acquiring a broad range of assets in developed countries. Using transaction-specific information and firm-level accounting data we evaluate the operating performance of publicly traded U.S. firms that have been acquired by firms from emerging markets over the period 1980-2007. Our empirical methodology uses a difference-in-differences approach combined with propensity score matching to create an appropriate control group of non-acquired firms. The results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets and employment), relative to matched non-acquired U.S. firms before the acquisition year. In the years following the acquisition, sales and employment decline while profitability rises, suggesting significant restructuring of the target firms.
    Keywords: foreign direct investment, capital flows, emerging markets, acquisitions, firm performance
    JEL: F21 F37 G34
    Date: 2009–11
  11. By: Luis Ignacio Jácome; Åke Lönnberg
    Abstract: This paper identifies key aspects that countries willing to officially dollarize must necessarily address. Based on country experiences, it discusses the critical institutional bases that are necessary to unilaterally introduce a new legal tender, describes the relevant operational issues to smooth the transition toward the use of the new currency, and identifies key structural reforms that are necessary to favor the sustainability over time of this monetary regime. The paper is aimed at providing preliminary guidance to policy makers and practitioners adopting official dollarization. The paper does not take a position on how appropriate this monetary arrangement is. Experiences from adopting dollarization in Ecuador, El Salvador, Kosovo, Montenegro, and Timor-Leste are illustrated briefly.
    Keywords: Bank reforms , Bank supervision , Central bank legislation , Central bank role , Central banks , Cross country analysis , Dollarization , Exchange rate policy , Fiscal reforms , Governance , Labor market reforms , Monetary policy , Trade policy ,
    Date: 2010–04–23
  12. By: Kathryn M.E. Dominguez (University of Michigan & NBER)
    Abstract: International reserve accumulation by developing countries is just one example of the puzzling behavior of international capital flows. Capital should flow to where its return is highest, which ought to be where capital is scare. Yet recent data suggest the opposite Ð net capital flows from developing countries to industrialized countries. This paper examines the role of financial market development in the accumulation of international reserves. In countries with underdeveloped capital markets the governmentÕs accumulation of reserves may substitute for what would otherwise be private sector capital outflows. Effectively, these governments are acting as financial intermediaries, channeling domestic savings away from local uses and into international capital markets, thereby offsetting the effects of domestic financial constraints that lead to excessive private sector exposure to potential capital shortfalls.
    Keywords: foreign reserves, financial development, external liabilities
    JEL: F21 F32 F33 F34 F41
    Date: 2009–08
  13. By: Helen Simpson (CMPO University of Bristol, IFS and Oxford University Centre for Business Taxation)
    Abstract: This paper investigates the structure of firms’ outward FDI and their behaviour at home in both manufacturing and business services sectors. UK multinationals with overseas affiliates in low-wage economies invest simultaneously in a large number of high-wage countries. I find that more productive multinationals operate in a greater number of countries, consistent with their being able to bear the fixed costs of investing in numerous locations abroad. UK manufacturing plants owned by large-scale, low-wage economy outward investors display lower domestic employment growth, in particular in low-skill activities, consistent with low-wage economy labour substituting for low-skill labour in the UK.
    Keywords: multinational enterprises; skills; globalisation
    JEL: F2
    Date: 2010
  14. By: Laura Jaramillo
    Abstract: Emerging market countries seek investment grade status to lower financing costs for the sovereign, expand the pool of potential investors to institutional investors, and allow corporates the possibility of reducing their borrowing costs. Using a random effects binomial logit model on a sample of 48 emerging markets, the paper finds that, to a large extent, investment grade rating assignments can be explained by a handful of variables. The results also suggest that efforts by emerging markets to increase the likelihood of an upgrade should focus on debt indicators rather than the other key determinants of investment grade status.
    Keywords: Economic models , Emerging markets , Investment , Public debt , Sovereign debt ,
    Date: 2010–04–13
  15. By: Michael McAleer (University of Canterbury); Bernardo da Veiga; Suhejla Hoti
    Abstract: The country risk literature argues that country risk ratings have a direct impact on the cost of borrowings as they reflect the probability of debt default by a country. An improvement in country risk ratings, or country creditworthiness, will lower a country’s cost of borrowing and debt servicing obligations, and vice-versa. In this context, it is useful to analyse country risk ratings data, much like financial data, in terms of the time series patterns, as such an analysis would provide policy makers and the industry stakeholders with a more accurate method of forecasting future changes in the risks and returns of country risk ratings. This paper considered an extension of the Value-at-Risk (VaR) framework where both the upper and lower thresholds are considered. The purpose of the paper was to forecast the conditional variance and Country Risk Bounds (CRBs) for the rate of change of risk ratings for ten countries. The conditional variance of composite risk returns for the ten countries were forecasted using the Single Index (SI) and Portfolio Methods (PM) of McAleer and da Veiga [10,11]. The results suggested that the country risk ratings of Switzerland, Japan and Australia are much mode likely to remain close to current levels than the country risk ratings of Argentina, Brazil and Mexico. This type of analysis would be useful to lenders/investors evaluating the attractiveness of lending/investing in alternative countries.
    Keywords: Country risk; risk ratings; value-at-risk; risk bounds; risk management
    Date: 2010–05–01

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