nep-ifn New Economics Papers
on International Finance
Issue of 2010‒06‒11
thirteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Official intervention in Foreign Exchange Market in Malawi: A comparison of GARCH and Equilibrium Exchange Rate approaches By Simwaka, Kisu; Mkandawire, Leslie
  2. Taylor rules and the Canadian-US equilibrium exchange rate By T. BERGER; B. KEMPA;
  3. The US Subprime Crises and Extreme Market Pressures in Asia By Siregar, Reza; Pontines, Victor; Mohd Hussain, Nurulhuda
  4. On cross-currency models with stochastic volatility and correlated interest rates By Grzelak, Lech; Oosterlee, Kees
  5. "Global Imbalances, the U.S. Dollar, and How the Crisis at the Core of Global Finance Spread to "Self-insuring" Emerging Market Economies" By Jörg Bibow
  6. Foreign Banks and Credit Volatility: The Case of Latin American Countries By Haouat, Meriem; Moccero, Diego Nicolas; Sosa Navarro , Ramiro
  7. Shareholder Protection, Ownership Concentration and FDI By Vahe Lskavyan; Mariana Spatareanu
  8. Regime-Shifts & Post-Float Inflation Dynamics In Australia By Neil Dias Karunaratne; Ramprasad Bhar
  9. Trade in Financial Services: India's Opportunities and Constraints By Rupa Chanda
  10. Foreign Bank Presence and its Effect on Firm Entry and Exit in Transition Economies By Olena Havrylchyk
  11. Exchange Rate Regimes and Macroeconomic Performance in South Asia By Ashima Goyal
  12. Bank secrecy, illicit money and offshore financial centers By PICARD, Pierre; PIERETTI, Patrice
  13. Do international remittances cause Dutch disease? By Edsel, Beja Jr

  1. By: Simwaka, Kisu; Mkandawire, Leslie
    Abstract: The Malawi kwacha was floated in February 1994. Since then, the Reserve Bank of Malawi (RBM) has periodically intervened in the foreign exchange market. This report analyses the effectiveness of foreign exchange market interventions by RBM. We used a generalized autoregressive conditional heteroskedastic (GARCH; 1, 1) model to simultaneously estimate the effect of intervention on the mean and volatility of the kwacha. We also ran an equilibrium exchange rate model and use the equilibrium exchange rate criterion to compare results with those from the GARCH model. Using monthly exchange rates and official intervention data from January 1995 to June 2008, results from the GARCH model indicated that net sales of United States dollars by RBM depreciate, rather than appreciate, the kwacha. Empirically, this implies the RBM “leans against the wind”, i.e., the RBM intervenes to reduce, but not reverse, around-trend exchange rate depreciation. However, results from the GARCH model for the post-2003 period indicated that RBM intervention in the market stabilizes the kwacha. In general, results from both the GARCH model and the real equilibrium exchange rate criterion for the entire study period showed that RBM interventions have been associated with increased exchange rate volatility, except during the post-2003 period. The implication of this finding is that intervention can only have a temporary influence on the exchange rate, as it is difficult to find empirical evidence showing that intervention has a long-lasting, quantitatively significant effect.
    Keywords: foreign exchange market; official intervention; GARCH; equilibrium exchange rate
    JEL: E51 E58 E52 E50
    Date: 2010–04–15
  2. By: T. BERGER; B. KEMPA;
    Abstract: This paper identifies the Canadian-US equilibrium exchange rate based on a simple structural model of the real exchange rate, in which monetary policy follows a Taylor rule interest rate reaction function. The equilibrium exchange rate is explained by relative output and inflation as observable variables, and by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974- 2008 we jointly estimate the unobserved components and the structural parameters using the Kalman filter and Bayesian technique. We find that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate, resulting in few but prolonged periods of currency misalignments.
    Keywords: equilibrium exchange rate, unobserved components, Kalman filter, Bayesian analysis, Importance sampling
    Date: 2010–02
  3. By: Siregar, Reza; Pontines, Victor; Mohd Hussain, Nurulhuda
    Abstract: The primary objective of this study is to examine the evidence of occurrences of extreme market pressure of currencies of a number of Asian economies against the US dollar during the period of 2000-2009. In particular, we are interested in investigating the severity of these pressures during the recent US sub-prime crisis of 2007-2009. Were the currencies of these economies subjected to indiscriminate selling pressures during the period of the crisis? Was the heightened severity of the selling pressures associated with a particular event during the subprime crisis, such as the collapse of the Lehman Brothers? Our findings confirm the globally indiscriminate impacts of the sub-prime crisis on the countries examined and the greatest impact was felt and experienced by these economies around the time of the Lehman-Brothers’ collapse during the last quarter of 2008. Our findings offer far-reaching implications in terms of the linkages between macroeconomic and financial stability.
    Keywords: Currency Crisis; Exchange Market Pressure; SEACEN; Extreme Value Theory
    JEL: C14 F31
    Date: 2010–05
  4. By: Grzelak, Lech; Oosterlee, Kees
    Abstract: We construct multi-currency models with stochastic volatility and correlated stochastic interest rates with a full matrix of correlations. We frst deal with a foreign exchange (FX) model of Heston-type, in which the domestic and foreign interest rates are generated by the short-rate process of Hull-White [HW96]. We then extend the framework by modeling the interest rate by a stochastic volatility displaced-diffusion Libor Market Model [AA02], which can model an interest rate smile. We provide semi-closed form approximations which lead to effcient calibration of the multi-currency models. Finally, we add a correlated stock to the framework and discuss the construction, model calibration and pricing of equity- FX-interest rate hybrid payoffs.
    Keywords: Foreign-exchange (FX); stochastic volatility; Heston model; stochastic interest rates; interest rate smile; forward characteristic function; hybrids; affne diffusion; effcient calibration.
    JEL: G1 F3 G13
    Date: 2010–06–01
  5. By: Jörg Bibow
    Abstract: This paper investigates the spread of what started as a crisis at the core of the global financial system to emerging economies. While emerging economies had exhibited some resilience through the early stages of the financial turmoil that began in the summer of 2007, they have been hit hard since mid-2008. Their deteriorating fortunes are only partly attributable to the collapse in world trade and sharp drop in commodity prices. Things were made worse by emerging markets' exposure to the turmoil in global finance itself. As "innocent bystanders," even countries that had taken out "self-insurance" proved vulnerable to the global "sudden stop" in capital flows. We critique loanable funds theoretical interpretations of global imbalances and offer an alternative explanation that emphasizes the special status of the U.S. dollar. Instead of taking out even more self-insurance, developing countries should pursue capital account management to enlarge their policy space and reduce external vulnerabilities.
    Keywords: Financial Crisis; Capital Flows; Self-insurance; Capital Controls; Bretton Woods II Hypothesis; Global Saving Glut Hypothesis
    JEL: E12 E43 E44 F02 F10 F32 F33 F42
    Date: 2010–03
  6. By: Haouat, Meriem; Moccero, Diego Nicolas; Sosa Navarro , Ramiro
    Abstract: Foreign bank presence has substantially increased in Latin America during the second half of the 1990s, which has prompted an intense debate on its banking and macroeconomic consequences. In this paper, we apply ARCH techniques to jointly estimate the impact of foreign bank presence on the level and volatility of real credit in a panel of eight Latin American countries, using quarterly data over the period 1995:1-2001:4. Results show that, together with financial development, foreign bank presence has contributed to reduce real credit volatility, improving the buffer shock function of the banking sector. This finding is consistent with the fact that foreign banks are typically well diversified institutions holding higher quality assets and having access to a broad set of liquidity sources. Keywords: foreign banks; credit volatility; Latin America; panel data; ARCH techniques
    Keywords: Foreign Banks; Credit Volatility; Latin America; Panel Data; ARCH techniques
    JEL: E51 C33 G21
    Date: 2010–03–15
  7. By: Vahe Lskavyan; Mariana Spatareanu
    Abstract: Host country’s weaker legal shareholder protection may make it costlier for parent shareholders to monitor the foreign subsidiary and hold managers accountable in case of misconduct. This prospect may motivate the managers to invest in such foreign environments. However, the agency costs associated with such investments can increase as well. The latter would tend to discourage such FDI. We test this ex ante uncertain relationship using a sample of publicly quoted UK parents that established new, majority owned joint venture subsidiaries in continental Europe. We find that host country’s weak legal shareholder protection discourages FDI. This negative relationship, however, is less important for firms with higher ownership concentration, implying that parent’s ownership concentration may be a substitute for host country’s weak legal shareholder protection.
    Keywords: FDI, agency costs, shareholder protection
    JEL: F21 G34
    Date: 2010–06
  8. By: Neil Dias Karunaratne; Ramprasad Bhar (School of Economics, The University of Queensland)
    Abstract: Australia’s inflation rate and inflation uncertainty during the post-float era 1983Q3-2006Q4 have acted as important barometers of Australia’s macroeconomic performance. The conceptualisation and measurement of the nexus between inflation and inflation uncertainty is subject to complex dynamics. We use Markov regime switching heteroscedasticity (MRSH) model to capture long-run stochastic trend and short-run noisy components. This allows us to conclude that in post-float Australia the results deviate significantly from the mainstream Friedman paradigm on inflation and its uncertainty. We also critically review the plausibility of rival paradigm explaining this paradoxical behaviour. The regime shifts detected in the inflation dynamics appear to be linked to the macroeconomic policies pursued to achieve external and internal balance as implied by Keynesian Mundell-Fleming model.
    Date: 2010
  9. By: Rupa Chanda
    Abstract: This paper analyzes the prospects for liberalizing financial services under the GATS, in view of India’s interests and concerns in this sector. The paper consists of seven sections. Section 2 discusses global trends in financial services and the internationalization of this sector. Section 3 discusses in detail the nature of India’s financial sector, its strengths and weaknesses, and its trade and investment prospects. Section 4 highlights the main external constraints to India’s trade and investment in financial services. Section 5 discusses the history of GATS negotiations on financial services, the resulting commitments with specific reference to the commitments made by India in this sector, and the latest developments in financial services under the request-offer process of the Doha Round negotiations in services (earlier known as the GATS 2000 negotiations). Section 6 highlights India’s negotiating strategy under the Doha Round, focusing on the offers India could make in financial services in keeping with its objective of modernizing and improving efficiency in this sector, while also safeguarding its interests on prudential and regulatory grounds. This section also discusses the scope for leveraging India’s offers in financial services to obtain more liberal commitments in other areas and modes that are of export interest to India. Section 7 discusses the domestic reform issues pertaining to India’s financial sector so as to make this sector globally competitive and efficient and to face the challenges and exploit the opportunities arising from multilateral liberalization.[Working Paper 152]
    Keywords: prospects, liberalizing, financial services, financial sector, strengths, weaknesses, investment prospects, commitments, multilateral liberalization, opportunities arising
    Date: 2010
  10. By: Olena Havrylchyk
    Abstract: This study investigates the impact of foreign bank penetration in Central and Eastern Europe on firm entry. We demonstrate that the acquisition of domestic banks by foreign investors has led to reduced firm creation, smaller average size of entrants and increased firm exit in opaque industries compared to transparent ones. At the same time, the entry of greenfield foreign banks spurred firm creation and exit. Unlike previous studies, which use interchangeably the notions of opacity and size, we define opacity in terms of technological process and show that economic significance of foreign bank entry is larger for opaque industries than for industries with large shares of small firms. Our findings can be interpreted as evidence of increased credit constraints and are consistent with theories that argue that foreign bank presence exacerbates informational asymmetries.
    Keywords: Entrepreneurship; foreign bank entry; asymmetric information; credit constraints
    JEL: E51 G21 M13
    Date: 2010–06
  11. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: Stylized facts for South Asia show the dominance of supply shocks, amplified by macroeconomic policies and procyclical current accounts. Interest and exchange rate volatility rose initially on liberalization, but fell as markets deepened. A gradual middling through approach to openness and market development are helping the region absorb shocks without reducing growth. Diverse sources of demand, flexible exchange rates, robust domestic savings, and changing political preferences are contributing. Countercyclical policy more suited to structure, and removal of distortions raising costs, would allow better coordination of monetary and fiscal polices to further support the process.
    Keywords: South Asia, supply shocks, flexible exchange rates, diversity, distortions
    JEL: E3 E63 O11
    Date: 2010
  12. By: PICARD, Pierre (UniversitŽ du Luxembourg, CREA, L-1511 Luxembourg; UniversitŽ catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium.); PIERETTI, Patrice (UniversitŽ du Luxembourg, CREA, L-1511 Luxembourg)
    Abstract: This paper discusses the effects of pressure policies on offshore financial centers as well as their ability to enforce the compliance of those centers with anti-money laundering regulations. Offshore banks can be encouraged to comply with rigorous monitoring of an investor's identity and the origin of his/her funds when pressure creates a sufficiently high risk of reputational harm to the investor. We show that such pressure policies harm both offshore and onshore investors and can benefit both the bank industry and tax administrations. We show that social optimal pressure policies are dichotomous decisions between no pressure at all and a pressure great enough to persuade offshore banks to comply. The delegation of pressure policies to onshore tax institutions may be inefficient. Deeper financial integration fosters compliance by the offshore center.
    Keywords: money laundering, offshore banking, compliance
    JEL: F21 K42
    Date: 2010–05–01
  13. By: Edsel, Beja Jr
    Abstract: The diagnosis: Dutch disease caused by international remittances afflicts the middle income countries but not the upper income and low income countries. The middle income countries can inoculate their economies from getting the disease with robust macro and sectoral economy conditions. But if they get infected, and their condition is not managed well or the illness is treated, Dutch disease could cripple their economies.
    Keywords: Dutch disease; international remittances; tradable sector; non-tradable sector
    JEL: O1 F22 O41 O5 F24 O14
    Date: 2010–06–01

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