nep-ifn New Economics Papers
on International Finance
Issue of 2010‒07‒03
nine papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. The Impact of Oil Prices on the Real Exchange Rate of the Dirham: a Case Study of the United Arab Emirates By Al-mulali, Usama; Che Sab, Normee
  2. Exchange Rate Dynamics In Brazil By Holland, Márcio; Vilela Vieira, Flávio
  3. Regional Monetary Coordination in Asia after the Global Financial Crisis: Comparison in Regional Monetary Stability between ASEAN+3 and ASEAN+3+3 By Eiji Ogawa
  4. What can EMU countries' sovereign bond spreads tell us about market perceptions of default probabilities during the recent financial crisis? By Dötz, Niko; Fischer, Christoph
  5. Determinants of Currency Invoicing in Japanese Exports: A firm-level analysis By ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
  6. International Capital Flows and Bond Risk Premia By Jesus Sierra
  7. What lies beneath the euro's effect on financial integration? Currency risk, legal harmonization, or trade? By Sebnem Kalemli-Ozcan; Elias Papaioannou; José-Luis Peydró
  8. Detecting and interpreting financial stress in the euro area By Marianna Blix Grimaldi
  9. Firm-level Analysis of Globalization: A Survey of the Eight Literatures By Kazunobu HAYAKAWA; Fukunari KIMURA; Tomohiro MACHIKITA

  1. By: Al-mulali, Usama; Che Sab, Normee
    Abstract: This study investigated the impact of oil shocks on the real exchange rate of the United Arab Emirates (UAE) dirham. Time series data were used for the period 1977 to 2007 covering four important oil shocks. Five variables have been used in this study, with the real exchange rate of the dirham as the dependent variable and the gross domestic product per capita, oil price, trade balance, and foreign direct investment inflows as the independent variables. In this study we used the Johansen-Juselius cointegration procedure, and conducted the Granger causality tests based on the VECM. Through this research, we found that a fixed exchange rate to the U.S. dollar is not an appropriate exchange rate regime for the UAE. This is because when the price of oil increases, and with a fixed exchange rate regime, this would lead to rapid growth in GDP and liquidity in the UAE economy. This in turn causes domestic prices to increase, which results in high levels of inflation.
    Keywords: oil Prices; real exchange rate; UAE; VAR
    JEL: E30 F31 Q43
    Date: 2009–06–23
  2. By: Holland, Márcio; Vilela Vieira, Flávio
    Abstract: The paper aims to investigate on empirical and theoretical grounds the Brazilian exchange rate dynamics under floatingexchange rates. The empirical analysis examines the short and long term behavior of the exchange rate, interest rate(domestic and foreign) and country risk using econometric techniques such as variance decomposition, Grangercausality, cointegration tests, error correction models, and a GARCH model to estimate the exchange rate volatility. Theempirical findings suggest that one can argue in favor of a certain degree of endogeneity of the exchange rate and thatflexible rates have not been able to insulate the Brazilian economy in the same patterns predicted by literature due to itsown specificities (managed floating with the use of international reserves and domestic interest rates set according toinflation target) and to externally determined variables such as the country risk. Another important outcome is the lackof a closer association of domestic and foreign interest rates since the new exchange regime has been adopted. That is,from January 1999 to May 2004, the US monetary policy has no significant impact on the Brazilian exchange ratedynamics, which has been essentially endogenous primarily when we consider the fiscal dominance expressed by theprobability of default.
    Date: 2010–06–16
  3. By: Eiji Ogawa
    Abstract: This paper analyzes how much deviation we have among Asian currencies, which include the Indian rupee, the Australian dollar, and the New Zealand dollar, given that we are discussing East Asian Community based on ASEAN+3 (Japan, China, and South Korea)+3 (India, Australia, and New Zealand). We investigate whether the instability or deviation of intra-regional exchange rates would increase when the additional three countries (India, Australia, and New Zealand) join the ASEAN+3. Contribution of each currency to the weighted average of AMU-wide Deviation Indicators shows that movements in the Japanese yen have contributed to those in the weighted average of the AMU-wide Deviation Indicators over time during the sample period from January 2000 to January 2010. Moreover, we use concepts of β and σ convergences in the context of economic growth to statistically analyze convergence or divergence for the ASEAN+3+3 currencies. The addition of the Indian rupee into the ASEAN+3 currencies makes the regional currencies unstable before and during the global financial crisis. Moreover, comparison between ASEAN+3+3 and ASEAN+3+Indian currencies shows that the addition of only the Indian rupee is relatively more stable than the addition of the Australian dollar and the New Zealand dollar as well as the Indian rupee since September 2008. It is worthy to consider that India will join the Chiang Mai Initiative to manage currency crises while the monetary authorities will conduct surveillance over stability of the intra-regional exchange rates in the near future.
    Date: 2010–06
  4. By: Dötz, Niko; Fischer, Christoph
    Abstract: This paper presents a new approach for analysing the recent development of EMU sovereign bond spreads. Based on a GARCH-in-mean model originally used in the exchange rate target zone literature, spreads are decomposed into a risk premium, an expected loss component and a liquidity premium. Time-varying default probabilities are derived. The results suggest that the rise in sovereign spreads during the recent financial crisis mainly reflects an increased expected loss component. In addition, the rescue of Bear Stearns in March 2008 seems to mark a change in market perceptions of sovereign bond risk. The government bonds of some countries lost their former role as a safe haven. While price competitiveness always helps to explain sovereign spreads, it increasingly moved into investors' focus as financial sector soundness weakened. --
    Keywords: Sovereign bond spread,GARCH-in-mean,default probability
    JEL: E43 G15 C32 H63 F36
    Date: 2010
  5. By: ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
    Abstract: Currency invoicing in Japanese exports has two puzzling patterns concerning an excessively small share of yen invoicing: one is a strong tendency of Japanese firms to choose the importer's currency invoicing in exports to developed countries, and the other is the prevalence of U.S. dollar invoicing in Japanese exports to East Asia even though Japanese firms have built a regional production network over two decades. To address the puzzles, we propose new possible determinants of currency invoicing at a firm-level, based on an interview analysis with Japanese representative exporting firms, and then empirically test them by probit estimation using the unique dataset on the firms' currency invoicing choice by destination. Our novel findings suggest that a surprisingly low share of yen invoicing in Japanese exports even in the 2000s is attributed not only to the growing intra-firm trade through active overseas operations of Japanese firms but also to the unique production/trade structure in Asia mainly established by Japanese electronics companies.
    Date: 2010–06
  6. By: Jesus Sierra
    Abstract: This paper studies the impact of international capital flows on asset prices through risk premia. We investigate whether foreign purchases of U.S. Treasury securities significantly contributed to the decline in excess returns on long-term bonds between 1995 and 2008. We run forecasting regressions of realized excess returns on measures of net purchases of treasuries by both foreign official and private agents. We find a clear distinction in the effects of flows on excess returns. Official flows, with a negative and non-linear effect, appear similar to relative supply shocks; private net purchases, with a positive and linear effect, resemble flows that absorb excess supply and are thus compensated in equilibrium for this service, similar to the role of arbitrageurs in preferred-habitat models of the term structure.
    Keywords: Financial markets
    JEL: G11 G12 G15 F31 F32 F34 C22
    Date: 2010
  7. By: Sebnem Kalemli-Ozcan (University of Houston, Department of Economics, Houston, TX, 77204, USA.); Elias Papaioannou (Dartmouth College, 6106 Rockefeller Hall, 319 Silsby Hanover, NH 03755, USA.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Although recent research shows that the euro has spurred cross-border financial integration, the exact mechanisms remain unknown. We investigate the underlying channels of the euro’s effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years. We also construct a dataset that records the timing of legislative-regulatory harmonization policies in financial services across the European Union. We find that the euro’s impact on financial integration is primarily driven by eliminating the currency risk. Legislative-regulatory convergence has also contributed to the spur of cross-border financial transactions. Trade in goods, while highly correlated with bilateral financial activities, does not play a key role in explaining the euro’s positive effect on financial integration. JEL Classification: F1, F3, G2, K0.
    Keywords: Financial integration, Law and finance, Euro, European Union, FSAP, Trade, Regulation.
    Date: 2010–06
  8. By: Marianna Blix Grimaldi (Sveriges Riksbank, 103 37 Stockholm, Sweden.)
    Abstract: There is a need to find better models and indicators for large disruptive events, not least in order to be more prepared and mitigate their effects. In this paper we take a step in this direction and discuss the performance of a financial stress indicator with a specific focus on the euro area. As far as we know, our indicator is the first attempt to develop an indicator of financial stress with a specific focus on the euro area. It is also the first to exploit the information contained in central bank communication to help measure stress in financial markets. For use in real time, the indicator is able to efficiently extract information from an otherwise noisy signal and provide information about the level of stress in the markets. JEL Classification: E44, E50, G10.
    Keywords: Financial stress, central bank communication, logit distribution, leading indicator, behavioural finance.
    Date: 2010–06
  9. By: Kazunobu HAYAKAWA (Inter-Disciplinary Studies Center, Institute of Developing Economies, Japan); Fukunari KIMURA (Economic Research Institute for ASEAN and East Asia, Faculty of Economics, Keio University, Japan); Tomohiro MACHIKITA (Inter-Disciplinary Studies Center, Institute of Developing Economies, Japan)
    Abstract: This paper presents an extensive review of empirical studies that analyze the various impacts of the globalization phenomenon on corporate activities, using micro data. First, we set up a flow chart describing how globalization leads to national productivity enhancement. Secondly, we summarize the hypotheses and the methods explored in eight lines of literature on globalization, which this flow chart maps. Thirdly, we illustrate rich implication for economic consequences of trade liberalization and then discuss possible avenues for micro-data analyses
    Date: 2010–03–01

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