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on International Finance |
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Issue of 2010‒07‒17
twelve papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Dramane Coulibaly (Centre d'Economie de la Sorbonne); Hubert Kempf (Centre d'Economie de la Sorbonne - Paris School of Economics et Banque de France) |
| Abstract: | In this paper, we empirically examine the effect of inflation targeting on the exchange rate pass-through to prices in emerging countries. We use a panel VAR that allows us to use the larger data set on twenty-seven emerging countries (fifteen inflation targeters and twelve inflation nontargeters). Our evidence suggests that inflation targeting in emerging countries has helped to reduce the pass-through to various price indexes (import prices, producer prices and consumer prices) from a higher level to a new level that is significantly different from zero. The variance decomposition shows that the contribution of exchange rate shocks to prices fluctuations is more important in emerging targeters compared to nontargeters, and the contribution of exchange rate shocks to price fluctuations in emerging targeters declines after adopting inflation targeting. |
| Keywords: | Inflation targeting, exchange rate Pass-through, panel VAR. |
| JEL: | E31 E52 F41 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10049&r=ifn |
| By: | Matthieu Bussière; Sweta c Saxena; Camilo Tovar |
| Abstract: | The impact of currency collapses (ie large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (ie ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction; and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, ie one-time events induce exchange rate and output dynamics that differ from consecutive episodes. |
| Keywords: | currency crisis, nominal devaluations, nominal depreciations, exchange rates, real output growth, recovery from crises |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:314&r=ifn |
| By: | Sen Gupta, Abhijit |
| Abstract: | In this paper we devise quantitative techniques to analyze the management of foreign capital flows in India over the past three decades. The paper argues that India's overall approach towards liberalization of the capital account can be characterized as gradualist and calibrated, whereby certain agents and flows have been accorded priority in the liberalization process, from the viewpoint of ensuring financial stability. A cross country analysis indicates that the calibrated approach has resulted in India being ranked towards the lower end of the spectrum in terms of capital account openness. We analyze the extant regulations governing different types of foreign capital flow, and highlight the evolution of various types of capital flows over the recent period. To evaluate Indian macroeconomic management in the face of capital flows, we quantify the various policy options under the classic problem of "impossible trinity". We find that India, like other emerging markets, has also been confronted with the various alternatives under "impossible trinity" and has chosen to adopt an intermediate regime, juggling the objectives of monetary independence, exchange rate stability, and an open capital account as per the needs of the economy. |
| Keywords: | Capital Flows; Impossible Trinity; Macroeconomic Management |
| JEL: | E52 F41 F36 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23747&r=ifn |
| By: | M Morys; |
| Abstract: | Drawing on monthly data for 12 European countries, this paper asks whether countries under the Classical Gold Standard followed the so-called “rules of the game” and, if so, whether the external constraint implied by these rules was more binding for the periphery than for the core. Our econometric focus is a probit estimation of the central bank discount rate behaviour. Three main findings emerge: First, all countries followed specific rules but rules were different for core countries as opposed to peripheral countries. The discount rate decisions of core countries were motivated by keeping the exchange-rate within the gold points. In stark contrast, the discount rate decisions of peripheral countries reflected changes in the domestic cover ratio. The main reason for the different rules was the limited effectiveness of the discount rate tool for peripheral countries which resulted in more frequent gold point violations. Consequently, peripheral countries relied on high reserve levels and oriented their discount rate policy towards maintaining the reserve level. Second, there was a substantial amount of discretionary monetary policy left to all countries, even though we find that core countries enjoyed marginally more liberty in setting their discount rate than peripheral countries. Third, interest rate decisions were influenced more by Berlin than by London, suggesting that the European branch of the Classical Gold Standard was less London-centered than hitherto assumed. |
| Keywords: | gold standard, rules of the game, balance-of-payment adjustment, central banking |
| JEL: | E4 E5 E6 F3 N13 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:yor:cherry:10/01&r=ifn |
| By: | Hian Teck Hoon (School of Economics, Singapore Management University) |
| Abstract: | This paper evaluates the Prescott (2004) hypothesis that permanently higher payroll taxes fully explain the decline in number of market hours worked in Europe (relative to America) over three decades. The Prescott model made assumptions that, in steady state, left out any incentive for either international capital mobility or international exchange of goods. We study a one-good model where the imposition of higher payroll taxes in one region leads to higher domestic real interest rate in that region. As a result, there are incentives for international capital outflows into the high payroll tax region with the consequence that number of market hours worked in the low payroll tax region also decline. With identical tastes and rate of time discount across the two regions, we find that the number of hours worked in the market, home work, and leisure are equalized across the two regions. In the multi-good model, when factor price equalization holds so free trade acts as a substitute for factor mobility, we show that there is also equalization of market work, home work, and leisure across the two regions. |
| Keywords: | Payroll taxes, wealth decumulation, capital mobility |
| JEL: | E13 E22 E24 F11 F16 F21 H20 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:05-2010&r=ifn |
| By: | Sabine Herrmann; Dubravko Mihaljek |
| Abstract: | This paper studies the nature of spillover effects in bank lending flows from advanced to the emerging market economies and identifies specific channels through which such effects occur. Based on a gravity model we examine a panel data set on cross-border bank flows from 17 advanced to 28 emerging market economies in Asia, Latin America and central and eastern Europe from 1993 to 2008. The empirical analysis suggests that global as well as country specific factors are significant determinants of cross-border bank flows. Greater global risk aversion and expected financial market volatility seem to have been the most important factors behind the decrease in cross-border bank flows during the crisis of 2007-08. The decrease in cross-border loans to central and eastern Europe was more limited compared to Asia and Latin America, in large measure because of the higher degree of financial and monetary integration in Europe, and relatively sound banking systems in the region. These results are robust to various specification, sub-samples and econometric methodologies. |
| Keywords: | gravity model, cross-border bank flows, financial crises, emerging market economies, spillover effects, panel data |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:315&r=ifn |
| By: | Macias, Jose Brambila; Massa, Isabella; Salois, Matthew J. |
| Abstract: | The global financial crisis has hit hard international trade that dropped below levels not seen since the Great Depression with disastrous consequences for the developing world. This paper estimates an extended gravity model of trade on a sample of 83 developing countries over the period 1990-2007 to shed light on how banking crises and global economic downturns affect bilateral exports flows from developing countries. In addition to traditional variables, we include a trade finance variable and foreign aid among the regressors. Differences between developing regions are taken into account. Our results show that (i) trade finance has a positive and significant impact on bilateral export flows in all developing regions except Latin America; (ii) foreign aid matters in all regions; (iii) global economic downturns exert a negative and significant impact on export flows in all developing countries, and especially in Latin American and Sub-Saharan African economies; (iv) banking crises appear to have no significant impact in most regions. |
| Keywords: | Banking Crises, Developing Countries, Foreign Aid, Global Downturn, International Trade, Trade Finance, Mixed Effects Panel Data, Random Coefficients., Agricultural and Food Policy, C23, F11, F12, F34, F35, G01., |
| Date: | 2010–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aesc10:91831&r=ifn |
| By: | Bas Berend Bakker; Anne Marie Gulde |
| Abstract: | In the past decade, most of the EU New Member States experienced a severe credit-boom bust cycle. This paper argues that the credit boom-bust cycle was to a large extent the result of factors external to the region (“bad luckâ€). Rapid credit growth followed from a high liquidity in global markets and the particular attractiveness of “new Europe†for capital flows, while the end of the credit cycle was brought about by a global crisis. However, the fact that some countries managed to avoid most of the excesses, including asset price bubbles and foreign exchange lending, suggests that policies and policy failures (“bad policiesâ€)—in particular overly expansionary macroeconomic settings and excessively optimistic views on prudential risks—also have played a critical role. |
| Date: | 2010–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/130&r=ifn |
| By: | Cheikh A. Gueye; Amadou N. R. Sy |
| Abstract: | Post debt relief, the number of African countries considering accessing international capital markets, often to fund large infrastructure projects, is increasing. Potential risks of capital inflows are well known but the literature offers little help to estimate the cost of borrowing internationally for the first time. This paper proposes a two-step approach to estimate the sovereign credit rating and interest rate cost of a country considering borrowing externally. Estimates can be used to assess the costs and benefits of different financing options. The method can also be used to construct foreign currency as well as domestic local currency yield curves. |
| Date: | 2010–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/140&r=ifn |
| By: | Jiro Honda; Geneviève Verdier; Amina Lahreche; Era Dabla-Norris |
| Abstract: | What accounts for variations in FDI flows from advanced to developing countries? How have FDI inflows explained cross-country growth experiences? In this paper we tackle both these questions empirically for a large sample of middle and low-income countries. Two key results emerge: (i) lower borrowing costs and positive real-side external factors were increasingly important drivers of FDI outflows to low-income countries in the pre-crisis period; (ii) economic fundamentals, the strength of economic reforms, and commitment to macroeconomic discipline are crucial determinants of the growth dividends of FDI. Our paper suggests that low-income countries can turn to domestic policy solutions to mitigate the adverse effects of a potential decline in FDI in the post-crisis world. |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/132&r=ifn |
| By: | Hikaru Ogawa (School of Economics, Nagoya University); Yasuhiro Sato (Graduate School of Economics, Osaka University); Toshiki Tamai (Faculty of Economics, Kinki University) |
| Abstract: | The welfare effects of capital market integration are examined under a model of tax competition with two asymmetric countries. The asymmetry is expressed through the labor market: one country has a perfect labor market whereas the other country is unionized. Our results show that the welfare effects of capital market integration are different depending on whether governments play an active role in attracting capital: in the absence of active governments, the capital market integration benefits the country with a competitive labor market and harms the unionized country. If the governments are active and compete for mobile capital using tax/subsidy, the market integration benefits both countries. The governmentfs incentive to participate in a tax/subsidy game is also examined in the integrated capital market. We find that the unionized country always prefers to participate in the tax/subsidy game, but the non-unionized country avoids the game if it is a capital importer. |
| Keywords: | Capital Market Integration, Capital Mobility, Tax Competition, Trade Unions, Welfare. |
| JEL: | F21 H73 J51 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1018&r=ifn |
| By: | Hiroko Oura; Papa M'B. P. N'Diaye; Qianying Chen; Dale F. Gray; Natalia T. Tamirisa |
| Abstract: | The paper evaluates how increases in banks’ and nonfinancial corporates’ default risk are transmitted in the global economy, using in a vector autoregression model for 30 advanced and emerging economies for the period from January 1996 to December 2008. The results point to two-way causality between bank and corporate distress and to significant global macroeconomic and financial spillovers from either type of distress when it originates in a systemic economy. Corporate distress in advanced economies has a larger impact on economic growth in emerging economies than bank distress in advanced economies has. In contrast, activity in advanced economies is more vulnerable to bank distress than to corporate distress. |
| Keywords: | Banking sector , Corporate sector , Credit risk , Developed countries , Economic models , Emerging markets , Financial risk , Spillovers , |
| Date: | 2010–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/124&r=ifn |