nep-ifn New Economics Papers
on International Finance
Issue of 2010‒07‒24
nine papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Does foreign exchange reserve decumulation lead to currency appreciation? By Kathryn M.E. Dominguez; Rasmus Fatum; Pavel Vacek
  2. U.S. foreign-exchange-market intervention during the Volcker-Greenspan era By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  3. Asymmetries and state dependence: the impact of macro surprises on intraday exchange rates By Rasmus Fatum; Michael Hutchison; Thomas Wu
  4. Hybrid Inflation Targeting Regimes1 By Carlos Garcia; Jorge Restrepo; Scott Roger
  5. The Behavior of Intoxicated Investors: The role of institutional investors in propagating the crisis of 2007-2008 By Alberto Manconi; Massimo Massa; Ayako Yasuda
  6. Cross-country evidence on the relation between stock prices and the current account By Berg, Tim Oliver
  7. Financial Contagion, Vulnerability and Information Flow: Empirical Identification By Weber, Enzo
  8. Changes in the second-moment properties of disaggregated capital flows By Silvio Contessi; Pierangelo De Pace; Johanna L. Francis
  9. Exploring the international transmission of U.S. stock price movements By Berg, Tim Oliver

  1. By: Kathryn M.E. Dominguez; Rasmus Fatum; Pavel Vacek
    Abstract: Many developing countries have increased their foreign reserve stocks dramatically in recent years, often 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 daythese 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 ; Monetary policy ; International economic relations
    Date: 2010
  2. By: Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
    Abstract: The Federal Reserve abandoned foreign-exchange-market intervention because it conflicted with the System’s commitment to price stability. By the early 1980s, economists generally concluded that, absent a portfolio-balance channel, sterilized foreign-exchange-market intervention did not provide central banks with a mechanism for systematically influencing exchange rates independent of their monetary policies. If intervention were to have anything other than a fleeting, hit-or-miss effect on exchange rates, monetary policy had to support it. Exchange rates, however, often responded to U.S. monetary-policy initiatives, so intervention to offset or reverse those exchange-rate responses can seem a contrary policy move and can create uncertainty about the strength of the System's commitment to price stability. That the U.S. Treasury maintained primary responsibility for foreign-exchange intervention only compounded this uncertainty. In addition, many FOMC participants feared that swap drawings and warehousing could contravene the Congressional appropriations process and, therefore, potentially pose a threat to System independence, a necessary condition for monetary-policy credibility.
    Keywords: Banks and banking, Central ; Foreign exchange administration ; Monetary policy ; Federal Open Market Committee
    Date: 2010
  3. By: Rasmus Fatum; Michael Hutchison; Thomas Wu
    Abstract: The impact of news surprises on exchange rates depends in principle upon a number of factors including the state of the economy, institutional setting and nature of the expected policy response. These characteristics may lead to state-contingent asymmetric responses to news. In this paper we investigate the possible asymmetric response of intraday exchange rates (5-minute intraday JPY/USD) to macroeconomic news announcements during a very unusual period--Japan during 1999-2006 when the money market interest rate was effectively zero. We may think of this period as a "natural experiment" consisting of an institutional setting when interest rates may rise but not decline, thereby constraining both endogenous policy reactions to news and private market expectations. Asymmetric responses to news, to the extent that they are important in exchange rate markets as they are in equity markets, would seem particularly likely to be evident during this period. We consider several ways asymmetric responses may be manifested and linked to macroeconomic news during the zero-interest rate period. We assess whether the intraday exchange rate responds differently depending on whether the news is emanating from Japan or the U.S.; we consider the state of the business cycle; and we distinguish between "good" and "bad" news.
    Keywords: Foreign exchange rates ; Financial markets ; International finance
    Date: 2010
  4. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile); Scott Roger (IMF Institute, International Monetary Fund, Washington D.C.-USA)
    Abstract: This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank’s policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exchange rate smoothing because of the perverse impact of exchange rate movements on activity.
    Keywords: Inflation targeting, monetary policy, exchange rate
    JEL: E42 E52 F41
    Date: 2009–12
  5. By: Alberto Manconi; Massimo Massa; Ayako Yasuda
    Abstract: Using a novel data of institutional investors’ bond holdings, we examine a transmission of the crisis of 2007-2008 from the securitized bond market to the corporate bond market via joint ownership of these bonds by investors. We posit that, ceteris paribus, corporate bonds held by investors with high exposure to securitized bonds and liquidity needs experience greater selling pressure and price declines (yield increases) at the onset of the crisis. We further test predictions of a model of dynamic asset liquidation: Investors with large enough future liquidity shocks retain liquid assets, and instead sell assets that have relatively high temporary price impacts of trading. Mutual funds with higher sensitivity of pay to performance held higher portions of their portfolios in securitized bonds prior to the crisis. After the onset of the crisis, these funds did not sell securitized bonds on average and instead sold corporate bonds to meet their liquidity needs. Sales rose and yield spreads widened more for those corporate bonds whose mutual fund holders’ portfolios were more heavily exposed to securitized bonds, compared to same-issuer bonds held by unexposed funds. Shorter-horizon mutual funds liquidated greater portions of their corporate bond holdings and in particular lower-rated bonds. In contrast, insurance companies sold little regardless of their exposure as long as they were above the minimum capital ratio threshold. These findings suggest that short-horizon mutual funds with high exposure to securitized bonds played a role in transmitting the crisis from securitized bonds to corporate bonds.
    JEL: G11 G22 G23 G28
    Date: 2010–07
  6. By: Berg, Tim Oliver
    Abstract: This paper explores the relation between stock prices and the current account for 17 OECD countries in 1980-2007. I use a panel vector autoregression (VAR) to compare the effects of stock price shocks to those originating from monetary policy and exchange rates. While monetary policy shocks have little effects, shocks to stock prices and exchange rates have sizeable effects. A 10% contraction in stock prices improves the current account by 0.3% after two years. Hence I find a channel, in addition to the traditional exchange rate channel, through which external balance for an OECD country with a current account imbalance can be restored.
    Keywords: current account fluctuations; stock prices; panel VAR
    JEL: F32 E44 C33
    Date: 2010–05–19
  7. By: Weber, Enzo
    Abstract: This paper proposes a new approach to modelling financial transmission effects. In simultaneous systems of stock returns, fundamental shocks are identified through heteroscedasticity. The size of contemporaneous spillovers is determined in the fashion of smooth transition regression by the innovations' variances and (negative) signs, both representing typical crisis-related magnitudes. Thereby, contagion describes higher inward transmission in times of foreign crisis, whereas vulnerability is defined as increased susceptibility to foreign shocks in times of domestic turmoil. The application to major American stock indices confirms US dominance and demonstrates that volatility and sign of the equity returns significantly govern spillover size.
    Keywords: Contagion; Vulnerability; Identification; Smooth Transition Regression
    JEL: C32 G15
    Date: 2009–07–10
  8. By: Silvio Contessi; Pierangelo De Pace; Johanna L. Francis
    Abstract: Using formal statistical tests, we detect (i) significant volatility increases for various types of capital flows for a period of changes in business cycle comovement among the G7 countries, and (ii) mixed evidence of changes in covariances and correlations with a set of macroeconomic variables.
    Keywords: Capital investments ; International finance
    Date: 2010
  9. By: Berg, Tim Oliver
    Abstract: I investigate the transmission of U.S. stock price shocks to real activity and prices in G-7 countries using a multicountry vector autoregressive (VAR) model. I achieve identification by imposing a small number of sign restrictions on impulse responses, while controlling for monetary policy, business cycle and government spending shocks. The results suggest that (a) stock price movements are important for fluctuations in G-7 real activity and prices but do not qualify as demand side business cycle shocks and (b) the transmission is similar across G-7 countries.
    Keywords: international transmission; stock prices; G-7 countries; multicountry VAR; identification with sign restrictions
    JEL: F30 E44 C33
    Date: 2010–05–19

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