nep-ifn New Economics Papers
on International Finance
Issue of 2010‒07‒31
nine papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. The Impact of Capital and Foreign Exchange Flows on the Competitiveness of Developing Countries By Bassem Kamar; Damyana Bakardzhieva; Samy Ben Naceur
  2. Currency Hedging for International Portfolios By Jochen M. Schmittmann
  3. Testing unit roots and long range dependence of foreign exchange. By Dominique Guegan; Zhiping Lu
  4. Exchange Rate Fluctuations, Plant Turnover and Productivity By Ben Tomlin
  5. External Finance, Sudden Stops, and Financial Crisis: What is Different This Time? By D. Filiz Unsal; Gülçin Özkan
  6. On the Dynamics of Exports and FDI: The Spanish Internationalization Process By Jaime Martínez-Martín
  7. Examining The Case For Reserve Pooling In East Asia: Empirical Analysis By Ramkishen S. Rajan; Graham Bird; Reza Y. Siregar
  8. Financial regulation, financial globalization and the synchronization of economic activity By Sebnem Kalemli-Ozcan; Elias Papaioannou; José-Luis Peydró
  9. Exports and sectoral financial dependence: evidence on French firms during the great global crisis By Jean-Charles Bricongne; Lionel Fontagné; Guillaume Gaulier; Daria Taglioni; Vincent Vicard

  1. By: Bassem Kamar; Damyana Bakardzhieva; Samy Ben Naceur
    Abstract: Attracting capital and foreign exchange flows is crucial for developing countries. Yet, these flows could lead to real exchange rate appreciation and may thus have detrimental effects on competitiveness, jeopardizing exports and growth. This paper investigates this dilemma by comparing the impact of six types of capital and foreign exchange flows on real exchange rate behavior in a sample of 57 developing countries covering Africa, Europe, Asia, Latin America, and the Middle East. The results reveal that portfolio investments, foreign borrowing, aid, and income lead to real exchange rate appreciation, while remittances have disparate effects across regions. Foreign direct investments have no effect on the real exchange rate, contributing to resolve the above dilemma.
    Date: 2010–07–01
  2. By: Jochen M. Schmittmann
    Abstract: This paper examines the benefits from hedging the currency exposure of international investments in single- and multi-country equity and bond portfolios from the perspectives of German, Japanese, British and American investors. Over the period 1975 to 2009, hedging of currency risk substantially reduced the volatility of foreign investments at a quarterly investment horizon. Contrary to previous studies, the paper finds that at longer investment horizons of up to five years the case for hedging for risk reduction purposes remained strong.In addition to its impact on risk, hedging affected returns in economically meaningful magnitudes in some cases.
    Keywords: Exchange risk , Foreign exchange transactions , Foreign investment , International capital markets , Risk management , Multiple currency practices ,
    Date: 2010–06–28
  3. By: Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Zhiping Lu (School of Finance and Statistics - East China Normal University)
    Abstract: Foreign exchange rate plays an important role in international finance. This paper examines unit roots and the long range dependence of 23 foreign exchange rates using Robinson's (1994) test, which is one of the most efficient tests when testing fractional orders of seasonal/cyclical long memory processes. Monte Carlo simulations are carried out to explore the accuracy of the test before implementing the empirical applications.
    Keywords: Foreign exchange rate, long memory processes, Monte Carlo simulation, non-stationary, test.
    JEL: C12 C15 C22
    Date: 2010–06
  4. By: Ben Tomlin
    Abstract: In a small open economy fluctuations in the real exchange rate can affect plant turnover, and thus aggregate productivity, by altering the makeup of plants that populate the market. An appreciation of the local currency increases the level of competition in the domestic market as import competition intensifies and export opportunities shrink, forcing less productive plants from the market and compelling new entrants to be more competitive than they otherwise would have been. Depreciations have the opposite effect, as import competition weakens and new export opportunities arise, less competitive plants are able to continue to operate in the market and crowd out new, more productive entrants. This paper develops a dynamic structural model that captures the effect of plantlevel productivity and real exchange rate fluctuations on plant entry and exit decisions in the Canadian agricultural implements industry, and how this, in turn, affects aggregate productivity. The model's dynamic parameters are estimated in two stages. Variable profit parameters and the per-period fixed cost of operation are estimated first using the Nested Pseudo Likelihood (NPL) algorithm, and then the parameters characterizing the distribution of unobserved potential entrant productivity, along with the cost of entry, are estimated in a second stage using the Method of Simulated Moments (MSM). Finally, simulations of the model are used to investigate the effects of shocks to the exchange rate process on aggregate industry productivity.
    Keywords: Productivity; Exchange rates; Market structure and pricing
    JEL: D21 D24 L11
    Date: 2010
  5. By: D. Filiz Unsal; Gülçin Özkan
    Abstract: This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows.
    Date: 2010–07–09
  6. By: Jaime Martínez-Martín (Faculty of Economics, University of Barcelona)
    Abstract: This paper provides further insights into the dynamics of exports and outward foreign direct investment (FDI) flows in Spain from a time-series approach. The contribution of the paper is twofold: i) the existence of either substitution or a complementary relationship between Spanish outward investments and exports is empirically tested using a multivariate cointegrated model (VECM). The evolution in exchange flows (1993-2008) and country-specific variables (such as world demand - including Spain’s main recently growing foreign markets - for trade flows and the relative price of exports in order to proxy new global competitors) are taken into account for the first time. And ii) the growth in the trade of services in recent decades leads us to test a specific causality relationship by disaggregating between goods and services flows. Our results provide evidence of a positive (Granger) causality relationship running from FDI to exports of goods (stronger) and to exports of services (weaker) in the long run, the complementarity relation of which is consistent with vertical FDI strategies. In the short run, however, only exports of goods are affected (positively) by FDIs.
    Keywords: Foreign Direct Investment, Exports, Granger-Causality. JEL classification:F21, F40
    Date: 2010–07
  7. By: Ramkishen S. Rajan; Graham Bird; Reza Y. Siregar
    Abstract: Two features of East Asia’s recovery from the financial turmoil of 1997- 98 appear to be rather paradoxical. First, the regional economies (except Hong Kong, China and Malaysia) have allowed a relatively greater albeit modest degree of variability of their currencies according to market conditions. Second, the regional monetary authorities have simultaneously appeared keen on bolstering reserves to historically high levels. This paper examines the subject of reserve management in the broader context of monetary cooperation in East Asia. The paper briefly reviews the factors that go into the determination of “optimal reserves†in general, and specifically in the case of East Asia. It then goes on to investigate the gains, if any, to be reaped if the East Asian economies were to pool their reserves. [Working Paper No. 15]
    Keywords: East Asia, Financial turmoil, Hong Kong, China, Malaysia, Optimal Reserves, monetary authorities
    Date: 2010
  8. 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: We identify the effect of financial integration on international business cycle synchronization, by utilizing a confidential database on banks’ bilateral exposure and employing a country-pair panel instrumental variables approach. Countries that become more integrated over time have less synchronized growth patterns, conditional on global shocks and country-pair factors. To account for reverse causality and measurement error, we exploit variation in the transposition dates of financial legislation. We find that increases in financial integration stemming from regulatory harmonization policies are followed by more divergent cycles. Our results contrast with those of the previous studies which suffer from the standard identification problems. JEL Classification: E32, F15, F36, G21, G28, O16.
    Keywords: Banking Integration, Co-movement, Fluctuations, Financial Legislation.
    Date: 2010–07
  9. By: Jean-Charles Bricongne (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Lionel Fontagné (Paris School of Economics, University Paris 1, 106-112 Bd de l’Hôpital, 75647 Paris Cedex 13, France.); Guillaume Gaulier (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Daria Taglioni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vincent Vicard (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.)
    Abstract: The unprecedented drop in international trade during the last quarter of 2008 and the first quarter of 2009 has mainly been analysed at the macroeconomic or sectoral level. However, exporters who are heterogeneous in terms of productivity, size or external financial dependence should be heterogeneously affected by the crisis. This issue is examined in this paper by using data on monthly exports at the product and destination level for some 100,000 individual French exporters, up to 2009M4. We show that the drop in French exports is mainly due to the intensive margin of large exporters. Small and large exporters are evenly affected when sectoral and geographical specialisations are controlled for. Lastly, exporters (small and large) in sectors structurally more dependent on external finance are the most affected by the crisis. JEL Classification: F02, F10, G01.
    Keywords: financial crisis, international trade, firms’ heterogeneity, intensive and extensive margins.
    Date: 2010–07

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