nep-ifn New Economics Papers
on International Finance
Issue of 2010‒08‒28
nine papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. The Common Component in the Forward Premium: Evidence from the Asia-Pacific Region By Nagayasu, Jun
  2. Can Cross-Border Financial Markets Create Endogenously Good Collateral in a Crisis? By Makoto Saito; Shiba Suzuki; Tomoaki Yamada
  3. Unpleasant surprises : sovereign default determinants and prospects By Bandiera, Luca; Cuaresma, Jesus Crespo; Vincelette, Gallina A.
  4. Indian Capital Control Liberalization: Evidence from NDF Markets By Hutchison, Michael; Kendall, Jake; Pasricha, Gurnain; Singh , Nirvikar
  5. Financial Integration and Foreign Banks in Latin America: Do They Amplify External Financial Shocks? By Arturo J. Galindo, Alejandro Izquierdo, and Liliana Rojas-Suarez
  6. Exports and Productivity: An Empirical Analysis of German and Austrian Firm-Level Performance By Thorsten Hansen
  7. Evidence on Financial Globalization and Crisis: Geographic/Bilateral External Balance Sheets By Sá, P.
  8. What Determines Borrowing Costs of EU Countries By Jan Zilinsky
  9. Does the euro dominate Central and Eastern European money markets? By Mario Cerrato; Alexander Kadow; Ronald MacDonald

  1. By: Nagayasu, Jun
    Abstract: This paper empirically analyzes the behavior of the forward premium. Unlike previous research, we use data from Asia-Pacific countries and adopt the panel data approach (Bai and Ng 2004) which allows us to decompose the forward premium into common and idiosyncratic (country-specific) components. Our data suggest the presence of one common factor and the stationarity of both common and idiosyncratic factors for short maturities, leading to the conclusion of a stationary forward premium. In contrast, the stationarity of the premium is less supported by the longer maturity data. Furthermore, a large portion of the premium fluctuation is shown to be due to a common factor, particularly over the short time horizon, which in turn can be explained by economic and financial developments in the US. In particular, when the US interest rate increases and the economy declines, the common factor tends to fall.
    Keywords: Forward premium; common factor; panel unit root test
    JEL: F41
    Date: 2010–08–21
  2. By: Makoto Saito (Professor, Faculty of Economics, Hitotsubashi University, 2-1, Naka, Kunitachi, Tokyo, 186-8601, Japan, phone: +81-42- 580-8807, fax: +81-42-580-8882 (E-mail:; Shiba Suzuki (Assistant Professor, Faculty of Economics, Meisei University); Tomoaki Yamada (Associate Professor, School of Commerce, Meiji University)
    Abstract: In this paper, we explore whether markets can create endogenously good collateral in a crisis by analyzing a simple exchange economy where a country-specific catastrophic shock is shared between two countries. To see this possibility, we examine whether the equilibrium achieved by the time-0 complete markets with solvency constraints can be recovered in the dynamically complete markets with collateral constraints. This paper demonstrates that it is possible to recover the time-0 equilibrium outcome in a sequential manner when pricing errors occur randomly in evaluating Lucas trees at a catastrophic event. Such stochastic components may be interpreted as a policy initiative to create good collateral and yield constrained efficient outcomes at crisis periods.
    Keywords: Solvency Constraints, Collateral Constraints, Dynamic Optimal Contract, Catastrophic Shocks
    JEL: F34 G12 G15
    Date: 2010–08
  3. By: Bandiera, Luca; Cuaresma, Jesus Crespo; Vincelette, Gallina A.
    Abstract: This paper uses model averaging techniques to identify robust predictors of sovereign default episodes on a pooled database for 46 emerging economies over the period 1980-2004. Sovereign default episodes are defined according to Standard&Poor’s or by non-concessional International Monetary Fund loans in excess of 100 percent of the country’s quota. The authors find that, in addition to the level of indebtedness, the quality of policies and institutions is the best predictor of default episodes in emerging market countries with relatively low levels of external debt. For emerging market countries with a higher level of debt, macroeconomic stability plays a robust role in explaining differences in default probabilities. The paper provides evidence that model averaging can improve out-of-sample prediction of sovereign defaults, and draws policy conclusions for the current crisis based on the results.
    Keywords: Debt Markets,External Debt,Bankruptcy and Resolution of Financial Distress,Economic Theory&Research,Currencies and Exchange Rates
    Date: 2010–08–01
  4. By: Hutchison, Michael; Kendall, Jake; Pasricha, Gurnain; Singh , Nirvikar
    Abstract: This paper analyzes the extent to which the effectiveness of capital controls in India have changed over time. We begin by calculating deviations from covered interest parity utilizing data from the 3-month offshore non-deliverable rupiah forward (NDF) market. Then, using the self-exciting threshold autoregression methodology, we estimate a no-arbitrage band whose boundaries are determined by transactions costs and by the effectiveness of capital controls. Inside the bands, small deviations from CIP follow a random walk process. Outside the bands, profitable arbitrage opportunities exist and we estimate an adjustment process back towards the boundaries. We identify three distinct periods, and estimate the model over each sub-sample in order to capture the de facto effect of changes in capital controls over time. We find that de facto capital control barriers: (1) are asymmetric over inflows and outflows, (2) have changed over time from primarily restricting outflows to effectively restricting inflows; (3) arbitrage activity closes deviations from CIP when the threshold boundaries are exceeded in all sub-samples. In recent years, capital controls have been more symmetric over capital inflows and outflows and the deviations from CIP outside the boundaries are closed more quickly.
    Keywords: capital controls; India; arbitrage; non-deliverable forward markets; covered interest parity; self-exciting autoregressive threshold model
    JEL: F41 F36
    Date: 2010–03
  5. By: Arturo J. Galindo, Alejandro Izquierdo, and Liliana Rojas-Suarez
    Abstract: This paper explores the impact of international financial integration on credit markets in Latin America. Using a cross-country dataset covering 17 Latin American countries between 1996 and 2008, the authors find that financial integration amplifies the impact of international financial shocks on aggregate credit and interestrate fluctuations. Despite this pernicious effect, the net impact of integration on deepening credit markets is positive and dominates for the large majority of states of nature. The paper also uses a detailed bank-level dataset covering more than 500 banks in Latin America for a similar time period to explore the role of financial integration—captured through the participation of foreign banks—in propagating external shocks. The authors find that interest rates charged and loans supplied by foreign-owned banks respond more to external financial shocks than those supplied by domestically owned banks. However, this result does not hold for all foreign banks: Spanish banks in the sample behave more like domestic banks and do not amplify the impact of foreign shocks on credit and interest rates. Important policy recommendations to avoid foreign banks’ amplification of external financial shocks include the establishment of ring-fencing mechanisms, the development of early-warning systems, and the incorporation for agreements between domestic and foreign supervisors.
    Keywords: foreign banks, credit, interest rates, financial shocks
    JEL: F36 G0 G21
    Date: 2010–03
  6. By: Thorsten Hansen (University of Munich)
    Abstract: This paper studies the relationship between export activities and firm-level productivity. Unique matching of German and Austrian micro data from 1994 to 2003 suggests that exporters are more productive by around 40 percent compared with non-exporters. Moreover, beside other analysis techniques, instrumental variable estimations suggest that exporting causes a rise in firm-level productivity. That is, the annual average growth rate of an exporting firm's productivity is between about 1 and 1.5 percent higher than that of non-exporters. It allows the conclusion that, against other findings of existing studies, both directions hold: more productive firms self-select themselves into export markets and being active in foreign markets boosts firm-level productivity.
    JEL: D24 F13 F23 L22 L23 O47
    Date: 2010–04
  7. By: Sá, P.
    Abstract: This article reviews the main sources of data on the geographic composition of countries' external balance sheets, covering both international and country-specific sources. It examines the determinants of bilateral financial assets and liabilities and discusses how gravity models, traditionally used in the trade literature, have been applied to explain bilateral financial links. A new dataset is used to derive some stylized facts on how bilateral financial links look like, how they have evolved over time and how they compare with trade links. The role that cross-border financial links play in the international transmission of shocks is discussed, with reference to the 2007-2009 financial crisis.
    Keywords: Bilateral financial links, international financial network
    JEL: F21
    Date: 2010–08–16
  8. By: Jan Zilinsky (MIT, Department of Economics)
    Abstract: This paper finds that public debt and a range of other economic variables are surprisingly weakly correlated with sovereign spreads in EU countries. Democratic capital, on the other hand, was a powerful predictor of spread heights between 2003 and 2007, while its relevance disappeared in late 2008, when only credit ratings were correlated with the investors' estimate of default probabilities. These results suggests that (1) institutional characteristics may sometimes play a central role in determining borrowing costs and (2) investors attach different weights to relevant variables depending on global macroeconomic conditions.
    Keywords: Public debt, Democratic capital, Long-term interest rates, Monetary unions, Financial crises
    JEL: H6 F5
    Date: 2010–02
  9. By: Mario Cerrato; Alexander Kadow; Ronald MacDonald
    Abstract: The so-called German Dominance Hypothesis (GDH) claimed that Bundesbank policies were transmitted into other European Monetary System (EMS) interest rates during the pre-euro era. We reformulate this hypothesis for the Central and Eastern European (CEE) countries that are on the verge of accessing the eurozone. We test this "Euro Dominance Hypothesis (EDH)" in a novel way using a global vector autoregressive (GVAR) approach that combines country-specic error correction models in a global system. We find that euro area monetary policies are transmitted into CEE interest rates which provides evidence for monetary integration between the eurozone and CEE countries. Our framework also allows for introducing global monetary shocks to provide empirical evidence regarding the eects of the recent nancial crisis on monetary integration in Europe.
    Keywords: German Dominance Hypothesis, Global VAR, Central and Eastern Europe, monetary integration, European integration.
    JEL: E58 F36 G15
    Date: 2010–06

This nep-ifn issue is ©2010 by Ajay Shah. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.