nep-ifn New Economics Papers
on International Finance
Issue of 2010‒09‒03
seven papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Comparing Exchange Market Pressure in West and Southern African Countries By Lopes, Jose Mario; Santos, Fabio
  2. Floating versus managed exchange rate regime in a DSGE model of India. By Batini, Nicoletta; Gabriel, Vasco; Levine, Paul
  3. Dynamic Models of Exchange Rate Dependence Using Option Prices and Historical Returns By Leonidas Tsiaras
  4. Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence By Richard Chisik; Ronald B. Davies
  5. Understanding the ADR premium under market segmentation. By Stigler, Mathieu; Shah, Ajay; Patnaik, Ila
  6. Foreign State Immunity and Foreign Government Controlled Investors By David Gaukrodger
  7. OECD’s FDI Restrictiveness Index: 2010 Update By Blanka Kalinova; Angel Palerm; Stephen Thomsen

  1. By: Lopes, Jose Mario; Santos, Fabio
    Abstract: We compare the performance of Cape Verde and Mozambique concerning financial credibility as measured by Exchange Market Pressure, an institutional feature that has often been overlooked in the literature as a relevant institution for economies. Drawing on previous research by Macedo et al. (2009), we expand their analysis and, using several definitions of “financial credibility”, all related to different angles on Exchange Market Pressure indices, we conclude that - against reasonable benchmarks in their respective regions - financial credibility has been very good for Cape Verde and fairly good for Mozambique. JEL codes:
    Date: 2010
  2. By: Batini, Nicoletta (IMF and University of Surrey); Gabriel, Vasco (University of Surrey); Levine, Paul (University of Surrey)
    Abstract: We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic inflation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely.
    Keywords: DSGE model, Indian economy, Monetary interest rate rules, Floating versus managed exchange rate, Financial frictions
    JEL: E52 E37 E58
    Date: 2010–04
  3. By: Leonidas Tsiaras (Department of Business Studies, ASB, Aarhus University and CREATES)
    Abstract: Models for the conditional joint distribution of the U.S. Dollar/Japanese Yen and Euro/Japanese Yen exchange rates, from November 2001 until June 2007, are evaluated and compared. The conditional dependency is allowed to vary across time, as a function of either historical returns or a combination of past return data and option-implied dependence estimates. Using prices of currency options that are available in the public domain, risk-neutral dependency expectations are extracted through a copula repre- sentation of the bivariate risk-neutral density. For this purpose, we employ either the one-parameter \Normal" or a two-parameter \Gumbel Mixture" specification. The latter provides forward-looking information regarding the overall degree of covariation, as well as, the level and direction of asymmetric dependence. Specifications that include option-based measures in their information set are found to outperform, in-sample and out-of-sample, models that rely solely on historical returns.
    Keywords: Exchange Rates, Implied Correlation, Copula, Forecasting, Options
    JEL: F31 F37 G14 G15
    Date: 2010–01–12
  4. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada); Ronald B. Davies (Department of Economics, University of Oregon, Eugene, Oregon)
    Abstract: Tax treaties are often viewed as a mechanism for eliminating tax competition, however this approach ignores the need for bargaining over the treaty?s terms. This paper focuses on how bargaining can affect the withholding taxes set under the treaty. In a simple framework, we develop hypotheses about patterns in treaty tax rates. A key determinant for these patterns is the relative size of bilateral foreign direct investment (FDI) activity. In plausible situations, more asymmetric countries will negotiate treaties with higher tax rates. This theory is then tested using 1992 data from U.S. bilateral tax treaties. Overall, the data supports the prediction that greater asymmetric FDI activity increases the negotiated tax rates.
    Keywords: Foreign Direct Investment, Tax Treaties, Multinational Corporations, Bargaining, Withholding Taxes.
    JEL: F23 H25 K34
    Date: 2010–08
  5. By: Stigler, Mathieu; Shah, Ajay (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: Capital controls can induce large and persistent deviations from the Law of One Price for cross-listed stocks in international capital markets. A considerable literature has explored firm-specific factors which influence ADR pricing when LOP is violated. In this paper, we examine the interlinkages between Indian ADR premiums and macroeconomic time-series. We construct an ADR premium index, whereby diversification across firms diminishes idiosyncratic fluctuations associated with each security. We find that the S P 500 index and the domestic Nifty index influence the ADR Premium Index. Positive shocks to the ADR premium index precede higher purchases by foreign investors on the domestic market, and precede positive returns on the domestic index.
    Keywords: Capital market integration, Depository receipts
    JEL: F30 F36 G15
    Date: 2010–07
  6. By: David Gaukrodger
    Abstract: Discussions at the “Freedom of Investment” Roundtables, hosted by the OECD Investment Committee, have stressed that increased investments by foreign State-controlled investors can bring significant benefits to home and host societies, but have also noted that they can raise concerns. This paper examines two principal issues concerning foreign State-controlled investors: whether the doctrine of foreign state immunity may make it difficult for private parties to pursue legitimate claims against them and whether that doctrine creates regulatory enforcement gaps for host countries. Although the restrictive approach to immunity is now widely recognised, important issues, such as whether the financial investment activities of a sovereign wealth fund are commercial or sovereign acts, remain uncertain. In the area of regulation, the paper analyses state policies in the area of tax, competition law and criminal law, and notes key factors that may influence immunity in such cases.
    Keywords: taxation, regulation, competition law, sovereign wealth funds, foreign state immunity, foreign sovereign immunity, state immunity, international investment law, state-controlled investors, foreign government controlled investors, state-owned enterprises, central banks, antitrust
    JEL: F21 F23 G28 H82 K21 K33 K34
    Date: 2010–08
  7. By: Blanka Kalinova; Angel Palerm; Stephen Thomsen
    Abstract: The 2010 update of the FDI Restrictiveness Index (FDI Index) expands the sectors covered and revises the way in which FDI measures are scored and weighted. The FDI Index is now available for all OECD Members, adherents to the Declaration on International Investment and Multinational Enterprises, Enhanced Engagement countries and other G-20 countries. The FDI Index, originally developed in 2003, is jointly maintained by the OECD Investment Division and the OECD Economics Department as one component of the revised 2008 OECD Indicator of Product Market Regulation (PMR) from which the Going for Growth policy priorities are drawn. It is also used on a stand-alone basis to assess the restrictiveness of FDI policies in OECD Economic Surveys; reviews of candidates for accession; and OECD Investment Policy Reviews, including reviews of Enhanced Engagement countries, new adherents to the OECD Declaration on International Investment and Multinational Enterprises and of other non-OECD partner countries. The FDI Index has been used as a summary measure of OECD members’ positions under the OECD investment instruments in the Committee’s 2009 report updating countries’ reservations to the OECD Codes and exceptions to the OECD National Treatment instrument (NTI). The extension to all G-20 countries enables its use in the G-20 context.
    Keywords: foreign direct investment, FDI restrictions, foreign ownership
    JEL: F21 F23
    Date: 2010–08

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