nep-ifn New Economics Papers
on International Finance
Issue of 2010‒09‒25
nine papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Are the intraday effects of central bank intervention on exchange rate spreads asymmetric and state dependent? By Rasmus Fatum; Jesper Pedersen; Peter Norman Sørensen
  2. Exchange Rate Target Zones: A Survey of the Literature By António Portugal Duarte; João Sousa Andrade; Adelaide Duarte
  3. Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect By Gall, Thomas; Schiffbauer, Marc; Kubny, Julia
  4. Foreign Currency Loans - Demand or Supply Driven? By Brown, Martin; Kirschenmann, Karolin; Ongena; Steven
  5. Mode of Entry and Expropriation By Dadasov, Ramin; Lorz, Oliver
  6. FDI liberalization, firm heterogeneity and foreign ownership: German firm decisions in reforming India By Görg, Holger; Mühlen, Henning; Nunnenkamp, Peter
  7. World Market for Mergers and Acquisitions By Erel, Isil; Liao, Rose C.; Weisbach, Michael S.
  8. Firms and the global crisis: French exports in the turmoil By Jean-Charles Bricongne; Lionel Fontagné; Guillaume Gaulier; Daria Taglioni; Vincent Vicard
  9. Deposit Dollarization and Its Impact on Financial Deepening in the Developing World By Eduardo Court; Emre Ozsoz; Erick W. Rengifo

  1. By: Rasmus Fatum; Jesper Pedersen; Peter Norman Sørensen
    Abstract: This paper investigates the intraday effects of unannounced foreign exchange intervention on bid-ask exchange rate spreads using official intraday intervention data provided by the Danish central bank. Our starting point is a simple theoretical model of the bid-ask spread which we use to formulate testable hypotheses regarding how unannounced intervention purchases and intervention sales influence the market asymmetrically. To test these hypotheses we estimate weighted least squares (WLS) time-series models of the intraday bid-ask spread. Our main result is that intervention purchases and sales both exert a significant influence on the exchange rate spread, but in opposite directions: intervention purchases of the smaller currency, on average, reduce the spread while intervention sales, on average, increase the spread. We also show that intervention only affects the exchange rate spread when the state of the market is not abnormally volatile. Our results are consistent with the notion that illiquidity arises when traders fear speculative pressure against the smaller currency and confirms the asymmetry hypothesis of our theoretical model.
    Keywords: Financial markets ; Banks and banking, Central ; Monetary policy ; Foreign exchange rates ; International finance
    Date: 2010
  2. By: António Portugal Duarte (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal); João Sousa Andrade (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal); Adelaide Duarte (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal)
    Abstract: This work selectively reviews the literature on exchange rate target zones and their theoretical and empirical methodologies and examines whether they can be used to clarify to what extent this type of exchange rate regime could contribute to greater exchange rate stability. We discuss the main contributions of the first and second generations of exchange rate target zone models. In an attempt to reconcile the poor empirical performance of the Krugman (1991) model with the reality of exchange rate target zone regimes, this line of research integrates target zones with alternative underlying economic models, such as imperfect credibility, intra-marginal interventions and sticky price models. It was thus possible to understand the correlations observed between the exchange rate, its fundamentals determinants and the interest rate differential, and to explain the fact that the statistical distribution of the exchange rate is hump-shaped rather than U-shaped. This implies that the initial emphasis of target zone models on nonlinearities, “honeymoon effect”, “smooth pasting” and marginal interventions has vanished. Exchange rate target zones are better described as similar to managed floating regimes with intra-marginal interventions, with some marginal interventions when the exchange rate reaches the edges of the floating band.
    Keywords: Exchange rate target zones, imperfect credibility, intra-marginal interventions realignments and sticky prices.
    JEL: F31 F41 G15
    Date: 2010–07
  3. By: Gall, Thomas; Schiffbauer, Marc; Kubny, Julia
    Abstract: This paper argues that foreign direct investment in economies with credit market imperfections may increase their vulnerability to capital flow shocks. Due to better access to financial markets foreign firms can use other wage contracts than domestic ones. This alters the domestic wage composition and the subsequent wealth distribution. When credit markets are imperfect, the wealth distribution typically determines an economy's growth potential in autarky; hence, high exposure to foreign direct investment may significantly impede the capability to recover from sudden withdrawals of foreign capital. This is substantiated by empirical evidence on durations of output recovery after systemic sudden stops. --
    Keywords: Credit market imperfections,foreign direct investment,growth,occupational choice,sudden stops
    JEL: F43 F23 O16
    Date: 2010
  4. By: Brown, Martin; Kirschenmann, Karolin; Ongena; Steven
    Abstract: Motivated by current concerns over foreign currency exposures in emerging economies, we examine the currency denomination of business loans made in Bulgaria prior to the current crisis. We analyze information on the requested and granted currency for more than hundred thousand loans granted by one bank to sixty thousand different firms during the period 2003- 2007. This unique data set allows us to disentangle demand-side from supply-side determinants of foreign currency loans. We find that the bank in our sample often grants loans in foreign currency even when a firm requests a loan in local currency. The bank lends in foreign currency, not only to less risky firms, but also when the firm requested a large or long-term loan and after the bank itself received more funding in euro. These results suggest that foreign currency borrowing in Eastern Europe is not only be driven by borrowers who try to benefit from lower interest rates but may be partly supply-driven with banks hesitant to lend long-term in local currency and eager to match the currency structure of their assets and liabilities. --
    Keywords: foreign currency debt,banking
    JEL: G21 G30 F34 F37
    Date: 2010
  5. By: Dadasov, Ramin; Lorz, Oliver
    Abstract: We develop a politico-economic model to analyze the relationship between mode of entry into a new market and institutional quality of the host country. A foreign investor can either purchase a domestic firm, what we consider as FDI, or form a joint venture, in which the control right over the firm rests with the domestic entrepreneur. In an autocratic regime, the ruling elite uses its political power to implement expropriatory policies. In an integrated firm the risk of expropriation targets the foreign investor whereas in a joint venture the domestic agent bears this risk. We determine the equilibrium level of the probability of expropriation and show that the ruling elite, by choosing it, discriminates in favor of the foreign investor. This has implications for the form of invested capital, and thus for the organizational structure of active firms in the host country. --
    Keywords: Foreign direct investments,joint ventures,property rights,expropriation
    JEL: F21 L22 P48
    Date: 2010
  6. By: Görg, Holger; Mühlen, Henning; Nunnenkamp, Peter
    Abstract: The paper investigates the role of firm-level productivity and industry-level R&D for MNEs' choice of undertaking FDI, and the share of ownership in foreign affiliates. Two firm-specific datasets on German MNEs with varying equity stakes in Indian affiliates are used to account for the two-step decision process. The paper also analyses how German firm decisions were affected by the liberalisation of FDI regulations in India. Results show remarkable differences between the selection and the ownership share equation, and also between the pre-reform and post-reform periods. The evidence clearly reveals the tradeoffs involved in selective FDI approvals and foreign ownership restrictions. --
    Keywords: multinational enterprises,firm characteristics,selective FDI approval,German FDI,ownership share,Heckman model
    JEL: F23 L25
    Date: 2010
  7. By: Erel, Isil (Ohio State University); Liao, Rose C. (Rutgers University); Weisbach, Michael S. (Ohio State University)
    Abstract: Despite the fact that one-third of worldwide mergers involve firms from different countries, the vast majority of the academic literature on mergers studies domestic mergers. What little has been written about cross-border mergers has focused on public firms, usually from the United States. Yet, the vast majority of cross-border mergers involve private firms that are not from the United States. We provide an analysis of a sample of 56,978 cross-border mergers occurring between 1990 and 2007. We first characterize the patterns of who buys whom: Geography matters, with firms being much more likely to purchase firms in nearby countries than in countries far away. Purchasers are usually but not always from developed countries and they tend to purchase firms in countries with lower accounting standards. A significant factor in determining acquisition patterns is currency movements; firms tend to purchase firms from countries relative to which the currency of the acquirers country has appreciated. In addition, economy-wide factors reflected in the countrys stock market returns lead to acquisitions as well. Both the currency and stock market effect could suggest either misvaluation or wealth explanations. Our evidence is more consistent with the wealth explanation than the misvaluation explanation.
    Keywords: Mergers; Currency movements; Market movements; Valuation
    JEL: F30 G34
    Date: 2010–09–20
  8. By: Jean-Charles Bricongne (Banque de France, 31 rue Croix des petits champs, 75001 Paris, France.); Lionel Fontagné (Paris School of Economics, University Paris 1.); Guillaume Gaulier (Banque de France, 31 rue Croix des petits champs, 75001 Paris, France.); Daria Taglioni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vincent Vicard (Banque de France, 31 rue Croix des petits champs, 75001 Paris, France.)
    Abstract: Global trade contracted quickly and severely during the global crisis. This paper, using a unique dataset of French firms, matching together export data with firm-level credit constraints, shows that most of the 2008-2009 trade collapse is accounted by the unprecedented demand shock and by product characteristics. While all firms have been evenly affected by the crisis, large firms did so mainly through the intensive margin and by reducing the portfolio of products offered in each destination served. Smaller exporters instead have been forced to reduce the range of destinations served or to stop exporting altogether. Credit constraints, on their part, emerged as an aggravating factor for firms active in sectors of high financial dependence. Nonetheless, as the share of credit constrained firms is small and their number did not increase much during the crisis, the overall impact of credit constraints on trade remains limited. JEL Classification: F02, F10, G01.
    Keywords: financial crisis, credit constraints, international trade, firms’ heterogeneity, intensive and extensive margins.
    Date: 2010–09
  9. By: Eduardo Court (Pontificia Universidad Catolica Del Peru, Centrum Catolica); Emre Ozsoz (Fashion Institute of Technology, State University of New York (SUNY), Social Sciences Department, and Fordham University, Center for International Policy Studies (CIPS)); Erick W. Rengifo (Fordham University, Department of Economics and Center for International Policy Studies (CIPS))
    Abstract: One of the main reasons for dollarization is the erosion of money's function as a store of value as the Currency Substitution view suggests. It has not been uncommon for countries with high inflationary processes to have high dollarization ratios and banking system that faces important challenges and risks that significantly affect their ability to provide capital to the overall economy (financial intermediation). In these economies, dollarization played a dual role: in one hand, the role of a hedging instrument protecting the value of money and, in the other hand, contributing to generate the so-called currency mismatch and default risks. This paper investigates the role of dollarization on the development of financial intermediation in developing economies. Our empirical findings suggest that dollarization has a negative impact on financial deepening, except on high-inflation economies.
    Keywords: Dollarization, Financial Development, Financial Deepening
    JEL: F31 G21
    Date: 2010

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