nep-ifn New Economics Papers
on International Finance
Issue of 2010‒10‒02
fourteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Exchange Rate Asymmetry and Flexible Exchange Rates under Inflation Targeting Regimes: Evidence from Four East and Southeast Asian Countries By Pontines, Victor; Siregar, Reza Y.
  2. Fear of Appreciation in East and Southeast Asia: The Role of the Chinese Renminbi By Pontines, Victor; Siregar, Reza Y.
  3. Market-specific and Currency-specific Risk during the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London By Shin-ichi Fukuda
  4. Bretton-Woods systems, old and new, and the rotation of exchange-rate regimes By Stephen Hall; George Hondroyiannis; P.A.V.B Swamy; George Tavlas
  5. India’s trilemma: financial liberalization, exchange rates and monetary policy By Hutchison, Michael; Sengupta, Rajeswari; Singh, Nirvikar
  6. Offshore markets for the domestic currency: monetary and financial stability issues By Dong he; Robert McCauley
  7. Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach By James P Walsh; Jiangyan Yu
  8. European sovereign bond spreads: monetary unification, market conditions and financial integration. By Dimitris A. Georgoutsos; Petros Migiakis
  9. A Cyclical Model of Exchange Rate Volatility By Evarist Stoja; Richard D. F. Harris; Fatih Yilmaz
  10. Dedollarization By Romain Veyrune; Annamaria Kokenyne; Jeremy Ley
  11. Analysis of the intraday effects of economic releases on the currency market By Rezania, Omid; Rachev, Svetlozar T.; Sun, Edward; Fabozzi, Frank J.
  12. Sudden Stops, Output Drops, and Credit Collapses By Jihad Dagher
  13. The Cross-Country Incidence of the Global Crisis By Gian Maria Milesi-Ferretti; Philip R. Lane
  14. Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease? By Ruy Lama; Juan Pablo Medina Guzman

  1. By: Pontines, Victor; Siregar, Reza Y.
    Abstract: We demonstrate that the economies of Indonesia, Korea, Philippines and Thailand, which are among the first group of emerging markets to embrace the inflation targeting framework of monetary policy, tend to adopt a form of an asymmetrical exchange rate behaviour wherein appreciation pressures are restrained more substantially than depreciation pressures. In short, these four Asian economies exemplify aversion to appreciations such that greater flexibility is allowed only one side of the market. Formal econometric tests using the smooth transition autoregressive and the Markov regime switching models confirm this hypothesis of aversion to appreciation and show that the central banks of these four economies tend to tolerate more of depreciations than of appreciations of their local currencies against the US dollar.
    Keywords: Exchange Rate Asymmetry Inflation Targeting; Fear of Floating; Fear of Appreciation; Regime Switching Models.
    JEL: E58 F41 F31
    Date: 2010–08–28
  2. By: Pontines, Victor; Siregar, Reza Y.
    Abstract: Our study brings into light the evidence of a fundamental role of the Chinese renminbi in shaping the exchange rate behavior of other major Asian currencies. We obtain results suggesting that there is an additional dimension to the ‘fear of appreciation’ or ‘fear of floating in-reverse’ behavior, initially coined by Levy-yeyati and Sturzenegger (2007)with regards to the cases of these major Asian currencies. In particular, we find that there is a greater degree of aversion to appreciation of these same Asian currencies, specifically, the Philippine peso and the Thailand baht against the renminbi than against the US dollar. This heightened fear of appreciation against the Chinese currency confirms that trade competition indeed matters in this part of the world and that the fear continues to play a central role in the exchange rate management behavior of major Asian currencies. This is understandable as the rising role of China as a major trading hub in the region as well as globally, must then render the renminbi to exert a significant influence to the rest of the currencies in the region.
    Keywords: Asymmetrical Exchange Rate Regime; East and Southeast Asia; Regime Switching Models
    JEL: E58 F41 F31
    Date: 2010–09–24
  3. By: Shin-ichi Fukuda (University of Tokyo)
    Abstract: This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets.
    Date: 2010–09
  4. By: Stephen Hall (Leicester University); George Hondroyiannis (Bank of Greece and Harokopio University); P.A.V.B Swamy (Federal Reserve Board (retired)); George Tavlas (Bank of Greece)
    Abstract: A recent contribution to the literature argues that the present international monetary system in many ways operates like the Bretton-Woods system. Asia is the new periphery of the system and pursues an export-led development strategy based on undervalued exchange rates and accumulated foreign reserves. The United States remains the centre country, pursuing a monetary-policy strategy that overlooks the exchange rate. Under both regimes the United States does not take external factors into account in conducting monetary policy while the periphery does take external factors into account. We provide results of a test of this hypothesis. Then, we present a new method for decomposition of a seasonally adjusted series the business cycle and other components using a time-varying-coefficient technique that allows us to test the relationship between the cycle and macroeconomic policies under both regimes.
    Keywords: Revived Bretton-Woods system, asymmetry hypothesis, time-series, decomposition, time-varying-coefficient estimation
    JEL: C22 E32 F33
    Date: 2010–04
  5. By: Hutchison, Michael; Sengupta, Rajeswari; Singh, Nirvikar
    Abstract: A key challenge for macroeconomic policy in open economies is how to simultaneously manage exchange rates, interest rates and capital account openness—the trilemma. This paper calculates a trilemma index for India and investigates its evolution over time. We find that financial integration has increased markedly after the mid-2000s, with corresponding limitations on monetary independence and exchange rate stability. This tradeoff has been mitigated, however, with the rise of international reserves as a partially independent instrument of macroeconomic policy. In addition, we confirm that the weighted sum of the three indexes adds up to a constant, validating the notion that a rise in one trilemma variable should be traded-off with a drop of the weighted sum of the other two. Finally, we consider the implications of changes in the trilemma index for macroeconomic outcomes. We find some evidence that greater financial integration and corresponding loss of monetary autonomy and exchange rate stability has influenced inflation and inflation volatility, though not in a consistent manner.
    Keywords: Financial trilemma; Indian economy; International reserves; Foreign exchange intervention; Monetary policy
    JEL: F4 F3 E5 E4
    Date: 2010–09–22
  6. By: Dong he; Robert McCauley
    Abstract: We show in this paper that offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. We argue that, for emerging market economies that are interested in seeing some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency while still allowing the authorities to retain a measure of control over the pace of capital account liberalisation. The development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed. The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euromarkets shows that policy options are available for managing such risks.
    Keywords: offshore markets; currency internationalisation; monetary stability; financial stability
    Date: 2010–09
  7. By: James P Walsh; Jiangyan Yu
    Abstract: Using a dataset which breaks down FDI flows into primary, secondary and tertiary sector investments and a GMM dynamic approach to address concerns about endogeneity, the paper analyzes various macroeconomic, developmental, and institutional/qualitative determinants of FDI in a sample of emerging market and developed economies. While FDI flows into the primary sector show little dependence on any of these variables, secondary and tertiary sector investments are affected in different ways by countries’ income levels and exchange rate valuation, as well as development indicators such as financial depth and school enrollment, and institutional factors such as judicial independence and labor market flexibility. Finally, we find that the effect of these factors often differs between advanced and emerging economies.
    Keywords: Foreign direct investment , Developing countries , Economic models , Emerging markets , Gross domestic product ,
    Date: 2010–07–09
  8. By: Dimitris A. Georgoutsos (Athens University of Economics & Business); Petros Migiakis (Bank of Greece)
    Abstract: In this paper we examine the dynamics of European sovereign bond yield spreads focusing on issues related to financial integration and market conditions. The finding of near-unit-root effects highlights the need for careful econometric specification. Thus we formulate sovereign bond yield spreads, for eleven EMU countries against the Bund for the period 1992:1-2009:12, as AR(1) processes, while allowing for regime switching effects, along the lines of a Markovian probabilistic specification. Specifically, by taking into account regime switching effects we examine, rather than assume, that monetary unification affected sovereign bond yield spreads, allowing for states of higher and lower interactions to be revealed. Next, we examine the effects of several exogenous explanatory variables. Our results indicate that European sovereign bonds achieved only partial integration even before the recent financial crisis, while financial integration and financial stability are found to be interconnected. Specifically, we find evidence of different effects exercised by the same deterministic factors on sovereign bond yield spreads even before the recent crisis. Additionally, it appears that a negative relation exists between low-volatility conditions and the magnitude of effects exercised by idiosyncratic risk factors on bond yield spreads.
    Keywords: financial integration; sovereign bond spreads; near unit root; regime shifts
    JEL: F21 G12 G32
    Date: 2010–06
  9. By: Evarist Stoja; Richard D. F. Harris; Fatih Yilmaz
    Abstract: In this paper, we investigate the long run dynamics of the intraday range of the GBP/USD, JPY/USD and CHF/USD exchange rates. We use a non-parametric filter to extract the low frequency component of the intraday range, and model the cyclical deviation of the range from the long run trend as a stationary autoregressive process. We find that the long run trend is time-varying but highly persistent, while the cyclical component is strongly mean reverting. This has important implications for modelling and forecasting volatility over both short and long horizons. As an illustration, we use the cyclical volatility model to generate out-of-sample forecasts of exchange rate volatility for horizons of up to one year under the assumption that the long run trend is fully persistent. As a benchmark, we compare the forecasts of the cyclical volatility model with those of the two-factor intraday range-based EGARCH model of Brandt and Jones (2006). Not only is the cyclical volatility model significantly easier to estimate than the EGARCH model, but it also offers a substantial improvement in out-of-sample forecast performance.
    Keywords: Conditional volatility, Intraday range, Hodrick-Prescott filter
    JEL: C15 C22
    Date: 2010–10
  10. By: Romain Veyrune; Annamaria Kokenyne; Jeremy Ley
    Abstract: This paper provides a summary of the key policies that encourage dedollarization. It focuses on cases in which the authorities’ intention is to gain greater control of monetary policy and draws on the experiences of countries that have successfully dedollarized. Unlike previous work on the subject, this paper examines both macroeconomic stabilization policies and microeconomic measures, such as prudential regulation of the financial system. This study is also the first attempt to make extensive use of the foreign exchange regulation data reported in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions. The main conclusion is that durable dedollarization depends on a credible disinflation plan and specific microeconomic measures.
    Date: 2010–07–21
  11. By: Rezania, Omid; Rachev, Svetlozar T.; Sun, Edward; Fabozzi, Frank J.
    Abstract: Using four years of second-by-second executed trade data, we study the intraday effects of a representative group of scheduled economic releases on three exchange rates: EUR/$, JPY/$ and GBP/$. Using wavelets to analyze volatility behavior, we empirically show that intraday volatility clusters increase as we approach the time of the releases, and decay exponentially after the releases. Moreover, we compare our results with the results of a poll that we conducted of economists and traders. Finally, we propose a wavelet volatility estimator which is not only more efficient than a range estimator that is commonly used in empirical studies, but also captures the market dynamics as accurately as a range estimator. Our approach has practical value in high-frequency algorithmic trading, as well as electronic market making. --
    Keywords: Foreign exchange,volatility estimation,economic release,wavelet,high frequency
    JEL: F31 G14 G15
    Date: 2010
  12. By: Jihad Dagher
    Abstract: This paper proposes a tractable Sudden Stop model to explain the main patterns in firm level data in a sample of Southeast Asian firms during the Asian crisis. The model, which features trend shocks and financial frictions, is able to generate the main patterns observed in the sample during and following the Asian crisis, including the ensuing credit-less recovery, which are also patterns broadly shared by most Sudden Stop episodes as documented in Calvo et al. (2006). The model also proposes a novel explanation as to why small firms experience steeper declines than their larger peers as documented in this paper. This size effect is generated under the assumption that small firms are growth firms, to which there is support in the data. Trend shocks when combined with financial frictions in this model also generate strong leverage effects in line with what is observed in the sample, and with other observations from the literature.
    Keywords: Stock prices , Southeast Asia , Borrowing , Financial crisis , External shocks , Capital flows , Credit , Current account ,
    Date: 2010–07–29
  13. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: We examine whether the cross-country incidence and severity of the 2008-2009 global recession is systematically related to pre-crisis macroeconomic and financial factors. We find that the pre-crisis level of development, increases in the ratio of private credit to GDP, current account deficits, and openness to trade are helpful in understanding the intensity of the crisis. International risk sharing did little to shield domestic demand from the country-specific component of output declines, while those countries with large pre-crisis current account deficits saw domestic demand fall by much more than domestic output during the crisis.
    Date: 2010–07–26
  14. By: Ruy Lama; Juan Pablo Medina Guzman
    Abstract: This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode. We consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector. The paper shows that leaning against an appreciated exchange rate can prevent an inefficient loss of tradable output but at the cost of generating a misallocation of resources in other sectors of the economy. The paper also finds that welfare is a decreasing function of exchange rate intervention. These results suggest that stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary.
    Date: 2010–08–02

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