nep-ifn New Economics Papers
on International Finance
Issue of 2010‒10‒09
twelve papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Global Financial Crisis and the Puzzling Exchange Rate Path in CEE Countries By Jesús Crespo Cuaresma; Adam Gersl; Tomáš Slačík
  2. The evolving renminbi regime and implications for Asian currency stability By Guonan Ma; Robert McCauley
  3. Renminbising China's Foreign Assets By Yin-Wong Cheung; Guonan Ma; Robert N. McCauley
  4. The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis By Hui Tong; Shang-Jin Wei
  5. Leverage Constraints and the International Transmission of Shocks By Michael B. Devereux; James Yetman
  6. Sudden Stops, Financial Frictions, and Labor Market Flows: Evidence from Latin America By Francisco Gallego; José Tessada
  7. Foreign currency borrowing of households in new EU member states By Attila Csajbók; András Hudecz; Bálint Tamási
  8. Do Derivative Markets Contain Useful Information for Signaling "Hot Money" Flows? By Joseph K. W. Fung; Robert I. Webb; Wing H. Chan
  9. Interbank market integration, loan rates, and firm leverage By Steven Ongena; Alexander Popov
  10. Trends in National and Regional Investors Financing Crossborder Infrastructure Projects in Asia By Prabir De; Muthi Samudram; Sanjeev Moholkar
  11. Domestic Institutions and the Bypass Effect of Financial Globalization By Jiandong Ju; Shang-Jin Wei
  12. Currency Crises Early Warning Systems: why they should be Dynamic By Candelon Bertrand; Dumitrescu Elena-Ivona; Hurlin Christophe

  1. By: Jesús Crespo Cuaresma (Vienna University of Economics and Business); Adam Gersl (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Tomáš Slačík (European Central Bank)
    Abstract: In the present paper we examine whether financial markets could have helped predict exchange rates in three selected Central and Eastern European (CEE) economies of the EU, namely the Czech Republic, Hungary and Poland, during the current financial crisis. To this end, we derive risk-neutral densities from the implied volatilities of FX options, which approximate market expectations about exchange rate developments. Based on these risk-neutral density estimates, we then assess the out-of-sample predictive power of indicators. The forecasting results suggest that models based on FX options are inferior to the random walk in terms of the forecasting error, confirming a stylized fact about the short-term forecasting of exchange rates. Yet, we also find that, for the Czech Republic and Poland, risk-neutral densities contain useful information on the direction of change of the exchange rate.
    Keywords: Options, implied volatility, risk-neutral density, exchange rate forecasting, Bayesian model averaging, subprime crisis, emerging markets
    JEL: C11 C32 C53 F37 G14
    Date: 2010–09
  2. By: Guonan Ma; Robert McCauley
    Abstract: The Chinese authorities described the management of the renminbi after its 2005 unpegging from the US dollar as involving a basket of trading partner currencies. Outside analysts have detected few signs of such management. We find that, in the two years from mid-2006 to mid-2008, the renminbi strengthened gradually against trading partners' currencies within a narrow band. In mid-2008, the financial crisis interrupted this experiment and the bilateral renminbi/dollar exchange rate stabilised at 6.8. The 2006-08 experience suggests that a shared policy of gradual nominal effective appreciation renders East Asian currencies quite stable against one another. Such a shared policy would create favourable conditions for regional monetary cooperation.
    Keywords: exchange rate regime, renminbi, effective exchange rate, regional currency stability, regional monetary cooperation
    Date: 2010–09
  3. By: Yin-Wong Cheung (University of California, Santa Cruz and Hong Kong Institute for Monetary Research); Guonan Ma (Bank for International Settlements); Robert N. McCauley (Bank for International Settlements)
    Abstract: Since the 2008 global financial crisis, China has rolled out a number of initiatives to actively promote the international role of the renminbi and to denominate more of its international claims away from the US dollar and into the renminbi. This paper discusses the factors shaping the prospects of internationalising the renminbi from the perspective of the currency composition of China's international assets and liabilities. These factors include, among others, underlying valuation and management of the renminbi.
    Keywords: Renminbi Internationalisation, Net International Asset Position, Convertibility, Exchange Rate Uncertainty, Dollar Peg
    JEL: F30 F31 F33 O24
    Date: 2010–06
  4. By: Hui Tong (International Monetary Fund); Shang-Jin Wei (Columbia University and Tsinghua University and National Bureau of Economic Research and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research)
    Abstract: This paper studies whether the volume and composition of capital flows affect the degree of credit crunch during the 2007-2009 crisis. Using data on 3823 firms in 24 emerging countries, we find that, on average, the decline in stock prices was more severe for firms that are intrinsically more dependent on external finance for working capital. Interestingly, while the volume of capital flows per se has no significant effect, the composition matters a lot. In particularly, greater dependence on non-FDI capital inflows before the crisis worsens the credit crunch during the crisis, while exposure to FDI alleviates the liquidity constraint.
    Keywords: Financial Globalization, Financial Crisis, Spillover, Liquidity Constraint
    JEL: F3 G2 G3
    Date: 2010–06
  5. By: Michael B. Devereux (University of British Columbia and National Bureau of Economic Research and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); James Yetman (Bank for International Settlements and Hong Kong Institute for Monetary Research)
    Abstract: Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent portfolio holdings among leverage-constrained investors. In our model, without leverage constraints on investment, financial integration itself has no implication for international macro co-movements. When leverage constraints bind however, the presence of these constraints in combination with diversified portfolios introduces a powerful financial transmission channel which results in a positive co-movement of production, independently of the size of international trade linkages. In addition, the paper shows that, with binding leverage constraints, the type of financial integration is critical for international co-movement. If international financial markets allow for trade only in non-contingent bonds, but not equities, then the international co-movement of shocks is negative. Thus, with leverage constraints, moving from bond trade to equity trade reverses the sign of the international transmission of shocks.
    Keywords: Leverage, International Transmission, Portfolios
    JEL: F3 F32 F34
    Date: 2010–05
  6. By: Francisco Gallego; José Tessada
    Abstract: Sudden stops and international financial crises have been a main feature of developing countries in the last three decades. While their aggregate effects are well known, the disaggregated channels through which they work are not well explored yet. In this paper, we study the sectoral responses that take place over episodes of sudden stops. Using job flows from a sectoral panel dataset for four Latin American countries, we find that sudden stops are characterized as periods of lower job creation and increased job destruction. Moreover, these effects are heterogeneous across sectors: we find that when a sudden stop occurs, sectors with higher dependence on external financing experience lower job creation. In turn, sectors with higher liquidity needs experience significantly larger job destruction. This evidence is consistent with the idea that dependence on external financing affects mainly the creation margin and that exposure to liquidity conditions affects mainly the destruction margin. Overall, our results confirm the large labor market effects of sudden stops, and provide evidence of financial conditions being an important transmission channel of sudden stops within a country, highlighting the role of financial frictions in the restructuring process in general.
    Keywords: Sudden stops, Gross job flows, Adjustment, Financial frictions.
    JEL: E24 F3 G21 J63
    Date: 2010
  7. By: Attila Csajbók (Magyar Nemzeti Bank); András Hudecz (Magyar Nemzeti Bank); Bálint Tamási (Magyar Nemzeti Bank)
    Abstract: The post-Lehman phase of the financial crisis has exposed a number of weaknesses in the banking sectors of the European Union’s New Member States (NMSs). One of these is the prevalence of lending in foreign currency. While banks themselves in these countries have not taken on sizeable currency risk directly, they passed it on to households and the corporate sector. With large depreciations taking place or looming in the region, the currency risk at households and corporates without a natural hedge is now being transformed into credit risk for the banking sector. This is creating a serious problem in maintaining financial stability and cripples monetary policy in countries where it operates primarily through the exchange rate channel. The patterns of foreign currency lending to households in NMSs vary widely both across countries and time periods. For example, FX lending to households is virtually non-existent in the Czech Republic while in some Baltic countries its share is close to 100 per cent of total household lending. The main goal of the paper is (1) to present the stylised facts of pre-crisis FX lending in NMSs systematically and (2) to try to explain these differing patterns in an econometric model. In order to do so, a panel database of household FX borrowing is compiled, covering 10 NMSs in the period 1999-2008. Our estimation results suggest that the degree of household FX borrowing depends on the interest rate differential, the institutional features of mortgage financing and the monetary regime. Household FX borrowing tends to be less prevalent if the interest rate differential is small, fixed interest rate mortgage financing is available and the monetary authority’s “fear of floating” is low.
    Keywords: foreign currency lending, new member states, credit risk, monetary policy
    JEL: E44 E50 G21
    Date: 2010
  8. By: Joseph K. W. Fung (Hong Kong Institute for Monetary Research and Hong Kong Baptist University); Robert I. Webb (Hong Kong Institute for Monetary Research and University of Virginia); Wing H. Chan (City University of Hong Kong and Wilfrid Laurier University)
    Abstract: This study examines whether information from derivative markets is useful for signaling "hot money" and other large capital flows in an economy where the monetary authority pursues a policy of exchange rate stability. Specifically, this study examines the information content of various Hong Kong traded derivative securities for signaling changes in the aggregate balance of the Hong Kong banking system during a period of intense IPO activity and speculation on the revaluation of the renminbi. The impact of the introduction of the Hong Kong Monetary Authority's (HKMA) Convertibility Undertakings on the dynamic relationships among capital flows, stock market volatility and stock market turnover is also examined. Finally, the implications for monetary policymakers in potentially using information from derivative markets are assessed. The results show that derivative markets contain useful information for signaling "hot money" flows. Granger causality tests from a VAR model show that Hong Kong dollar forward and RMB non-deliverable forward (NDF) prices predict future variation in the aggregate balance. Moreover, changes in aggregate balance has a significant impact on Hong Kong's interbank rates. The findings also suggest that the introduction of the May 18, 2005 Convertibility Undertakings may have increased the credibility of the Linked Exchange Rate System by discouraging the use of the Hong Kong dollar and Hong Kong dollar denominated assets as speculative vehicles on RMB denominated assets.
    Date: 2010–05
  9. By: Steven Ongena (Tilburg University, Warandelaan 2 5037 AB Tilburg, Netherlands.); Alexander Popov (European Central Bank, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We study the effect of interbank market integration on small firm finance in the build-up to the 2007-2008 financial crisis. We use a comprehensive data set that contains contract terms on individual loans to 6,047 firms across 14 European countries between 1998:01 and 2005:12. We account for the selection that arises in the loan request and approval process. Our findings imply that integration of interbank markets resulted in less stringent borrowing constraints and in substantially lower loan rates. The decrease was strongest in markets with competitive banking sectors. We also find that in the most rapidly integrating markets, firms became substantially overleveraged during the build-up to the crisis. JEL Classification: E51, G15, G21, G34.
    Keywords: interbank markets, selection, loan rates, bank competition, firm leverage.
    Date: 2010–10
  10. By: Prabir De; Muthi Samudram; Sanjeev Moholkar
    Abstract: This study examines a range of crossborder infrastructure development issues related to the Asian countries. Despite active pursuit of private investment in infrastructure by most developing countries in Asia and a growing number of success stories, the pace of such investment remains slow. Participation by the private sector in infrastructure development has been mixed. While there has been moderate progress in national infrastructure development by the private sector, progress is rather limited in the case of development of crossborder infrastructure in Asia. [ADBI Working Paper 245]
    Keywords: infrastructure, Asian countries, infrastructure development, private sector, crossborder
    Date: 2010
  11. By: Jiandong Ju (Tsinghua University and Center for International Economic Research and University of Oklahoma); Shang-Jin Wei (Columbia University and Center for International Economic Research and National Bureau of Economic Research and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research)
    Abstract: This paper proposes a simple model to study how domestic institutions affect patterns of international capital flows. Inefficient financial system and poor corporate governance may be bypassed by two-way capital flows in which domestic savings leave the country in the form of financial capital outflows but domestic investment takes place via inward FDI. While financial globalization always improves the welfare of a developed country with a good financial system, its effect is ambiguous for a developing country with an inefficient financial sector or poor corporate governance. Interestingly, financial and property rights institutions can have opposite effects on capital flows.
    Keywords: Two-Way Capital Flows, Property Rights Protection, Financial Development, Corporate Governance
    JEL: F21 F33
    Date: 2010–08
  12. By: Candelon Bertrand; Dumitrescu Elena-Ivona; Hurlin Christophe (METEOR)
    Abstract: This paper introduces a new generation of Early Warning Systems (EWS) which takes into account dynamics within a system composed by binary variables. We elaborate on Kauppi and Saikonnen (2008), which allows to consider several dynamic specifications and to use an exact maximum likelihood estimation method. Applied so as to predict currency crises for fifteen countries, this new EWS turns out to exhibit significantly better predictive abilities than the existing models both within and out of the sample.
    Keywords: financial economics and financial management ;
    Date: 2010

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