nep-ifn New Economics Papers
on International Finance
Issue of 2010‒10‒23
nine papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. International Reserves and Swap Lines in Times of Financial Distress: Overview and Interpretations By Joshua Aizenman
  2. Weathering the financial storm: The importance of fundamentals and flexibility By Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
  3. Exchange Rate Volatility and Productivity Growth: the Role of Liability Dollarization By Benhima Kenza
  4. Foreign Exchange Reserves in a Credit Constrained Economy By Kurmas Akdogan
  5. Foreign Bond Markets and Financial Market Development: International Perspectives By Jonathan A. Batten; Peter G Szilagyi; Warren P. Hogan
  6. Periodic Sequences of Arbitrage: A Tale of Four Currencies By Rod Cross; Victor Kozyakin; Brian O'Callaghan; Alexei Pokrovskii; Alexey Pokrovskiy
  7. Developing Asian Local Currency Bond Markets: Why and How? By Mark M. Spiegel
  8. The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914-1939 By Barry Eichengreen, Marc Flandreau
  9. International Business Cycles and Remittance Flows By Mallick, Debdulal; Cooray, Arusha

  1. By: Joshua Aizenman
    Abstract: In this paper I review the use of precautionary measures aimed at mitigating emerging markets’ exposure to fragility associated with financial integration. The discussion draws possible lessons from the ongoing global liquidity crisis. The fear of losing international reserves (IR) constrained most emerging markets more than the fear of floating. The fear of using IR during a crisis suggests that emerging markets (EMs) opt to revisit the gains from financial globalization. High levels of IR may be required for the self insurance offered by those reserves to be effective. Under such circumstances, countries may benefit by supplementing the hoarding of IR with Pigovian tax-cum-subsidy policies. These policies would reduce external borrowing, and would fund the marginal hoarding of IR. The fear of losing IR also suggests a greater demand for regional pooling arrangements and swap lines as well as possible new roles for international financial institutions (IFI). [ADBI Working Paper 192]
    Keywords: precautionary measures, markets, international reserves, financial globalization
    Date: 2010
  2. By: Thorvardur Tjörvi Ólafsson (School of Economics and Management, Aarhus University, Denmark); Thórarinn G. Pétursson (Central Bank of Iceland)
    Abstract: The recent global financial tsunami has had economic consequences that have not been witnessed since the Great Depression. But while some countries suffered a particularly large contraction in economic activity on top of a system-wide banking and currency collapse, others came off relatively lightly. In this paper, we attempt to explain this cross-country variation in post-crisis experience, using a wide variety of pre-crisis explanatory variables in a sample of 46 medium-to-high income countries. We find that domestic macroeconomic imbalances and vulnerabilities were crucial for determining the incidence and severity of the crisis. In particular, we find that the pre-crisis rate of inflation captures factors which are important in explaining the post-crisis experience. Our results also suggest an important role for financial factors. In particular, we find that large banking systems tended to be associated with a deeper and more protracted consumption contraction and a higher risk of a systemic banking or currency crisis. Our results suggest that greater exchange rate flexibility coincided with a smaller and shorter contraction, but at the same time increased the risk of a banking and currency crisis. Countries with exchange rate pegs outside EMU were hit particularly hard, while inflation targeting seemed to mitigate the crisis. Finally, we find some evidence suggesting a role for international real linkages and institutional factors. Our key results are robust to various alterations in the empirical setup and we are able to explain a significant share of the cross-country variation in the depth and duration of the crisis and provide quite sharp predictions of the incidence of banking and currency crises. This suggests that country-specific initial conditions played an important role in determining the economic impact of the crisis and, in particular, that countries with sound fundamentals and flexible economic frameworks were better able to weather the financial storm.
    Keywords: Global financial crisis, real economy impact, banking and currency crisis, initial conditions, cross-country analysis
    JEL: F30 F31 F32 F41
    Date: 2010–10–14
  3. By: Benhima Kenza
    Abstract: This paper studies how liability dollarization conditions the effect of exchange rate flexibility on growth. It develops a model with credit-constrained firms facing liquidity shocks denominated in tradables while their revenues are both in tradable and nontradables. With frictions in the reallocation between tradables and nontradables, a peg is more growth-enhancing than a float in countries with dollarized debt because it stabilizes firms' cash flows. However, this relative advantage diminishes when dollarization decreases. These theoretical predictions are confirmed by an empirical analysis on a panel of 76 countries spanning 1995-2004: the higher the degree of dollarization, the more negative the impact of exchange rate flexibility on growth.
    Keywords: exchange rate regimes; growth; liability dollarization
    JEL: O16 O24 O41 O42
    Date: 2010–08
  4. By: Kurmas Akdogan (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We discuss the role of foreign exchange reserves as precautionary savings under an imperfect market framework due to the presence of endogenously determined borrowing constraints. We show that cost of holding reserves is higher in borrowing constrained economies than unconstrained ones as a result of the leverage effect of the debt. We also argue that high global reserve holdings can even be welfare reducing for the world economy where financially constrained developing countries are heavy borrowers in international lending markets.
    Date: 2010–09
  5. By: Jonathan A. Batten; Peter G Szilagyi; Warren P. Hogan
    Abstract: The domestic bond markets of the Asia and Pacific region have grown considerably since the Asian financial crisis of 1997, although they remain undeveloped relative to the region’s weight in the world economy. This paper proposes that in order to encourage further development of these markets, regulators should make them more accessible to foreign borrowers. [ADBI Working Paper 173]
    Keywords: domestic, bond markets, Asia, Pacific, economy, markets
    Date: 2010
  6. By: Rod Cross (Department of Economics, University of Strathclyde); Victor Kozyakin (Institute for Information Transmission Problems, Russian Academy of Sciences,Bolshoj Karetny lane 19, Moscow 127994 GSP-4, Russia); Brian O'Callaghan (Department of Applied Mathematics University College Cork, Ireland); Alexei Pokrovskii (Department of Applied Mathematics University College Cork, Ireland); Alexey Pokrovskiy (London School of Economics and Political Science)
    Abstract: This paper investigates arbitrage chains involving four currencies and four foreign ex-change trader-arbitrageurs. In contrast with the three-currency case, we find that arbitrage operations when four currencies are present may appear periodic in nature, and not involve smooth convergence to a "balanced" ensemble of exchange rates in which the law of one price holds. The goal of this article is to understand some interesting features of sequences of arbitrage operations, features which might well be relevant in other contexts in finance and economics.
    Keywords: Limits to arbitrage, Four currencies, Recurrent sequences, Asynchronous systems
    JEL: C60 F31 D82
    Date: 2010–10
  7. By: Mark M. Spiegel
    Abstract: This paper examines the motivation for, and the success of, regional efforts in Asia to promote local currency bond markets. The analysis demonstrates that Asian local currency bond markets made substantial gains as a region going into the current global financial crisis. However, we argue that the current financial crisis requires a reassessment of the merits of promoting local currency bond markets and the gains that have been made to date. While most of the initial motivations for encouraging the development of domestic local currency bond markets appear to remain valid, there are some exceptions. However, the degree to which success in the development of these markets will be sustained remains unknown until global financial markets regain tranquility and official interventions into these markets are removed. [ADBI Working Paper 182]
    Keywords: motivation, success, Asia, currency, markets, financial
    Date: 2010
  8. By: Barry Eichengreen, Marc Flandreau (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper provides new evidence on the rise of the dollar as an international currency, focusing on its role in the conduct of trade and the provision of trade credit. We show that the shift to the dollar occurred much earlier than conventionally supposed: during and immediately after World War I. Not just market forces but also policy support – the Fed in its role as market maker – was important for the dollar’s overtaking of sterling as the leading international currency. On balance, this experience challenges the popular notion of international currency status as being determined mainly by market size. It suggests that the popular image of strongly increasing returns and pervasive network externalities leaving room for only one monetary technology is misleading.
    Keywords: international currency, trade credit, network externalities
    Date: 2010–08
  9. By: Mallick, Debdulal; Cooray, Arusha
    Abstract: In this paper, we investigate the macroeconomic determinants and the effect of host country business cycles on remittance inflows. Estimating a dynamic panel data model by the system GMM, we document that remittance inflows are pro-cyclical to home country volatility but counter-cyclical to the volatility in host countries. This result does not hold for high income counties for which remittance inflows are acyclical to home country volatility but pro-cyclical to the volatility in host countries. For a host country, remittance outflows are counter-cyclical to the volatility of home countries. Trade openness is the single most important factor that determines both remittance inflows and outflows for the home and host countries, respectively.
    Keywords: Remittance; volatility; international business cycle; dynamic panel data
    JEL: F22 E32 C23 F24
    Date: 2010–08

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