nep-ifn New Economics Papers
on International Finance
Issue of 2010‒12‒11
thirteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. The Option Of Last Resort: A Two-Currency Emu By Arghyrou, Michael G; Tsoukalas, John D.
  2. The Dynamics of Portfolio Holdings in Emerging Europe By Vahagn Galstyan; Philip Lane
  3. The Determinants of Bilateral FDI: Is Asia Different? By Peter A. Petri
  4. Peru: Drivers of De-dollarization By Mercedes García-Escribano
  5. Foreign acquisitions, domestic multinationals, and R&D By Bandick, Roger; Görg, Holger; Karpaty, Patrik
  6. The European Union, the Euro, and Equity Market Integration By Geert Bekaert; Campbell R. Harvey; Christian T. Lundblad; Stephan Siegel
  7. A Reappraisal of the Allocation Puzzle through the Portfolio Approach By Benhima Kenza
  8. Bilateral Trade, Openness and Asset Holdings By Alexandra Peter
  9. Is History a Blessing or a Curse? International Borrowing without Commitment, Leapfrogging and Growth Reversals By Raouf BOUCEKKINE; Patrick A. PINTUS
  10. Innovation and Foreign Ownership By Maria Guadalupe; Olga Kuzmina; Catherine Thomas
  11. Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons By Òscar Jordà; Moritz Schularick; Alan M. Taylor
  12. Remittances and Financial Openness By Michel Beine; Elisabetta Lodigiani; Robert Vermuelen
  13. Globalization and productivity : a survey of firm-level analysis By Hayakawa, Kazunobu; Kimura, Fukunari; Machikita, Tomohiro

  1. By: Arghyrou, Michael G (Cardiff Business School); Tsoukalas, John D.
    Abstract: This article, originally published at on 7 February 2010, spells out our two-currency EMU proposal as a plan of last resort for resolving the present EMU sovereign-debt crisis. The key ingredients of our proposal involve a temporary split of the euro into two currencies, both run by the European Central Bank. The hard euro will be maintained by the core-EMU members whereas periphery EMU countries will adopt for a suitable period of time the weak euro. All existing debts will continue to be denominated in strong-euro terms. The plan involves a one-off devaluation of the weak euro versus the strong one, simultaneously with the introduction of far-reaching reforms and rapid fiscal consolidation in the periphery EMU countries. We argue that due to enhanced market credibility, our two-tier euro plan has a realistic chance of success in resolving the EMU crisis, if all other approaches fail.
    Keywords: euro; two-currency EMU
    JEL: E44 F30
    Date: 2010–11
  2. By: Vahagn Galstyan (Institute for International Integration Studies, Trinity College Dublin); Philip Lane (Institute for International Integration Studies, Trinity College Dublin)
    Abstract: In this paper we examine shifts in the bilateral patterns in international portfolio holdings in emerging Europe during the 2001-2008 period. In relation to the 2001-2007 pre-crisis period, we find some evidence that shifts in the geographical composition of portfolio debt liabilities reflect shifts in bilateral trade patterns. In addition, we find that the new member states disproportionately attracted portfolio equity investment from other members of the European Union after 2004. During the crisis period, we find that the bilateral composition of the shift in portfolio positions is affected by the scale of pre-crisis holdings and the geographical proximity of creditors. We also find that countries in the euro area are more likely to maintain portfolio positions in emerging Europe than were investors from other regions.
    Keywords: Portfolio holdings, crises, emerging Europe
    JEL: F30 F32
    Date: 2010–11
  3. By: Peter A. Petri (International Business School, Brandeis University)
    Abstract: Intra-Asian foreign direct investment (FDI) is dominated by flows from high technology economies to medium technology economies, while FDI elsewhere primarily consists of flows among high technology economies. This distinctive pattern is not due simply to differences in the relative distribution of Asian FDI recipients by technology, or to systematic differences in Asia’s technology characteristics. A gravity model analysis is used to explore whether Asian FDI patterns differ significantly from those elsewhere, and if so, in what ways. The results show that Asian FDI flows, in contrast to other FDI flows, systematically favor hosts with relatively low technology achievement and relatively strong intellectual property rights regimes. This type of “Asian exceptionalism” is consistent with “flying geese” theories that have argued that Asian development is the result of technology flows among economies that occupy nearby rungs of the technology ladder.
    Keywords: Foreign Direct Investment, FDI, Asia, Technology Transfer, Gravity Model, Intellectual Property Rights, Flying Geese Paradigm
    JEL: F21 O33 O34
    Date: 2010–03
  4. By: Mercedes García-Escribano (International Monetary Fund)
    Abstract: Peru has successfully pursued a market-driven financial de-dollarization during the last decade. Dollarization of credit and deposit of commercial banks—across all sectors and maturities—has declined, with larger declines for commercial credit and time and saving deposits. The analysis presented in this paper confirms that de-dollarization has been driven by macroeconomic stability, introduction of prudential policies to better reflect currency risk (such as the management of reserve requirements), and the development of the capital market in soles. Further de-dollarization efforts could focus on these three fronts. Given the now consolidated macroeconomic stability, greater exchange rate flexibility could foster de-dollarization; additional prudential measures could further discourage banks’ lending and funding in foreign currency; while further capital market development in domestic currency would help overall financial de-dollarization.
    Keywords: Dollarization; de-dollarization; monetary policy
    JEL: E50 G20 G21 G28
    Date: 2010–11
  5. By: Bandick, Roger (Department of Economics); Görg, Holger (Kiel Institute for the World Economy); Karpaty, Patrik (Swedish Business School)
    Abstract: The aim of this paper is to evaluate the causal effect of foreign acquisition on R&D intensity in targeted domestic firms. We are able to distinguish domestic multinationals and non-multinationals, which allows us to investigate the fear that the change in ownership of domestic to foreign multinationals leads to a reduction in R&D activity in the country, as headquarter activities are relocated to the new owner’s home country. We use unique and rich firm level data for the Swedish manufacturing sector and different micro-econometric estimation strategies in order to control for the potential endogeneity of the acquisition dummy. Overall, our results give no support to the fears that foreign acquisition of domestic firms lead to a brain drain of R&D activity in Swedish MNEs. Rather, this paper finds robust evidence that foreign acquisitions lead to increasing R&D intensity in acquired domestic MNEs and non-MNEs.
    Keywords: No keywords;
    JEL: A10
    Date: 2010–12–01
  6. By: Geert Bekaert; Campbell R. Harvey; Christian T. Lundblad; Stephan Siegel
    Abstract: At a time of historic challenges to the viability of the Eurozone, we assess the contribution of the EU and the Euro to equity market integration in Europe. We use a simple and essentially model free measure of bilateral market segmentation: two countries are segmented if there is a wide divergence in the valuations of their industries. We first establish that segmentation is significantly lower for EU versus non- EU members. Bilateral valuation differentials remain lower for EU members even after we control for several possible channels of integration, such as bilateral trade, direct investment positions, financial regulation, and interest rate differences. Importantly, we find that EU membership reduces equity market segmentation between member countries whether or not members have also adopted the Euro. The Euro adoption as well as the anticipation of the Euro adoption has minimal effects on market integration.
    JEL: F30 F31 F33 G15
    Date: 2010–12
  7. By: Benhima Kenza
    Abstract: Paradoxically, high-investment and high-growth developing countries tend to experience capital outflows. This paper shows that this allocation puzzle can be explained simply by introducing uninsurable idiosyncratic investment risk in the neoclassical growth model. Using a sample of 67 countries between 1980 and 2003, we show that the model predicts accurately the allocation of capital flows in this sample. This is because the model accounts for two main facts: (i) TFP growth is positively correlated with capital outflows in a sample including creditor countries; (ii) the long-run level of capital per efficient unit of labor is positively correlated with capital outflows.
    Keywords: capital flows; global imbalances; investment risk
    JEL: F36 F41 F43
    Date: 2010–05
  8. By: Alexandra Peter
    Abstract: This paper analyzes the relationship between bilateral trade flows, trade openness, and asset holdings in a three-country stochastic general equilibrium model. The threecountry model set-up enables me to disentangle and separate the effects bilateral trade flows and trade openness have on bilateral portfolio patterns. I find that both factors independently influence bilateral asset holdings. Higher bilateral trade as well as higher trade openness lead to a higher bilateral foreign asset position. Furthermore, the two factors show an interaction effect, where increasing trade openness diminishes the influence of bilateral trade flows on asset holdings. I provide supporting empirical evidence for these theoretical findings using a data set on the geographical composition of international portfolio holdings.
    Keywords: International Portfolio Holdings, Bilateral Trade Flows, Trade Openness
    JEL: F10 F30 F41
    Date: 2010–12
  9. By: Raouf BOUCEKKINE (Universite Catholique de Louvain and IRES-CORE, Universite de la Mediterranee and GREQAM); Patrick A. PINTUS (Universite de la Mediterranee and GREQAM-IDEP, Institut Universitaire de France)
    Abstract: We develop a simple open-economy AK model with collateral constraints that accounts for growth-reversal episodes, during which countries face abrupt changes in their growth rate that lead to either growth miracles or growth disasters. Absent commitment to investment by the borrowing country, imperfect contract enforcement leads to an informational lag such that the debt contracted upon today depends upon the past stock of capital. The no-commitment delay originates a history effect by which the richer a country has been in the past, the more it can borrow today. For (arbitrarily) small deviations from perfect contract enforcement, the history effect offsets the growth benefits from international borrowing and dampens growth, and it leads to leapfrogging in long-run levels. When large enough, the history effect originates growth reversals and we connect the latter to leapfrogging. Finally, we argue that the model accords with the reported evidence on growth disasters and growth accelerations. We also provide examples showing that leapfrogging and growth reversals may coexist, so that currently poor but fastgrowing countries experiencing sharp growth reversals may end up, in the long-run, significantly richer than currently rich but declining countries.
    Keywords: Growth Reversals, Leapfrogging, International Borrowing, Open Economies
    JEL: F34 F43 O40
    Date: 2010–11–02
  10. By: Maria Guadalupe; Olga Kuzmina; Catherine Thomas
    Abstract: This paper uses a rich panel dataset of Spanish manufacturing firms (1990-2006) and a propensity score reweighting estimator to show that multinational firms acquire the most productive domestic firms, which, on acquisition, conduct more product and process innovation (simultaneously adopting new machines and organizational practices) and adopt foreign technologies, leading to higher productivity. We propose a model of endogenous selection and innovation in heterogeneous firms that jointly explains the observed selection process and the innovation decisions. Further, we show in the data that innovation on acquisition is associated with the increased market scale provided by the parent firm.
    JEL: D21 F23 O31
    Date: 2010–12
  11. By: Òscar Jordà; Moritz Schularick; Alan M. Taylor
    Abstract: Do external imbalances increase the risk of financial crises? In this paper, we study the experience of 14 developed countries over 140 years (1870-2008). We exploit our long-run dataset in a number of different ways. First, we apply new statistical tools to describe the temporal and spatial patterns of crises and identify five episodes of global financial instability in the past 140 years. Second, we study the macroeconomic dynamics before crises and show that credit growth tends to be elevated and natural interest rates depressed in the run-up to global financial crises. Third, we show that recessions associated with crises lead to deeper recessions and stronger turnarounds in imbalances than during normal recessions. Finally, we ask if external imbalances help predict financial crises. Our overall result is that credit growth emerges as the single best predictor of financial instability, but the correlation between lending booms and current account imbalances has grown much tighter in recent decades.
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2010–12
  12. By: Michel Beine (CREA, University of Luxembourg and CES-Ifo); Elisabetta Lodigiani (CREA, University of Luxembourg and Centro Studi Luca d’Agliano); Robert Vermuelen (CREA, University of Luxembourg and Maastricht University)
    Abstract: Remittances have greatly increased during recent years, becoming an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances, especially through formal channels that turn to be either less expensive or less risky. One way of doing so is to increase their financial openness, but this policy option might generate additional costs in terms of macroeconomic volatility. In this paper we investigate the link between remittance receipts and financial openness. We develop a small model and statistically test for the existence of such a relationship with a sample of 66 mostly developing countries from 1980-2005. Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of the financial openness policy. We apply a two-step method akin to two stage least squares to deal with the endogeneity of remittances and potential measurement errors. We find a strong positive statistical and economic effect of remittances on financial openness.
    Keywords: remittances, nancial openness, government policy
    JEL: E60 F24 F41 O10
    Date: 2010–11–30
  13. By: Hayakawa, Kazunobu; Kimura, Fukunari; Machikita, Tomohiro
    Abstract: Recent empirical studies which utilize plant- or establishment-level data to examine globalization's impact on productivity have discovered many causal mechanisms involved in globalization's impact on firms' productivity. Since these pathways have been broad, there have been few attempts to summarize the several and detailed mechanisms of self-selection and learning at the same time. This paper examines seven pathways so that the clear-cut consequences of the broad picture of globalization become visible. This strategy is useful for detecting missing links within and across the existing studies as well as for finding possible synergy effects among different mechanisms. Insightful policy implications may be derived from the comprehensive comparisons between the seven different pathways of globalization.
    Keywords: Firm-level data, Globalization, Productivity, International trade, Foreign investments, Developing countries, Developed countries
    JEL: F15 F23
    Date: 2010–08

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