nep-ifn New Economics Papers
on International Finance
Issue of 2010‒12‒18
six papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Liability dollarization and fear of floating By Nguyen, Quoc Hung
  2. The Federal Reserve, the Bank of England and the rise of the dollar as an international currency, 1914-39 By Barry Eichengreen; Marc Flandreau
  3. Why issue bonds offshore? By Susan Black; Anella Munro
  4. The Global Financial Crisis of 2007-08: Is it Unprecedented? By Michael D. Bordo; John S. Landon-Lane
  5. Tax differentials and inflow of foreign direct investments : evidence from foreign operations of U.S. multinational companies By Watanabe, Yuichi
  6. Choice of Collateral Currency By Masaaki Fujii; Akihiko Takahashi

  1. By: Nguyen, Quoc Hung
    Abstract: This paper explores the idea that fear of floating can be justified as an optimal discretionary monetary policy in a dollarized emerging economy. Specifically, I consider a small open economy in which intermediate goods importers borrow in foreign currency and face a credit constraint. In this economy, exchange rate depreciation not only worsens importers' net-worth but also increases the financing amount in domestic currency, therefore exaggerating their borrowing finance premium. Besides, because of high exchange rate pass-through into import prices, fluctuations in the exchange rate also have strong impacts on domestic prices and production. These effects, together, magnify the macroeconomic consequences of the floating exchange rate policy in response to external shocks. The paper shows that the floating exchange rate regime is dominated by the fixed exchange rate regime in the role of cushioning shocks and in welfare terms.
    Keywords: Developing countries, Foreign exchange, Exchange control, Liability Dollarization, Fear of Floating, Imported Goods
    JEL: F31
    Date: 2010–08
  2. By: Barry Eichengreen; Marc Flandreau
    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: foreign exchange reserves, network externalities, path dependency, money markets
    Date: 2010–12
  3. By: Susan Black; Anella Munro
    Abstract: This paper asks why Asia-Pacific residents issue debt in offshore markets and considers the implications for domestic debt markets. We use unit record data for bond issuance by non-government residents of Australia, Hong Kong, Korea, Japan and Singapore to link the decision to issue offshore to potential benefits. The results suggest that residents of smaller markets issue bonds offshore to arbitrage price differentials; to access foreign investors; and to issue larger, lower-rated or longer-maturity bonds. These bond characteristics tend to be correlated with offshore bond market size. The results support the notions that (i) deviations from covered interest parity are actively arbitraged by residents of minor currency areas, as well as by internationally active borrowers, as established in the literature; and (ii) issuers benefit from the liquidity and diversification of larger "complete" offshore markets. Against the potential benefits to borrowers, we consider the risks for both borrowers and the domestic market, and lessons from the ongoing financial crisis such as the benefits of funding diversification.
    Keywords: offshore bonds, interest rate parity, local currency debt
    Date: 2010–12
  4. By: Michael D. Bordo; John S. Landon-Lane
    Abstract: This paper compares the recent global crisis and recession to earlier international financial crises and recessions. Based on existing chronologies of banking, currency and debt crises we identify clusters of crises. We use an identification of extreme events and a weighting scheme based on real GDP relative to the U.S. to identify global financial crises since 1880. For banking crises we identify five global ones since 1880: 1890-91, 1907-08, 1913-14, 1931-32, 2007-2008. In terms of global incidence the recent crisis is fourth in ranking and comparable to 1907-08. We also calculate output losses during the recessions associated with global financial crises and again the recent crisis is similar in severity to 1907-08 and is fourth in ranking. On both dimensions the recent crisis is a pale shadow of the Great depression. The relatively mild experience of the recent crisis may reflect institutional and policy learning.
    JEL: E30 N20
    Date: 2010–12
  5. By: Watanabe, Yuichi
    Abstract: This paper concerns the measurement of the impact of tax differentials across countries on inflow of Foreign Direct Investment (FDI) by using comprehensive data on the foreign operations of U.S. multinational corporations that has been collected by the Bureau of Economic Analysis (BEA), the U.S. Department of Commerce. In particular, this research focuses on examining: (1) how responsive FDI locations are to tax differentials across countries, (2) how different the tax effect on FDI inflow is between developed and developing countries, and (3) whether investment location decisions have become more or less sensitive to tax differences between countries over time ranging from the late 1990s to the early 2000s. Estimation results suggest that high rates of corporate income taxation are associated with reduced foreign assets of U.S. multinational firms in all industries by decreasing the return to foreign asset investment. Further, foreign assets of U.S. multinationals in all industries have become more responsive to non-income tax differentials across countries than to income tax differences from 1999 to 2004. Empirical estimates also indicate that foreign investment by American firms is associated with higher tax sensitivity more in developed countries than in those that are developing.
    Keywords: Developing countries, United States, Foreign investments, International business enterprises, Taxation, Tax differentials, FDI inflow, Developed/Developing countries, Income/Non-income taxation, Developed countries
    JEL: F21 F23 H25
    Date: 2010–12
  6. By: Masaaki Fujii (Graduate School of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: Collateral has been used for a long time in the cash market and we have also experienced significant increase of its use as an important credit risk mitigation tool in the derivatives market for this decade. Despite its long history in the financial market, its importance for funding has been recognized relatively recently following the explosion of basis spreads in the crisis. This paper has demonstrated the impact of collateralization on derivatives pricing through its funding effects based on the actual data of swap markets. It has also shown the importance of the hchoiceh of collateral currency. In particular, when a contract allows multiple currencies as eligible collateral as well as its free replacement, the paper has found that the embedded hcheapest-todeliverh option can be quite valuable and significantly change the fair value of a trade. The implications of these findings for risk management have been also discussed.
    Date: 2010–12

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