nep-ifn New Economics Papers
on International Finance
Issue of 2011‒01‒16
fourteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. The Threat of 'Currency Wars': a European Perspective By Zsolt Darvas; Jean Pisani-Ferry
  2. Forecasting migrant remittances during the global financial crisis By Mohapatra, Sanket; Ratha, Dilip
  3. Monetary policy implementation and uncovered interest parity: empirical evidence from Oceania By Alfred Guender; Bevan Cook
  4. Equity Prices and Equity Flows: Testing Theory of the Information-Efficiency Tradeoff By Assaf Razin; Anuk Serechetapongse
  5. Does the Kiwi fly when the Kangaroo jumps? The effect of Australian macroeconomic news on the New Zealand dollar By Andrew Coleman; Özer Karagedikli
  6. Investment promotion agencies: do they work? By Hayakawa, Kazunobu; Lee, Hyun-Hoon; Park, Donghyun
  7. A two-dimensional analysis of the impact of outward FDI on performance at home: evidence from Japanese manufacturing firms By Obashi, Ayako; Hayakawa, Kazunobu; Matsuura, Toshiyuki; Motohashi, Kazuyuki
  8. The Demand for Liquid Assets, Corporate Saving, and Global Imbalances By Bacchetta Philippe; Benhima Kenza
  9. The role of the chinese dollar peg for macroeconomic stability in China and the world economy By Gunther Schnabl
  10. Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data By Paravisini, Daniel; Rappoport, Veronica; Schnabl, Philipp; Wolfenzon, Daniel
  11. U.S. Foreign-Exchange-Market Intervention and the Early Dollar Float: 1973 – 1981 By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  12. Globalization, Governance, and the Returns to Cross-Border Acquisitions By Jesse Ellis; Sara B. Moeller; Frederik P. Schlingemann; René M. Stulz
  13. Identifying the global transmission of the 2007-09 financial crisis in a GVAR Model By Alexander Chudik; Marcel Fratzscher
  14. To err is human: rating agencies and the interwar foreign government debt crisis By Marc Flandreau; Norbert Gaillard; Frank Packer

  1. By: Zsolt Darvas; Jean Pisani-Ferry
    Abstract: The 'currency war', as it has become known, has three aspects: 1) the inflexible pegs of undervalued currencies; 2) recent attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a 'beggar-thy-neighbour' policy as long as the Fed’s policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro’s exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.
    Keywords: currency war, quantitative easing, currency intervention, international monetary system
    JEL: E52 E58 F31 F33
    Date: 2010–12–15
  2. By: Mohapatra, Sanket; Ratha, Dilip
    Abstract: The financial crisis has highlighted the need for forecasts of remittance flows in many developing countries where these flows have proved to be a lifeline to the poor people and the economy. This note describes a simple methodology for forecasting country-level remittance flows in a manner consistent with the medium-term outlook for the global economy. Remittances are assumed to depend on bilateral migration stocks and income levels in the host country and the origin country. Changes in remittance costs, shifts in remittance channels, global exchange rate movements, and unpredictable immigration controls in the migrant-destination countries pose risks to the forecasts. Much remains to be done to improve the forecast methodology, data on bilateral flows, and high-frequency monitoring of migration and remittance flows.
    Keywords: Remittances,Debt Markets,Currencies and Exchange Rates,Agriculture&Farming Systems,Emerging Markets
    Date: 2010–12–01
  3. By: Alfred Guender; Bevan Cook (Reserve Bank of New Zealand)
    Abstract: The close integration of Australian and New Zealand financial markets and the similarity of the monetary policy regimes provide the perfect backdrop for testing the empirical relevance of uncovered interest rate parity (UIP) in Oceania. We find that changes in the bilateral exchange rate have become more sensitive to the short-term interest differential over time. Most important, after the introduction of the Official Cash Rate regime in New Zealand, the responsiveness of the exchange rate has accelerated to such an extent that it is incompatible with UIP. Evidence on UIP over longer horizons is mixed with a 10-year horizon since 1990 providing the strongest support for the theory.
    JEL: F31 F36 E52
    Date: 2010–12
  4. By: Assaf Razin; Anuk Serechetapongse
    Abstract: The paper tests three hypotheses concerning foreign equity investment in the presence of liquidity risk. First, the FDI-to-FPI price differential is negatively related to liquidity risk (the "Price Discount Hypothesis"). The idea is that market participants do not know whether the FDI investor liquidates a firm because of an idiosyncratic liquidity shock, or because, as an informed investor, the firm is hit by a productivity shock. Second, the FDI-to-FPI composition of foreign equity investment skews towards FPI, if investors are expected to experience liquidity shortage in the future (the "Equity-Composition Hypothesis"). The idea is that because direct investments are more costly to liquidate, due to the price discount, the more severe is the expected liquidity shock, the smaller is the FDI-to-FPI ratio. Third, the FDI-to-FPI composition of foreign equity flows skews towards FDI, the larger are past FDI-to-FPI stocks (the "Strategic Complementarity Hypothesis"). The idea is that high liquidity need investors generate a positive information-externality for low liquidity need investors among investors who choose FDI, and further increases in the number of FDI investors comes from mainly high liquidity need investors. Such an increase reinforces the information externality, thereby lowering the FDI-to-FPI price discount, creating further incentives for investors to choose FDI. The paper brings these hypotheses to country level data consisting of a large set of developed and developing countries over the period 1970 to 2004. The evidence gives strong support to the hypotheses. To test the hypothesis, we apply also a dynamic panel model to examine the variation of FPI relative to FDI for source and host countries from 1985 to 2004. Country-wide sales of external assets are used as a proxy for liquidity problems. We estimate the determinants of liquidity problems, and then test the effect of expected liquidity problems on stock prices, the ratio of FPI to FDI and gross flows of FDI and FPI. We find strong support for the hypotheses: greater expected liquidity problems increase the price discount, have a significant positive effect on gross flows of FPI, negative effect on gross flows of FPI, and positive effect on the ratio between FPI and FDI.
    JEL: F12 H21
    Date: 2010–12
  5. By: Andrew Coleman; Özer Karagedikli (Reserve Bank of New Zealand)
    Abstract: We conduct an event study that examines how the New Zealand - US (NZ/US) and the Australia - US (AU/US) exchange rates responds to the release of Australian macroeconomic news including the CPI, GDP, trade balance, and monetary policy decisions. We use two different measures of the unanticipated component of the news announcements. First, we use the difference between the actual value of the data and a survey of market participants' expectations of that data announcement. Second, we use the immediate response of the AU/US exchange rate to the news announcement.Our study has three main conclusions: 1) We show that the effects of the macro news in one country can also transmit to another country via the non-bilateral exchange rate (probably in anticipation of future spill-over effects). 2) Combined with results that show that the AU/US exchange rate responds by very little to New Zealand news, the results suggest that the low variation in the New Zealand - Australia cross rate is because both currencies respond in a similar fashion to Australian (but not New Zealand) macroeconomic data. 3) We highlight the problems associated with the events studies in which the surprises are calculated from a market price and propose a new estimator that overcomes this problem.
    JEL: C11 C13 C53
    Date: 2010–12
  6. By: Hayakawa, Kazunobu; Lee, Hyun-Hoon; Park, Donghyun
    Abstract: In this paper, we examine the role of investment promotion agencies (IPAs) in promoting outward FDI from Japan and Korea. Looking at two home countries enables us to control for both country-pair time-invariant characteristics and host country time-varying characteristics. Our empirical results suggest that home-country IPAs tend to be more effective in promoting outward FDI in politically risky host countries. However, this finding depends on whether the home-country firm is listed or unlisted. More specifically, we find that the positive effect of home country IPAs on outward FDI in politically risky countries is limited to unlisted home- country firms, which are widely assumed to be less competitive and productive.
    Keywords: FDI, Multinational firm, Firm heterogeneity, Investment promotion, Firm behavior, Foreign investments, International business enterprises, Administrative organization
    JEL: F21 F23
    Date: 2010–12
  7. By: Obashi, Ayako; Hayakawa, Kazunobu; Matsuura, Toshiyuki; Motohashi, Kazuyuki
    Abstract: This paper empirically investigates two areas of changes in firm behavior and performance at home before and after investing abroad. The first change is dependent upon the type of foreign direct investment (FDI): horizontal FDI or vertical FDI. The second change is dependent upon the firm’s domestic activities: production activities or non-production activities. From a theoretical standpoint, the impact of outward FDIs differs not only by type, but according to the firm’s activities. By exploiting two types of firm-level data that enable us to distinguish between production and non-production activities, our paper provides a detailed picture of the intra-firm changes in behavior and performance that occur as a result of production globalization.
    Keywords: FDI, Multinational enterprises, Propensity score matching, International business enterprises, Manufacturing industries, Foreign investments, Industrial management
    JEL: F21 F23
    Date: 2010–12
  8. By: Bacchetta Philippe; Benhima Kenza
    Abstract: In the recent decade, capital outflows from emerging economies, in the form of a demand for liquid assets, have played a key role in the context of global imbalances. In this paper, we model the demand for liquid assets by firms in a dynamic open-economy macroeconomic model. We find that the implications of this model are very different from standard models, because the demand for foreign bonds is a complement to domestic investment rather than a substitute. We show that this complementarity is at work when an emerging economy is on its convergence path or when it has a higher TFP growth rate. This framework is consistent with global imbalances and with a number of stylized facts such as high corporate saving rates in high-growth, high-investment, emerging countries.
    Keywords: capital flows; global imbalances; working capital; credit constraints
    JEL: E22 F21 F41 F43
    Date: 2010–12
  9. By: Gunther Schnabl (Institute for Economic Policy, University of Leipzig)
    Abstract: During the 1997/98 Asian crisis and the 2007-2010 world financial and economic crisis, China has proved to be a stabilizer for East Asia and the world. The paper stresses the crucial role of the dollar peg for macroeconomic stability in China. The paper explores the current role of China's nominal exchange rate stabilization as stabilizing factor for China, East Asia and the world economy. Distortions originating in real exchange rate stabilization are identified and are argued to be a risk for global growth perspectives. To prevent further economic and financial turmoil the paper recommends policy coordination between China and the US. The exit from unconventional low interest rate policies in the US combined with the end of real (but not nominal) exchange rate stabilization in China is seen as necessary to stabilize longterm growth in China, East Asia and the US.
    Keywords: China, dollar peg, structural distortions, international policy coordination, global imbalances
    JEL: F15 F31 F33
    Date: 2011–01–10
  10. By: Paravisini, Daniel (Columbia GSB); Rappoport, Veronica (Columbia GSB); Schnabl, Philipp (NYU Stern); Wolfenzon, Daniel (Columbia GSB)
    Abstract: This paper presents evidence on the effect of credit supply shocks on exports. Capital flow reversals in Peru during the 2008 financial crisis induced a decline in the supply of credit by domestic banks with high share of foreign-currency denominated liabilities. We use this variation to estimate the elasticity of exports to bank credit. We use matched customs and firm-level bank credit data to control for non-credit related factors that may also affect the level of exports: we compare changes in exports of the same product and to the same destination by firms borrowing from different banks. Exports react strongly to changes in the supply of credit in the intensive margin, irrespectively of the firms' export volume. In the extensive margin, the negative credit supply shock increases the probability of exiting a product-destination export market, but does not significantly affect the number of firms entering an export market. The magnitude of the respective elasticities, as well as their heterogeneity across firm and export flow observable characteristics, are estimated.
    Date: 2010–12
  11. By: Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
    Abstract: The dollar’s depreciation during the early floating rate period, 1973 – 1981, was a symptom of the Great Inflation. In that environment, sterilized foreign exchange interventions were ineffective in halting the dollar’s decline, but showed a limited ability to smooth dollar movements. Only after the Volcker FOMC changed its monetary-policy approach and demonstrated a willingness to maintain a disinflationary stance despite severe economic weakness and high unemployment did the dollar begin a sustained appreciation. Also contributing to the ineffectiveness of the interventions was the Desk’s method of operation. The small, covert interventions, particularly prior to 1977, seemed inconsistent with an expectations channel of influence, and financing intervention with short-term borrowed funds seemed inconsistent with a portfolio-balance channel of influence. The Desk never clearly articulated an intervention transmission mechanism. The episode indicated the shortcomings of sterilized intervention and led to their cessation in April 1981.
    JEL: F3 N1 N2
    Date: 2010–12
  12. By: Jesse Ellis; Sara B. Moeller; Frederik P. Schlingemann; René M. Stulz
    Abstract: Using a sample of control cross-border acquisitions from 61 countries from 1990 to 2007, we find that acquirers from countries with better governance gain more from such acquisitions and their gains are higher when targets are from countries with worse governance. Other acquirer country characteristics are not consistently related to acquisition gains. For instance, the anti-self-dealing index of the acquirer has opposite associations with acquirer returns depending on whether the acquisition of a public firm is paid for with cash or equity. Strikingly, global effects in acquisition returns are at least as important as acquirer country effects. First, the acquirer’s industry and the year of the acquisition explain more of the stock-price reaction than the country of the acquirer. Second, for acquisitions of private firms or subsidiaries, acquirers gain more when acquisition returns are high for acquirers from other countries. We find strong evidence that better alignment of interests between insiders and minority shareholders is associated with greater acquirer returns and weaker evidence that this effect mitigates the adverse impact of poor country governance.
    JEL: G31 G32 G34
    Date: 2011–01
  13. By: Alexander Chudik (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The paper analyses and compares the role that the tightening in liquidity conditions and the collapse in risk appetite played for the global transmission of the financial crisis. Dealing with identification and the large dimensionality of the empirical exercise with a Global VAR approach, the findings highlight the diversity of the transmission process. While liquidity shocks have had a more severe impact on advanced economies, it was mainly the decline in risk appetite that affected emerging market economies. The tightening of financial conditions was a key transmission channel for advanced economies, whereas for emerging markets it was mainly the real side of the economy that suffered. Moreover, there are some striking differences also within types of economies, with Europe being more adversely affected by the fall in risk appetite than other advanced economies. JEL Classification: E44, F3, C5.
    Keywords: Liquidity, risk, financial crisis, global transmission, global VAR (GVAR), shocks, modelling, US, advanced economies, emerging market economies.
    Date: 2011–01
  14. By: Marc Flandreau; Norbert Gaillard; Frank Packer
    Abstract: During the 1930s, rating agencies took up a central role in regulatory supervision that they still have today. The proximate cause for this changeover was the economic shock of the Great Depression. Exploring the performance of rating agencies in assessing the risks of sovereign debt, an important segment of the bond market, we do not find that superior forecasting capacities can explain the agencies' growing importance.
    Keywords: sovereign credit ratings, Great Depression, financial crisis, international bond markets
    Date: 2010–12

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