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on International Finance |
| By: | Ben S. Bernanke; Carol Bertaut; Laurie Pounder DeMarco; Steven Kamin |
| Abstract: | A broad array of domestic institutional factors--including problems with the originate-to-distribute model for mortgage loans, deteriorating lending standards, deficiencies in risk management, conflicting incentives for the GSEs, and shortcomings of supervision and regulation--were the primary sources of the U.S. housing boom and bust and the associated financial crisis. In addition, the extended rise in U.S. house prices was likely also supported by long-term interest rates (including mortgage rates) that were surprisingly low, given the level of short-term rates and other macro fundamentals--a development that Greenspan (2005) dubbed a "conundrum." The "global saving glut" (GSG) hypothesis (Bernanke, 2005 and 2007) argues that increased capital inflows to the United States from countries in which desired saving greatly exceeded desired investment--including Asian emerging markets and commodity exporters--were an important reason that U.S. longer-term interest rates during this period were lower than expected. ; This essay investigates further the effects of capital inflows to the United States on U.S. longer-term interest rates; however, we look beyond the overall size of the inflows emphasized by the GSG hypothesis to examine the implications for U.S. yields of the portfolio preferences of foreign creditors. We present evidence that, in the spirit of Caballero and Krishnamurthy (2009), foreign investors during this period tended to prefer U.S. assets perceived to be safe. In particular, foreign investors--especially the GSG countries--acquired a substantial share of the new issues of U.S. Treasuries, Agency debt, and Agency-sponsored mortgage-backed securities. The downward pressure on yields exerted by inflows from the GSG countries was reinforced by the portfolio preferences of other foreign investors. We focus particularly on the case of Europe: Although Europe did not run a large current account surplus as did the GSG countries, we show that it leveraged up its international balance sheet, issuing external liabilities to finance substantial purchases of apparently safe U.S. "private-label" mortgage-backed securities and other fixed-income products. The strong demand for apparently safe assets by both domestic and foreign investors not only served to reduce yields on these assets but also provided additional incentives for the U.S. financial services industry to develop structured investment products that "transformed" risky loans into highly-rated securities. ; Our findings do not challenge the view that domestic factors, including those listed above, were the primary sources of the housing boom and bust in the United States. However, examining how changes in the pattern of international capital flows affected yields on U.S. assets helps provide a deeper understanding of the origins and dynamics of the crisis. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1014&r=ifn |
| By: | Costas Karfakis |
| Abstract: | The purpose of this study is to examine whether the portfolio balance effect, operating through the outstanding debts of US and euro area, and the signaling effect of sterilized intervention, operating through the relative composition of official reserves of developing and emerging countries, explain the developments of the euro/dollar exchange rate. The empirical analysis reveals that both effects are statistically significant and have the correct signs. The Clark-West testing procedure indicates that the model which relates the exchange rate to official reserves and the interest rate differential outperforms the random walk model in the forecasting accuracy. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0431&r=ifn |
| By: | Yu-chin Chen (University of Washington and Hong Kong Institute for Monetary Research); Kwok Ping Tsang (Virginia Tech and Hong Kong Institute for Monetary Research) |
| Abstract: | The nominal exchange rate is both a macroeconomic variable equilibrating international markets and a financial asset that embodies expectations and prices risks associated with cross border currency holdings. Recognizing this, we adopt a joint macro-finance strategy to model the exchange rate. We incorporate into a monetary exchange rate model macroeconomic stabilization through Taylor-rule monetary policy on one hand, and on the other, market expectations and perceived risks embodied in the cross-country yield curves. Using monthly data between 1985 and 2005 for Canada, Japan, the UK and the US, we employ a state-space system to model the relative yield curves between country-pairs using the Nelson and Siegel (1987) latent factors, and combine them with monetary policy targets (output gap and inflation) into a vector autoregression (VAR) for bilateral exchange rate changes. We find strong evidence that both the financial and macro variables are important for explaining exchange rate dynamics and excess currency returns, especially for the yen and the pound rates relative to the dollar. Moreover, by decomposing the yield curves into expected future yields and bond market term premiums, we show that both expectations about future macroeconomic conditions and perceived risks are priced into the currencies. These findings provide support for the view that the nominal exchange rate is determined by both macroeconomic and financial forces. |
| Keywords: | Exchange Rate, Term Structure, Latent Factors, Term Premiums |
| JEL: | E43 F31 G12 G15 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:012011&r=ifn |
| By: | Lukas Vogel |
| Abstract: | The paper analyses China's external position in a multi-region macroeconomic model of the world economy. The model includes a portfolio structure and Forex intervention to proxy net/gross and government/non-government foreign asset positions, capital controls and exchange rate management in China. The selected set of transition and globalisation shocks replicates China's external position well, suggesting that it reflects capital exports driven by shifts in domestic saving supply, rather than shifts in foreign saving demand. The simulations also highlight the importance of effective capital controls for the viability of China's exchange rate management. Finally, the analysis suggests that enhanced flexibility of the RMB exchange rate could reduce China's net creditor position. |
| JEL: | F30 F40 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0430&r=ifn |
| By: | Felices, Guillermo (Citi); Wieladek, Tomasz (Bank of England) |
| Abstract: | This paper assesses the extent to which common factors underlie indicators of vulnerability to financial crises in emerging market economies and whether this link is changing over time. We use a Bayesian dynamic common factor model to estimate their common component in a sample of up to 41 countries including both developed as well as emerging economies. This permits us to interpret the component in common to both of them as a global factor. We introduce time-variation into the model to investigate whether indicators are decoupling from global factors over time. While decoupling can be observed in a few cases, the exposure to global factors in most countries tends to fluctuate around the mean. Broadly speaking then, the answer is no. |
| Keywords: | Financial crises; Bayesian dynamic common factor models; decoupling |
| JEL: | C11 C22 F34 |
| Date: | 2011–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0410&r=ifn |
| By: | Rui Pedro Esteves |
| Abstract: | This paper introduces a new dataset of French investments in foreign securities. This is the most detailed data available to date. The data is used to study the composition, valuation, and total return of the French portfolio of non-sovereign foreign securities on the 34 years before World War 1. Additional insights are obtained about the structure of the financial market in France. |
| Keywords: | France, pre-1914, foreign portfolio investment |
| JEL: | G11 G15 N23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:534&r=ifn |