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on International Finance |
| By: | Hayakawa, Kazunobu; Kimura, Fukunari; Lee, Hyun-Hoon |
| Abstract: | In this paper, we aim to identify the political and financial risk components that matter most for the activities of multinational corporations. Our paper is the first paper to comprehensively examine the impact of various components of not only political risk but also financial risk on inward FDI, from both long-run and short-run perspectives. Using a sample of 93 countries (including 60 developing countries) for the period 1985-2007, we find that among the political risk components, government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, religious tensions, democratic accountability, and ethnic tensions have a close association with FDI flows. In particular, socioeconomic conditions, investment profile, and external conflict appear to be the most influential components of political risk in attracting foreign investment. Among the financial risk components, only exchange rate stability yields statistically significant positive coefficients when estimated only for developing countries. In contrast, current account as a percentage of exports of goods and services, foreign debt as a percentage of GDP, net international liquidity as the number of months of import cover, and current account as a percentage of GDP yield negative coefficients in some specifications. Thus, multinationals do not seem to consider seriously the financial risk of the host country. |
| Keywords: | Developing countries, Developed countries, Foreign investments, FDI, International business enterprises, Industrial management, Country risk, Political risk, Financial risk, Institution, MNEs |
| JEL: | F21 F23 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper281&r=ifn |
| By: | Zsolt Darvas (Institute of Economics Hungarian Academy of Sciences); Jean Pisani-Ferry (Bruegel, Brussels) |
| 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: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1102&r=ifn |
| By: | Mundaca, B. Gabriela |
| Abstract: | Intervention operations in the foreign exchange market are used by the Banco Central de Reserva del Peru to manage both the level and volatility of their exchange rates. The Banco Central de Reserva del Peru provides information to the market about the specific hours of the day interventions would take place and the total amount of intervention. It consistently buys and sells on the foreign exchange market to avoid large appreciations and depreciations of the Peruvian nuevo sol against the U.S. dollar (Sol/USD), respectively. The estimates in this paper indicate that past information on interventions has moved the sol in the intended direction but only during the time the Banco Central de Reserva del Peru has announced it would be active in the foreign exchange market. The authors also find that the expectation of future interventions by the Banco Central de Reserva del Peru decreases the volatility of the sol when it intervenes to avoid an appreciation of the sol; however, the opposite occurs when the intervention takes place to defend the sol from depreciation. Indeed, the sol has been less volatile during periods when the Banco Central de Reserva del Peru has intervened than otherwise. |
| Keywords: | Debt Markets,Emerging Markets,Economic Stabilization,Currencies and Exchange Rates,Macroeconomic Management |
| Date: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5579&r=ifn |
| By: | Nicolas E. Magud E. (International Monetary Fund); Carmen M. (Peterson Institute for International Economics); Kenneth S. Rogoff (Harvard University - Department of Economics) |
| Abstract: | The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a “success” and (iv) the empirical studies lack a common methodology--furthermore these are significantly “overweighted” by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to “standardize” the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing capital controls on short-term flows. We find that there should exist country-specific characteristics for capital controls to be effective. From this simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short-term capital flows. |
| Keywords: | Capital Controls |
| JEL: | E44 E5 F3 F30 F32 F34 F41 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp11-7&r=ifn |
| By: | Hong Bum Jang (Visiting Economist, Institute for Monetary and Economic Studies, Bank of Japan/ Director-General, Bank of Korea (E-mail: jhb@bok.or.kr)) |
| Abstract: | This paper examines the current situation pertaining to trade and financial integration in East Asia from various approaches and discusses potential linkages between intra-regional trade and financial integration. This paper also offers policy suggestions based upon its analyses that take full account of the post-global crisis policy landscape. The main conclusions drawn from this study are as follows: (i) the overall degree of intra-regional trade and financial integrations in East Asia still remain insufficient, as the regionfs financial integration lags far behind its trade integration; (ii) inter-regional links appear stronger than intra-regional links in East Asian economies; and (iii) intra-regional trade and portfolio investment flows in East Asia generally show positive correlations. Developing East Asia would benefit from wider regional mechanisms with the enhancement of intra- regional trade and financial integration. Since East Asia is at a critical turning point, this paper suggests that East Asian countries strive to strengthen the regional mechanisms with smoothly functioning, integrated regional markets while effectively controlling its risks. They should focus especially on enhancing trade policy cooperation, expediting capital market development, effectively managing cross-border portfolio investments, and strengthening regional safety networks. The three major countries in the region-Japan, China, and Korea-should take the lead in facilitating the integration process. |
| Keywords: | Trade and Financial Integration, Cross-Border Investment and Settlement, Trade-Finance Linkage, Free Trade Agreements, Asian Bond Market, East Asia, Global Economic and Financial Crisis |
| JEL: | E44 F15 F42 F59 G15 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-05&r=ifn |