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on International Finance |
|
Issue of 2011‒04‒02
seven papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Pascal Towbin; Sebastian Weber |
| Abstract: | A traditional argument in favor of flexible exchange rates is that they insulate output better from real shocks, because the exchange rate can adjust and stabilize demand for domestic goods through expenditure switching. This argument is weakened in models with high foreign currency debt and low exchange rate pass-through to import prices. The present study evaluates the empirical relevance of these two factors. We analyze the transmission of real external shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and let the responses vary with foreign currency indebtedness and import structure. We find that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high. |
| Keywords: | Currency pegs , Economic models , Exchange rate regimes , External debt , External shocks , Flexible exchange rates , Floating exchange rates , Imports , |
| Date: | 2011–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/42&r=ifn |
| By: | Cowan, Kevin; Raddatz, Claudio |
| Abstract: | The nature of the microeconomic frictions that transform sudden stops in output collapses is not only of academic interest, but also crucial for the correct design of policy responses to prevent and address these episodes and the lack of evidence on this regard is an important shortcoming. This paper uses industry-level data in a sample of 45 developed and emerging countries and a differences-in-differences methodology to provide evidence of the role of financial frictions for the consequences of sudden stops. The results show that, consistently with financial frictions being important, industries that are more dependent on external finance decline significantly more during a sudden stop, especially in less financially developed countries. The results are robust to controlling for other possible mechanisms, including labor market frictions. The paper also provides results on the role of comparative advantage during sudden stops and on the usefulness of various policy responses to attenuate the consequences of these shocks. |
| Keywords: | Debt Markets,Emerging Markets,Access to Finance,Currencies and Exchange Rates,Economic Theory&Research |
| Date: | 2011–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5605&r=ifn |
| By: | Xiaoli Chen (Shandong University); Yin-Wong Cheung (University of California, Santa Cruz and Hong Kong Institute for Monetary Research) |
| Abstract: | The paper assesses the international status of the Chinese currency renminbi (RMB) by recounting and reviewing the recent polices China instituted to promote the use of the RMB in the global market. The evidence suggests that the RMB is gaining acceptance overseas. However, compared with the size of the Chinese economy, the current scale of the use of the RMB is quite small. The path to a fully fledged international RMB will be a distant goal. |
| Keywords: | RMB Internationalization, Off-Shore RMB Market, Cross-Border Trade Settlement, Panda Bonds |
| JEL: | F02 F31 F33 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:082011&r=ifn |
| By: | Dirk Schoenmaker (Duisenberg School of Finance & VU University Amsterdam); Wolf Wagner (CentER, Tilburg University & European Banking Center, Tilburg) |
| Abstract: | This paper focuses on the stability aspects of cross-border banking. We first argue that cross-border banking brings about various benefits and costs for financial stability. Based on this, we draw conclusions for the desirability of cross-border banking in the EU, and derive implications for its optimal form. Next, we derive metrics that allow quantifying whether cross-border banking in a country (or region) takes a desirable form and apply these metrics to the EU countries. Our results suggest that the countries with the largest banking centers, UK and Germany, are well diversified. By contrast, the New Member States (NMS) are highly dependent on a few West-European banks and thus vulnerable to contagion effects. The Nordic and Baltic regions are also much interwoven without much diversification. At the system-wide level, the EU banking system is weakly diversified, with an overexposure to the US and an underexposure to Japan and China. This explains why the recent US originated financial crisis had such a large impact on European banks. |
| Keywords: | International Banking; Portfolio Diversification; Financial Stability |
| JEL: | G21 G28 |
| Date: | 2011–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110054&r=ifn |
| By: | Laura Jaramillo; Michelle Tejada |
| Abstract: | Sovereign investment grade status is often associated with lower spreads in international markets. Using a panel framework for 35 emerging markets between 1997 and 2010, thispaper finds that investment grade status reduces spreads by 36 percent, above and beyond what is implied by macroeconomic fundamentals. This compares to a 5-10 percent reduction in spreads following upgrades within the investment grade asset class, and no impact formovements within the speculative grade asset class, ceteris paribus. While global financial conditions play a central role in determining spreads, market sentiment improves with lower external public debt to GDP levels and higher domestic growth rates. |
| Keywords: | Credit risk , Economic models , Emerging markets , Investment , Sovereign debt , Time series , |
| Date: | 2011–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/44&r=ifn |
| By: | Stephanie E. Curcuru; Charles P. Thomas; Francis E. Warnock; Jon Wongswan |
| Abstract: | Counter to extant stylized facts, using newly available data on country allocations in U.S. investors' foreign equity portfolios we find that (i) U.S. investors do not exhibit returns-chasing behavior, but, consistent with partial portfolio rebalancing, tend to sell past winners; and (ii) U.S. investors increase portfolio weights on a country's equity market just prior to its strong performance, behavior inconsistent with an informational disadvantage. Over the past two decades, U.S. investors' foreign equity portfolios outperformed a value-weighted foreign benchmark by 160 basis points per year. |
| Keywords: | Investments, Foreign ; Portfolio management |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1016&r=ifn |
| By: | Stijn Claessens; Yishay Yafeh |
| Abstract: | Using newly-constructed data covering the last decade, we document that, in most of forty markets, when added to the main index, firms’ returns experience an increase in comovement with the rest of the index, reflected in higher beta and greater explanatory power of the market return. Stock turnover and analyst coverage also typically increase upon inclusion. Using various tests, we find the demand-based view of comovement (the category/habitat theories of Barberis, Shleifer and Wurgler, 2005) to provide a good explanation for many of our findings. Some results, though, suggest that information-related factors are also important in explaining the increased comovement. |
| Keywords: | Cross country analysis , Demand , International capital markets , Investment , Stock markets , Stock prices , |
| Date: | 2011–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/47&r=ifn |