nep-ifn New Economics Papers
on International Finance
Issue of 2011‒04‒09
ten papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Trilemma Stability and International Macroeconomic Archetypes in Developing Economies By Helen Popper; Alex Mandilaras; Graham Bird
  2. Foreign Currency Loans - Demand or Supply Driven? By Martin Brown; Karolin Kirschenmann; Steven Ongena
  3. A Simple Test of Momentum in Foreign Exchange Markets By Andres Felipe Garcia-Suaza; Jose Eduardo Gómez
  4. How Different are FDI and FPI Flows?: Does Distance Alter the Composition of Capital Flows? By Rabin Hattari; Ramkishen S. Rajan
  5. Bretton Woods Fixed Exchange Rate System versus Floating Exchange Rate System By Geza, Paula; Giurca Vasilescu, Laura
  6. Large devaluations, foreign direct investment and exports : a speculative note By Lederman, Daniel
  7. What International Monetary System for a Fast-Changing World Economy? By Agnes Benassy-Quere; Jean Pisani-Ferry
  8. Transmission of the Financial and Sovereign Debt Crises to the EMU: Stock Prices, CDS Spreads and Exchange Rates By Theoharry Grammatikos; Robert Vermeulen
  9. FDI from the South: the Role of Institutional Distance and Natural Resources By Mariya Aleksynska; Olena Havrylchyk
  10. Effects of CEOs' Characteristics on Internationalization of Small and Medium Enterprises in Japan By TODO Yasuyuki; SATO Hitoshi

  1. By: Helen Popper (Santa Clara University); Alex Mandilaras (University of Surrey); Graham Bird (University of Surrey)
    Abstract: In this paper, we examine the stability of international macroeconomic policies of developing countries in the post-Bretton Woods period. We use the simple geometry of the classic, open-economy trilemma to construct a new, univariate measure of inter- national macroeconomic policy stability, and to characterize international macroeconomic arrangements in terms of their semblance to definitive policy archetypes; and, we use the trilemma constraint to provide a new gauge of monetary sovereignty. Using these measures, we find that the greatest international macroeconomic stability among developing economies exists where there are capital controls and limited exchange rate flexibility. The least stable policies occur in the economies with flexible exchange rates and open financial markets. We also find that official holdings of foreign exchange re- serves seem to be weakly linked to greater policy stability, and their link is further weakened where financial markets are open.
    Keywords: Trilemma, Foreign Exchange Rate Regimes, International Reserves, Financial Openness, Fear of Floating, Monetary Sovereignty
    JEL: F3 F4 O1 O2
    Date: 2011–03
  2. By: Martin Brown; Karolin Kirschenmann; Steven Ongena
    Abstract: Motivated by concerns over foreign currency exposures of banks in Emerging Europe, we examine the currency denomination of business loans made in Bulgaria during the period 2003-2007. We analyze a unique dataset including information on the requested and granted currency for more than hundred thousand loans granted by one bank to sixty thousand different firms. This data set allows us to disentangle demand-side from supply-side determinants of foreign currency loans. We find that 32% of the foreign currency loans disbursed in our sample were actually requested in local currency by the firm. Our analysis suggests that the bank lends in foreign currency, not only to less risky firms, but also when the firm requests a long-term loan and when the bank itself has more funding in euro. These results imply that foreign currency borrowing in Eastern Europe is not only driven by borrowers who try to benefit from lower interest rates but also by banks hesitant to lend longterm in local currency and eager to match the currency structure of their assets and liabilities.
    Keywords: foreign currency debt, banking
    JEL: G21 G30 F34 F37
    Date: 2011
  3. By: Andres Felipe Garcia-Suaza; Jose Eduardo Gómez
    Abstract: This study proposes a new method for testing for the presence of momentum in nominal exchange rates, using a probabilistic approach. We illustrate our methodology estimating a binary response model using information on local currency / US dollar exchange rates of eight emerging economies. After controlling for important variables affecting the behavior of exchange rates in the short-run, we show evidence of exchange rate inertia; in other words, we find that exchange rate momentum is a common feature in this group of emerging economies, and thus foreign exchange traders participating in these markets are able to make excess returns by following technical analysis strategies. We find that the presence of momentum is asymmetric, being stronger in moments of currency depreciation than of appreciation. This behavior may be associated with central bank intervention.
    Date: 2011–03–28
  4. By: Rabin Hattari (Asian Development Bank); Ramkishen S. Rajan (George Mason University, Institute of Southeast Asian Studies and Hong Kong Institute for Monetary Research)
    Abstract: The availability of bilateral capital flows between countries has given rise to a number of papers attempting to understand trends and determinants of capital flows between country pairs. Almost without exception, the papers find that the gravity model fits the data quite well. Specifically, while economic sizes of the host and source (measured by GDP, population etc) appear to positively impact bilateral flows in most cases, distance -- broadly proxying some sort of transactions and / or information frictions -- stands out as consistently hindering all types of capital flows. But does greater distance hinder both foreign portfolio investment (FPI) and foreign direct investment (FDI) flows equally? In other words, does distance change the composition of capital flows? This is the specific question that this paper focuses on, differentiating between total FDI, FDI via mergers and acquisitions (M&As) and FPI.
    Keywords: Distance, Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), Gravity, Mergers and Acquisitions (M&As)
    JEL: F21 F23
    Date: 2011–03
  5. By: Geza, Paula; Giurca Vasilescu, Laura
    Abstract: One of the most important issues of monetary policy is to find out whether the state should intervene among the exchange rates, taking into account the fact that changes in the exchange rates represent a significant transmission channel of the effects generated by the monetary policy. Taking into consideration the failure of fixed exchange rate regimes and the recent improvement of financial markets, the return in the near future to such a regime – as for example the Bretton Woods system – is probably almost impossible.
    Keywords: Fixed exchange rate; floating exchange rate; Bretton Woods system
    JEL: E42 F31
    Date: 2011–03–29
  6. By: Lederman, Daniel
    Abstract: One side-effect of the Global Financial Crisis of 2008-09 was the resurgence of a debate over exchange rates. The conventional wisdom dictates that real-exchange rate adjustments are needed in order to bring about changes in trade balances across countries. However, the literature on the effect of exchange rate fluctuations and currency under-valuations on exports is surprisingly ambiguous. This note explores for the first time the potential role of foreign direct investment as an intermediate variable in the process of trade adjustment after large real-exchange rate changes. Real-exchange rate devaluations might result in increases in foreign direct investment inflows, as investors can take advantage of changes in the foreign-currency value of domestic assets. If so, the response of exports will depend to some extent on the nature of such foreign direct investment inflows, with inflows motivated by"horizontal"foreign direct investment associated with negligible changes in export growth after devaluation. The author utilizes quarterly data on real effective exchange rates, foreign direct investment inflows and exports to explore the effects of large devaluations (defined as the largest observed quarterly real effective exchange rate devaluation) on foreign direct investment and exports from 1990 to 2010. The admittedly speculative evidence suggests that there were heterogeneous experiences regarding the timing and magnitude of subsequent changes in foreign direct investment and exports, but on average foreign direct investment inflows tended to precede export surges within two year horizons.
    Keywords: Debt Markets,Economic Theory&Research,Emerging Markets,Currencies and Exchange Rates,Foreign Direct Investment
    Date: 2011–03–01
  7. By: Agnes Benassy-Quere; Jean Pisani-Ferry
    Abstract: Though the renminbi is not yet convertible, the international monetary regime has already started to move towards a 'multipolar' system, with the dollar, the Chinese currency and the euro as its key likely pillars. This shift corresponds to the long-term evolution of the balance of economic weight in the world economy. Such an evolution may mitigate some flaws of the present (non-) system, such as the rigidity of key exchange rates, the asymmetry of balanceof- payments adjustments or what remains of the Triffin dilemma. However it may exacerbate other problems, such as short-run exchange rate volatility or the scope for ‘currency wars’, while leaving key questions unresolved, such as the response to capital flows global liquidity provision. Hence, in itself, a multipolar regime can be both the best and the worst of all regimes. Which of these alternatives will materialise depends on the degree of cooperation within a multilateral framework.
    Keywords: International monetary system; capital controls
    JEL: F33 F32
    Date: 2011–03
  8. By: Theoharry Grammatikos; Robert Vermeulen
    Abstract: This paper tests for the transmission of the 2007-2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, whereas the increase in dependence of European financials on US financials is rather limited. Second, in order to test how the sovereign debt crisis affected stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in Greek CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is not present for non-financials. Third, before the crisis euro appreciations are associated with European stock market decreases, whereas during the crisis this is reversed. Finally, the reversal in the relationship between the Eurodollar exchange rate and stock prices seems to have been triggered by Lehman’s collapse.
    Keywords: financial crisis; euro exchange rate; EMU; equity markets; sovereign debt
    JEL: F31 G15
    Date: 2011–03
  9. By: Mariya Aleksynska; Olena Havrylchyk
    Abstract: This study explores location choices for investors stemming from emerging economies (often referred to as the South), with a particular emphasis on institutions and natural resources. Relying on a novel dataset of bilateral FDI flows between 1996 and 2007, we demonstrate that FDI from the South has a more regional aspect than investment stemming from the North. Institutional distance has an asymmetric effect on FDI depending on whether investors choose countries with better or worse institutions. In the latter case, a large institutional distance between source and destination countries discourages FDI inflows, but the growing attractiveness of the primary sector outweighs this deterring effect for emerging investors. We also attest to the complementary relationship between capital flows from the North and South in developing recipient countries, which we attribute to different FDI patterns of these investors.
    Keywords: Foreign direct investment; South-South; developing countries; institutions; crowding-in; natural resources
    JEL: F21 F23
    Date: 2011–03
  10. By: TODO Yasuyuki; SATO Hitoshi
    Abstract: Recent heterogeneous-firm models of international trade suggest that productivity determines whether firms engage in export and foreign direct investment. However in practice, m Abstract any productive firms are not internationalized, whereas many unproductive firms are. This situation suggests that factors other than productivity influence internationalization. This study examines a set of potential factors -personal characteristics of the chief executive officer (CEO)- using a unique panel dataset for Japanese small and medium enterprises (SMEs). We find that SMEs are more likely to be internationalized when the CEO is more risk-tolerant, forward-looking, and internationally experienced. These factors show significant statistical relationships with SMEs' decisions to internationalize, perhaps suggesting why productive firms might not internationalize. In addition, we find that productivity has no significant relationship with the decision of exiting international markets probably because initial costs of internationalization become sunk, whereas SMEs with internationally experienced CEOs show strongly less likelihood of exit. These empirical results are consistent with theoretical predictions of our model that incorporates the uncertainty of foreign markets into the trade theory with firm heterogeneity.
    Date: 2011–03

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