nep-ifn New Economics Papers
on International Finance
Issue of 2011‒04‒23
twelve papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Market-specific and Currency-specific Risk During the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London By Shin-ichi Fukuda
  2. Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries By Juan Carlos Berganza; Carmen Broto
  3. Averting Currency Crises: The Pros and Cons of Financial Openness By Gus, Garita; Chen, Zhou
  4. Globalization, financial crisis and contagion: time-dynamic evidence from financial markets of developing countries By Simplice A, Asongu
  5. The Debate about the Revived Bretton-Woods Regime: A Survey and Extension of the Literature* By Stephen Hall; George S. Tavlas
  6. Business cycle synchronisation: disentangling trade and financial linkages By Stéphane Dées; Nico Zorell
  7. U.S. Intervention During the Bretton Woods Era: 1962-1973 By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  8. Macroprudential Regulation, Financial Stability and Capital Flows By José De Gregorio
  9. The changing international transmission of financial shocks: evidence from a classical time-varying FAVAR By Eickmeier, Sandra; Lemke, Wolfgang; Marcellino, Massimiliano
  10. Tackling the Capital Inflow Challenge By José De Gregorio
  11. Exchange Rates and Global Rebalancing By Eichengreen, Barry; Rua, Gisela
  12. Hong Kong as international banking center: present and future By Alicia Garcia Herrero

  1. By: Shin-ichi Fukuda
    Abstract: This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets.
    JEL: E44 F32 F36
    Date: 2011–04
  2. By: Juan Carlos Berganza (Banco de España); Carmen Broto (Banco de España)
    Abstract: Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of "strict IT", which imply a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with FX interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, FX interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers.
    Keywords: inflation targeting, exchange rate volatility, foreign exchange interventions, emerging economies
    JEL: E31 E42 E52 E58 F31
    Date: 2011–04
  3. By: Gus, Garita; Chen, Zhou
    Abstract: We identify the benefits and costs of financial openness in terms of currency crises based on a novel quantification of the systemic impact of currency (financial) crises. We find that systemic currency crises mainly exist regionally, and that financial openness helps diminish the probability of a currency crisis after controlling for their systemic impact. To clarify further the effect of financial openness, we decompose it into the various types of capital inflows. We find that the reduction of the probability of a currency crisis depends on the type of capital and on the region. Finally yet importantly, we find that monetary policy geared towards price stability, through a flexible inflation target that takes into account systemic impact, reduces the probability of a currency crisis.
    Keywords: Exchange market pressure; systemic risk; capital flows
    JEL: F42 E52 F41 F31 F36
    Date: 2011–04–08
  4. By: Simplice A, Asongu
    Abstract: Financial integration among economies has the benefit of improving allocative efficiency and diversifying risk. However the recent global financial crisis, considered as the worst since the Great Depression has re-ignited the fierce debate about the merits of financial globalization and its implications for growth especially in developing countries. This paper examines whether equity markets in emerging countries were vulnerable to contagion during the recent financial meltdown. Findings show: (1) with the exception of India, Asian markets were worst hit; (2) but for Peru, Venezuela and Columbia, Latin American countries were least affected; (3) Africa and Middle East emerging markets were averagely contaminated with the exception of Kenya, Morocco, Dubai, Jordan and Lebanon. As a policy implication, India’s step-wise financial liberalization approach should be emulated. Lessons from Latin American fiscal and monetary policies should be learned and/or revised.
    Keywords: Globalization; Financial crisis; Contagion; developing countries; Equity Markets
    JEL: F30 G15 G10
    Date: 2011–04–06
  5. By: Stephen Hall; George S. Tavlas
    Abstract: This paper surveys the literature dealing with the thesis put forward by Dooley, Folkerts-Landau and Garber (DFG) that the present constellation of global exchange-rate arrangements constitutes a revived Bretton-Woods regime. DFG also argue that the revived regime will be sustainable, despite its large global imbalances. While much of the literature generated by DFG’s thesis points to specific differences between the earlier regime and revived regime that render the latter unstable, we argue that an underlying similarity between the two regimes renders the revived regime unstable. Specifically, to the extent that the present system constitutes a revived Bretton-Woods system, it is vulnerable to the same set of destabilizing forces -- including asset price bubbles and global financial crises -- that marked the latter years of the earlier regime, leading to its breakdown. We extend the Markov switching model to examine the relation between global liquidity and commodity prices. We find evidence of commodity-price bubbles in both the latter stages of the earlier Bretton-Woods regime and the revived regime.
    Keywords: Bretton-Woods regime, international liquidity, price bubbles, Markov switching model
    JEL: C22 F33 N10
    Date: 2011–03
  6. By: Stéphane Dées (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Nico Zorell (University of Tübingen.)
    Abstract: Drawing on a large sample of countries, this paper explores whether closer economic ties between countries foster business cycle synchronisation and disentangles the role of the various channels, including trade and financial linkages as well as the similarity in sectoral specialisation. Overall, our results confirm that trade integration fosters business cycle synchronisation. Similar patterns of sectoral specialisation also lead to closer business cycle co-movement. By contrast, it remains difficult to find a direct relationship between bilateral financial linkages and output correlation. However, our results suggest that financial integration affects business cycle synchronisation indirectly by raising the similarity in sectoral specialisation. Through this indirect link, financial integration tends to raise business cycle comovement between countries. JEL Classification: E32, F41, E44.
    Keywords: International transmission of shocks, Financial integration, International business cycle.
    Date: 2011–04
  7. By: Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
    Abstract: By the early 1960s, outstanding U.S. dollar liabilities began to exceed the U.S. gold stock, suggesting that the United States could not completely maintain its pledge to convert dollars into gold at the official price. This raised uncertainty about the Bretton Woods parity grid, and speculation seemed to grow. In response, the Federal Reserve instituted a series of swap lines to provide central banks with cover for unwanted, but temporary accumulations of dollars and to provide foreign central banks with dollar funds to finance their own interventions. The Treasury also began intervening in the market. The operations often forestalled gold losses, but in so doing, delayed the need to solve Bretton Woods’ fundamental underlying problems. In addition, the institutional arrangements forged between the Federal Reserve and the U.S. Treasury raised important questions bearing on Federal Reserve independence.
    JEL: E0 N1
    Date: 2011–04
  8. By: José De Gregorio
    Date: 2010–09
  9. By: Eickmeier, Sandra; Lemke, Wolfgang; Marcellino, Massimiliano
    Abstract: 1971-2009. Financial shocks are defined as unexpected changes of a financial conditions index (FCI), recently developed by Hatzius et al. (2010), for the US. We use a time-varying factor-augmented VAR to model the FCI jointly with a large set of macroeconomic, financial and trade variables for nine major advanced countries. The main findings are as follows. First, positive US financial shocks have a considerable positive impact on growth in the nine countries, and vice versa for negative shocks. Second, the transmission to GDP growth in European countries has increased gradually since the 1980s, consistent with financial globalization. A more marked increase is detected in the early 1980s in the US itself, consistent with changes in the conduct of monetary policy. Third, the size of US financial shocks varies strongly over time, with the `global financial crisis shock' being very large by historical standards and explaining 30 percent of the variation in GDP growth on average over all countries in 2008-2009, compared to a little less than 10 percent over the 1971-2007 period. Finally, large collapses in house prices, exports and TFP are the main drivers of the strong worldwide propagation of US financial shocks during the crisis. --
    Keywords: international business cycles,international transmission channels,financial markets,globalization,financial conditions index,global financial crisis,timevarying FAVAR
    JEL: F1 F4 F15 C3 C5
    Date: 2011
  10. By: José De Gregorio
    Date: 2010–05
  11. By: Eichengreen, Barry (Asian Development Bank Institute); Rua, Gisela (Asian Development Bank Institute)
    Abstract: This paper considers the general equilibrium relationship between exchange rates and global imbalances. It emphasizes that the exchange rate is not a primitive but an equilibrium price determined by the policy mix. It uses extensions of the two-country Obstfeld-Rogoff model to analyze the response of imbalances and real exchange rates to shocks. Finally, it analyzes the characteristics of episodes in which chronic current account surpluses (as opposed to deficits) come to an end.
    Keywords: global imbalances; exchange rates; current account; economic rebalancing; global rebalancing
    JEL: F00 F30 F40
    Date: 2011–04–13
  12. By: Alicia Garcia Herrero
    Abstract: The banking industry is key for Hong Kong’s economy but Hong Kong is not a big international banking center, at least not when compared with other centers belonging to large economic areas, such as New York and, to a lesser extent, Tokyo. Within Asia, Hong Kong has a larger banking sector as a whole but similar if we focus on the off-shore side of it and growing faster than in Hong Kong. Furthermore, Singapore is being more active as a banking platform for international corporates while Hong Kong remains larger in terms of banking relations. In fact, Hong Kong continues to have one of the highest concentrations of large banking institutions in the world.Such international banking platform, together with the increasing local presence of Chinese banks, offers Hong Kong a unique opportunity to become a major banking center, probably the largest off-shore center in Asia. Whether Hong Kong will reap this opportunity will very much depend on how it navigates among the opportunities that China offers in is current situation of capital controls without losing its international clout. In fact, Hong Kong banking system should benefit from the business from China coming off-shore due to capital controls (including RMB settlements but also issuance of RMB-denominated bonds). However, it should also look for non-Chinese related banking business so as to ensure that it remains distinguishable from Chinas’ domestic banking system in the years to come.
    Date: 2011–01

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