nep-ifn New Economics Papers
on International Finance
Issue of 2011‒05‒07
three papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Gross capital flows: dynamics and crises By Fernando Broner; Tatiana Didier; Aitor Erce; Sergio L. Schmukler
  2. Dislocations in the won-dollar swap markets during the crisis of 2007-09 By Naohiko Baba; Ilhyock Shim
  3. Capital Controls: A Meta-analysis Approach By Magud, Nicolas; Reinhart, Carmen; Rogoff, Kenneth

  1. By: Fernando Broner (CREI and Universitat Pompeu Fabra); Tatiana Didier (World Bank); Aitor Erce (Banco de España); Sergio L. Schmukler (World Bank)
    Abstract: This paper analyzes the joint behavior of international capital flows by foreigners and domestic agents over the business cycle and during financial crises. We show that gross capital flows by foreigners and domestic agents are very large and volatile relative to net capital flows. Namely, when foreigners invest in a country domestic agents tend to invest abroad, and vice versa. Gross capital flows are also pro-cyclical. During expansions, foreigners tend to bring in more capital and domestic agents tend to invest more abroad. During crises, especially during severe ones, there is retrenchment, i.e. a reduction in capital inflows by foreigners and an increase in capital inflows by domestic agents. This evidence sheds light on the nature of the shocks driving international capital flows and discriminates among existing theories. Our findings are consistent with shocks that affect foreigners and domestic agents asymmetrically - e.g. sovereign risk and asymmetric information - over productivity shocks.
    Keywords: Gross capital flows, net capital flows, domestic investors, foreign investors, crises
    JEL: F21 F32
    Date: 2011–04
  2. By: Naohiko Baba; Ilhyock Shim
    Abstract: Foreign exchange (FX) derivatives markets in the Korean won are comparatively thin and vulnerable to impaired functioning. During the crisis, Korea faced dislocations in its FX swap and cross-currency swap markets, so severe that covered interest parity (CIP) between the Korean won and the US dollar was seriously violated. Using a variation of the EGARCH model, we find that global market uncertainty - as proxied by VIX, the volatility index - was the main factor explaining the movement of deviations from CIP in the three-month FX swap market during the crisis period. The credit risk of Korean banks - as proxied by their credit default swap spread - was also a significant factor explaining deviations from CIP in the three-year cross-currency swap market before the crisis, while the credit risk of US banks was significant during the crisis period. The Bank of Korea's provision of funds using its own foreign reserves was not effective in reducing deviations from CIP, but the Bank of Korea's loans of the US dollar proceeds of swaps with the US Federal Reserve were effective. This is because the loans funded by swaps with the US Federal Reserve effectively added to Korea's foreign reserves and enhanced market confidence.
    Keywords: FX swap, cross-currency swap, regime switching, EGARCH model, foreign reserves
    Date: 2011–04
  3. By: Magud, Nicolas; Reinhart, Carmen; Rogoff, Kenneth
    Abstract: In this note we summarize our recent paper, where we delved into the details of this apple-to-oranges problem with the aim of defining a minimum common ground. We begin our analysis by explicitly documenting the kinds of measures that are construed as capital controls. Along the way, we describe the more drastic differences across countries/episodes and between controls on inflows and outflows as well a more subtle differences in types of inflow or outflow controls. Given that success is measured differently across studies, we standardize (to some degree) the results across studies. Inasmuch as possible, we highlight episodes that are less well known than the heavily analyzed cases of Chile and Malaysia. Our results are based on a meta-analysis of 37 empirical studies.
    Keywords: capital controls; capital inflows; exchange rate; monetary policy
    JEL: F32 F30 E50 F33
    Date: 2011–03

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