nep-ifn New Economics Papers
on International Finance
Issue of 2011‒05‒30
six papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Exchange Rates in Emerging Countries: Eleven Empirical Regularities from Latin America and East Asia By Sebastian Edwards
  2. Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries By Berganza, Juan Carlos; Broto, Carmen
  3. Financial Protectionism: the First Tests By Andrew K. Rose; Tomasz Wieladek
  4. Monetary Policy and the Exchange Rate in Colombia By Hernando Vargas Herrera
  5. International Transmission of the 2008 Crisis: Evidence from the Japanese stock market By HOSONO Kaoru; TAKIZAWA Miho; TSURU Kotaro
  6. Demographic Trends and International Capital Flows in an Integrated World By Luca Marchiori

  1. By: Sebastian Edwards
    Abstract: In this paper I discuss some of the most important lessons on exchange rate policies in emerging markets during the last 35 years. The analysis is undertaken from the perspective of both the Latin American and East Asian nations. Some of the topics addressed include: the relationship between exchange rate regimes and growth, the costs of currency crises, the merits of “dollarization,” the relation between exchange rates and macroeconomic stability, monetary independence under alternative exchange rate arrangements, and the effects of the recent global “currency wars” on exchange rates in commodity exporters.
    JEL: F0 F31 F32 F41
    Date: 2011–05
  2. By: Berganza, Juan Carlos (BOFIT); Broto, Carmen (BOFIT)
    Abstract: Emerging economies with inflation targets (IT) face a dilemma between fulflling the theoretical conditions of "strict IT", which implies a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with forex 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, forex interventions in some IT countries have been more effective in reducing 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: 2011–05–26
  3. By: Andrew K. Rose; Tomasz Wieladek
    Abstract: We provide the first empirical tests for financial protectionism, defined as a nationalistic change in banks’ lending behaviour, as the result of public intervention, which leads domestic banks either to lend less or at higher interest rates to foreigners. We use a bank-level panel data set spanning all British and foreign banks providing loans within the United Kingdom between 1997Q3 and 2010Q1. During this time, a number of banks were nationalised, privatised, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the “loan mix,” domestic (British) loans of a bank expressed as a fraction of its total loan activity. We also study effective short-term interest rates, though our data set here is much smaller. We examine the loan mix for both British and foreign banks, both before and after unusual public interventions such as nationalisations and public capital injections. We find strong evidence of financial protectionism. After nationalisations, foreign banks reduced the fraction of loans going to the UK by about eleven percentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalised British banks did not significantly change either their loan mix or effective interest rates. Succinctly, foreign nationalised banks seem to have engaged in financial protectionism, while British nationalised banks have not.
    JEL: F36 G21
    Date: 2011–05
  4. By: Hernando Vargas Herrera
    Abstract: The role of the exchange rate and the exchange rate regime in the monetary policy decision-making process in Colombia is described. The rationale for the intervention of the Central Bank in the FX market is explained and the experience in this regard is reviewed. Special attention is given to the seemingly varying effectiveness of different types of intervention and to the challenges posed by the sterilization of purchases of foreign currency. The exchange rate regime, FX regulation and FX policy determine the resilience of the economy in the face of external shocks and allow for the possibility of countercyclical monetary policy responses. A virtuous circle is created in which the volatility present in a flexible exchange rate regime improves the conditions for the functioning of a flexible exchange rate regime.
    Date: 2011–05–12
  5. By: HOSONO Kaoru; TAKIZAWA Miho; TSURU Kotaro
    Abstract: We investigate the international transmission of the credit crisis triggered by the Lehman default in September 2008 using Japan's stock market data. Using cumulative returns (CR) during the crisis, starting from the day of Lehman's default and lasting until the day prior to the news of the TARP capital injection, we find that CR is negatively correlated with the export-to-sales ratio, the loan-to-asset ratio, and the share owned by foreign investors. Once controlling for market risk, however, cumulative abnormal returns (CAR) during the same period shows a different picture. CAR is not negatively correlated with export shares or the share owned by foreign investors, which implies that neither trade channels nor portfolio-rebalancing by foreigners are unique characteristics of the crisis, but can be observed in normal downturns. We find that CAR is negatively correlated with the loan-to-asset ratio, suggesting that market participants were worried about the credit crunch. We also find that CAR is negatively correlated with the shares of exports to North America and Asia after controlling for total exports, suggesting that the composition of export destination matters. Finally, we find that the concentration of export destination is also relevant.
    Date: 2011–05
  6. By: Luca Marchiori (CREA, University of Luxembourg)
    Abstract: This paper examines the impact of projected demographic trends on international capital flows. The analysis builds upon a ten-region overlapping generations’model of the world economy where capital is mobile across regions. Results show that, over the first half of the century, emerging regions will finance the demand of capital coming from the developed world where population aging is relatively advanced. In particular, the findings suggest that in the coming decades China will be the world’s main creditor region. However, in the second half of the century, India will take over this leading position because of the predicted decline in the Chinese labor force. An additional analysis demonstrates that the economic consequences of demographic changes depend on the degree of capital market integration between regions.
    Keywords: Demographic trends; capital flows; overlapping generations; general equilibrium; multi-regional model
    JEL: J11 F21 D91 C68
    Date: 2011

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