nep-ifn New Economics Papers
on International Finance
Issue of 2011‒06‒18
ten papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Productivity and the Internationalization of Firms – Cross-border Acquisitions versus Greenfield Investments By Matthias Keese
  2. Common factors of the exchange risk premium in emerging European markets By Byrne, Joseph P; Nagayasu, Jun
  3. Cross-border bank lending to selected SEACEN economies: an integrative report By Pontines, Victor; Siregar, Reza Yamora
  4. The Real Exchange Rate, Real Interest Rates, and the Risk Premium By Charles Engel
  5. The Political Economy of Global Financial Liberalisation in Historical Perspective By Rui P. Esteves
  6. The microeconomics of bullionism : arbitrage, smuggling and silver outflows in Spain in the early 18th century By Pilar Nogues-Marco
  7. Exchange Rate Policy in Small Rich Economies By Francis Breedon; Thórarinn G. Pétursson; Andrew K. Rose
  8. Would emerging market pension funds benefit from international diversification: investigating wealth accumulations for pension participants By Kumara, Ajantha Sisira; Pfau, Wade Donald
  9. Financial Integration at Times of Financial Instability By Jan Babecky; Lubos Komarek; Zlatuse Komarkova
  10. Causality between FDI and Financial Market Development: Evidence from Emerging Markets By Soumaré, Issouf; TCHANA TCHANA, Fulbert

  1. By: Matthias Keese
    Abstract: This paper extends the literature on the determinants of international activity at the firm level towards cross-border acquisitions and greenfield investments as different modes of FDI using a rich dataset of British firms. While multinational firms are characterized by higher productivity levels than exporters on average, the productivity ranking predicted by Helpman et al. (2004) does not hold within all types of industries and across all modes of foreign direct investment. In line with Nocke & Yeaple (2007) it matters whether multinational firms engage abroad via greenfield investments or cross-border acquisitions. Cross-border deals involve the most productive firms in sectors with a high share of intangible assets, but the least productive group of all internationally active firms in other industries.
    Keywords: Foreign entry; cross-border M&A; greenfield investment; productivity
    JEL: F23 G34 L23 D24
    Date: 2011–04
  2. By: Byrne, Joseph P; Nagayasu, Jun
    Abstract: Existing empirical evidence suggests that the Uncovered Interest Rate Parity (UIRP) condition may not hold due to an exchange risk premium. For a panel data set of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) element and a common factor using a principal components approach. We present evidence of stationary idiosyncratic and common factors. This result leads to the conclusion of a stationary risk premium for these countries, which is consistent with previous studies often documenting a stationary premium in developed countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.
    Keywords: Uncovered Interest Rate Parity; Emerging Economies; Exchange Risk Premiums; Common Factors
    JEL: F41
    Date: 2011–05
  3. By: Pontines, Victor; Siregar, Reza Yamora
    Abstract: This study seeks to address a number of rising policy concerns from the aftermath of the recent subprime crisis. Did foreign bank lending decline sharply and transmit the financial shocks from the advanced economies to the SEACEN emerging markets? Was the decline driven by the drying-up in supply of cross-border loans or more by the sharp decline in the demand for this funding? Does greater exposure of foreign banks to a host country lowered the sensitivity of its claims to shocks originating from their own economies? Do bank claims to a country affected by the aggregate changes in claims to another country? How about the stability of these flows? In short, this study aims to ascertain the various multi-faceted aspects of this international bank lending.
    Keywords: International Bank Claims; Cross-border Lending; Bank Exposure; Subprime crisis; East and Southeast Economies.
    JEL: F34 G15 C23 N25 F36
    Date: 2011–06–10
  4. By: Charles Engel
    Abstract: The well-known uncovered interest parity puzzle arises from the empirical regularity that, among developed country pairs, the high interest rate country tends to have high expected returns on its short term assets. At the same time, another strand of the literature has documented that high real interest rate countries tend to have currencies that are strong in real terms – indeed, stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two strands – one concerning short-run expected changes and the other concerning the level of the real exchange rate – have apparently contradictory implications for the relationship of the foreign exchange risk premium and interest-rate differentials. This paper documents the puzzle, and shows that existing models appear unable to account for both empirical findings. The features of a model that might reconcile the findings are discussed.
    JEL: F30 F31 G12
    Date: 2011–06
  5. By: Rui P. Esteves (Department of Economics and Brasenose College, University of Oxford,)
    Abstract: This paper is a first attempt to garner the theory and evidence on the political economy of the first wave of financial liberalisation during the nineteenth and early twentieth century, and of its demise after World War I. Not everyone gained from the process of globalisation (of trade, labour, and finance), which brought about important changes in the structure of the economy and the distribution of income in nations across the world. This paper explores how the economic incentives generated by these dislocations translated, through the political system, into choices about openness to foreign capital and financial integration. The period before World War I is remarkable by the almost absence of restrictions on cross-border capital flows, which may explain the little attention it has received in the historical literature, compared to the extensive study of trade protectionism in this period. After the War, many countries experimented with capital controls which varied in nature and intensity and were intensified during the Depression. Despite the attempt made here to reconcile these stylized facts to models of political economy, the analysis requires a better empirical foundation and some suggestions for further research are also proposed.
    Keywords: political economy, financial liberalisation, capital controls, pre-war
    JEL: F4 G18 N20
    Date: 2011–06–01
  6. By: Pilar Nogues-Marco
    Abstract: In the Early Modern period, there was a systematic flow of precious metals from the American colonies to Spain and Portugal and, from there, throughout the world. In this paper, I use newly discovered data on the black market for silver in Cadiz to reconstruct a picture of Castilian smuggling and international silver flows in the Age of Bullionism (1729-1741). The arbitrage equation shows persistent violations of the silver-point that made arbitrage systematically profitable until devaluation pegged the exchange rate to the arbitrated parity. Market structure explains the persistent violations. The Cadiz shadow price was lower than the international market price because bullionist regulations configured an oligopsonistic structure. The price gap was the reason for the Castilian silver outflows to Europe
    Keywords: Bullionism, Capital controls, Silver outflows, Silver-point mechanism, Smuggling, Oligopsony, Arbitrage
    JEL: D43 E52 L22 N13
    Date: 2011–06
  7. By: Francis Breedon; Thórarinn G. Pétursson; Andrew K. Rose
    Abstract: We look at the exchange rate policy choices and outcomes for small rich economies. Small rich economies face significant policy challenges due to proportionately greater economic volatility than larger economies. These economies usually choose some form of fixed exchange rate regime, particularly in the very small economies where the per capita cost of independent monetary policy is relatively high. When such countries do choose a free or managed floating regime, they appear to derive no benefit from those regimes; their exchange rate volatility seems to rise without any significant change in fundamental economic volatility. Thus, for these countries, floating exchange rates seem to create problems for policy makers without solving any.
    Date: 2011–06
  8. By: Kumara, Ajantha Sisira; Pfau, Wade Donald
    Abstract: In recent years, investment portfolio selection is growing in importance for many emerging market pension funds, as pension reforms replace traditional pay-as-you-go systems with advanced funding systems. Various investment regulations are applied to the funded pensions, particularly in the form of portfolio limits for equities and international assets. With a bootstrap simulation approach, this paper attempts to quantify the impacts on retirement benefits of restricting international assets from the investment portfolios of emerging market pension funds. We find that, on average, over half of the pension portfolios of emerging market countries should be in international assets in order to maximize the expected utility of moderate and conservative pension fund participants. More generally, international assets can play a significant role in the investment portfolios for workers with risk aversion varying from aggressive to conservative. With few exceptions, the entire probability distribution of wealth accumulations at retirement could be shifted higher with the inclusion of international assets.
    Keywords: Emerging Market Pension Funds; International Diversification; Bootstrapping; Monte Carlo Simulations
    JEL: G11 H55 G23
    Date: 2011–06–08
  9. By: Jan Babecky; Lubos Komarek; Zlatuse Komarkova
    Abstract: This article analyzes the phenomenon of financial integration on both the theoretical and empirical levels, focusing primarily on assessing the impacts of the current financial crisis. In the theoretical section we first look at the definition of financial integration and summarize the benefits and costs associated with this process. We go on to examine the relationship between financial integration and financial instability, emphasizing the priority role of financial innovation. The subsequent empirical section provides an analysis of the speed and level of integration of the Czech financial market and the markets of selected inflation-targeting Central European economies (Hungary and Poland) and advanced Western European economies (Sweden and the United Kingdom) with the euro area. The results for the Czech Republic reveal that a process of increasing financial integration has been going on steadily since the end of the 1990s and also that the financial crisis caused only temporary price divergence of the Czech financial market from the euro area market.
    Keywords: Beta-convergence, financial crisis, financial integration, gamma-convergence, new EU Member States, propagation of shocks, sigma-convergence.
    JEL: C23 G12 G15
    Date: 2010–12
  10. By: Soumaré, Issouf; TCHANA TCHANA, Fulbert
    Abstract: This paper studies the causal relationship between foreign direct investment (FDI) and financial market development (FMD) using panel data from emerging markets. Most studies of the relationship between FDI and FMD have focused on the role of FMD in the link between FDI and economic growth, with no deep understanding of direct causality between FDI and FMD, especially in emerging markets, where financial markets are in the development stage. We document bidirectional causality between FDI and stock market development indicators. For banking sector development indicators, the relationship is ambiguous and inconclusive. Care is therefore needed when analysing the relationship between FMD and FDI, as results may depend on whether the FMD variables used to evaluate causality are stock market or banking sector development indicators.
    Keywords: Foreign direct investment; FDI; financial market development; stock market development; banking sector development; causality
    JEL: O16 F21
    Date: 2011–03

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