nep-ifn New Economics Papers
on International Finance
Issue of 2011‒07‒02
ten papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Words vs. Deeds: What Really Matters? By Charalambos G. Tsangarides; Mahvash Saeed Qureshi; Atish R. Ghosh
  2. Composition of International Capital Flows: A Survey By Koralai Kirabaeva; Assaf Razin
  3. Challenges for the dollar as a reserve currency By Gianluca Benigno
  4. The Great Liquidity Freeze: What Does It Mean for International Banking? By Domanski, Dietrich; Turner, Philip
  5. Impact of the Global Crisis on Banking Sector Soundness in Asian Low-Income Countries By Jack Joo K. Ree
  6. Is There a Beijing Consensus on International Macroeconomic Policy By Graham Bird; Alex Mandilaras; Helen Popper
  7. Global bond risk premiums By Rebecca Hellerstein
  8. Causes of Asset Shortages in Emerging Markets By Patrick A. Imam; Jiaqian Chen
  9. Understanding Foreign Direct Investment in East Asia By Thorbecke, Willem; Salike, Nimesh
  10. On the geography of international banking: the role of third-country effects By Georgios Fotopoulos; Helen Louri

  1. By: Charalambos G. Tsangarides; Mahvash Saeed Qureshi; Atish R. Ghosh
    Abstract: This paper revisits the link between the nominal exchange rate regime and inflation, based on a sample of 145 emerging market and developing countries (EMDCs) over the period 1980-2010. We contend that, just as a de jure peg that is not backed by a de facto peg will have little value, de facto pegs that lack the corresponding de jure will likewise reap few of the low inflation benefits associated with pegging the exchange rate. To test our hypothesis, we exploit a novel dataset of both de jure and de facto exchange rate regime classifications. We find that pegged exchange rates are associated with significantly lower inflation in EMDCs than flexible exchange rates, and that this effect is much stronger for de facto pegs that are matched by de jure pegs than for those that are not. When it comes to anchoring expectations and delivering low inflation, therefore, both deeds and words matter.
    Keywords: Currency pegs , Developing countries , Economic models , Emerging markets , Exchange rate regimes , Floating exchange rates , Inflation , Monetary policy ,
    Date: 2011–05–10
  2. By: Koralai Kirabaeva (Bank of Canada); Assaf Razin (Cornell University and Hong Kong Institute for Monetary Research)
    Abstract: We survey several mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). We focus on information frictions such as adverse selection and moral hazard, and exposure to liquidity shocks, and discuss the following implications for composition of capital flows: (1) home-court information advantage; (2) panic-based capital-flow reversals; (3) information-liquidity trade-off in the presence of source and host country liquidity shocks; (4) moral hazard in international debt contracts; and (5) risk sharing role of domestic bonds in the presence of home bias in goods and equities.
    Date: 2011–05
  3. By: Gianluca Benigno
    Abstract: Gianluca Benigno examines the extent to which the financial crisis has undermined the dollar's pre-eminence.
    Keywords: reserve currency, international, USA, China
    JEL: F31 F32 F41
    Date: 2011–06
  4. By: Domanski, Dietrich (Asian Development Bank Institute); Turner, Philip (Asian Development Bank Institute)
    Abstract: In mid-September 2008, following the bankruptcy of Lehman Brothers, international interbank markets froze and interbank lending beyond very short maturities virtually evaporated. Despite massive central bank support operations and purchases of key assets, many financial markets remained impaired for a long time. Why was this funding crisis so much worse than other past major bank failures and why has it proved so hard to cure? This paper suggests that much of that answer lies in the balance sheets of international banks and their customers. It outlines the basic building blocks of liquidity management for a bank that operates in many currencies and then discusses how the massive development of foreign exchange (forex) and interest rate derivatives markets transformed banks’ strategies in this area. It explains how the pervasive interconnectedness between major banks and markets magnified contagion effects. Finally, the paper provides some recommendations for how strategic borrowing choices by international banks could make them more stable and how regulators could assist in this process.
    Keywords: banking financial stability; financial markets; international banking; international interbank markets; liquidity management
    JEL: E44 G15 G18 G24 G28
    Date: 2011–06–24
  5. By: Jack Joo K. Ree
    Abstract: The paper takes stock of the impact of the global financial crisis that began in late 2007 on banking sectors of Asian low-income countries, by exploring bank-level data provided by Bankscope. The paper examines three key channels of possible crisis spillovers: exposures to (i) valuation changes of mark-to-market financial assets, (ii) a drop in crossborder funding, and (iii) rises in NPLs prompted by international real economic linkages. The paper finds that despite relatively low financial integration, the impact of the crisis on LIC banks, particularly the largest ones, were not insignificant. Impacts were most palpable through a loan-to-crossborder funding nexus.
    Keywords: Asia , Banking sector , Credit risk , Economic models , Emerging markets , Financial crisis , Financial risk , Global Financial Crisis 2008-2009 , Low-income developing countries , Spillovers ,
    Date: 2011–05–17
  6. By: Graham Bird (University of Surrey and Claremont McKenna College); Alex Mandilaras (University of Surrey); Helen Popper (Santa Clara University)
    Abstract: Some commentators have claimed that there is a growing Beijing Consensus among emerging and developing economies concerning the merits of ChinaÕs economic policies. Within an analytical framework provided by the well known international trilemma, this paper investigates the empirical evidence concerning this claim with specific reference to the adoption of international macroeconomic policies. We document ChinaÕs high degree of exchange rate stability and monetary independence and low degree of financial openness. We then find that there are substantial differences between what China does and what is done in other emerging and developing economies. While we discover some regional and inter-temporal variations, there seems to be little or no support for the existence of a Beijing Consensus on international macroeconomic pol- icy. The proximity of ChinaÕs policies to those in the rest of the developing world may increase in the future; but this is may reflect changes in China rather than elsewhere.
    Keywords: Trilemma, China
    JEL: F3 F4 O1 O2
    Date: 2011–06
  7. By: Rebecca Hellerstein
    Abstract: This paper examines time-varying measures of term premiums across ten developed economies. It shows that a single factor accounts for most of the variation in expected excess returns over time, across the maturity spectrum, and across countries. I construct a global return forecasting factor that is a GDP-weighted average of each country’s local return forecasting factor and show that it has information not spanned by the traditional level, slope, curvature factors of the term structure, or by the local return forecasting factors. Including the global forecasting factor in the model produces estimates of spillover effects that are consistent with our conceptual understanding of these flows, both in direction and magnitude. These effects are illustrated for three episodes: the period following the Russian default in 1998, the bond conundrum period from mid-2004 to mid-2006, and the period since the onset of the global financial crisis in 2008.
    Keywords: Bonds ; Risk ; Forecasting
    Date: 2011
  8. By: Patrick A. Imam; Jiaqian Chen
    Abstract: We first illustrate that emerging markets (EMs) face a shortage of financial assets, with financial assets not growing as rapidly as domestic savings. We then estimate the asset shortage in EMs for 1995-2008. We develop a model that explains how asset shortage develop, and then econometrically estimate the causes of asset shortages. We conclude with policy implications.
    Keywords: Capital markets , Corporate sector , Demand , Economic models , Emerging markets , Financial assets , Investment , Savings , Securities regulations , Supply ,
    Date: 2011–05–16
  9. By: Thorbecke, Willem (Asian Development Bank Institute); Salike, Nimesh (Asian Development Bank Institute)
    Abstract: The authors recount East Asia’s experience with foreign direct investment (FDI). They document that, contrary to the Rybczynski theorem, capital flows in the region cause the host country’s labor-intensive industry to expand and its capital-intensive industry to decline. They also present narrative evidence that sheds light on how FDI is affected by the host’s country’s locational advantages, whether Asian FDI is footloose, and how the PRC has become the center of Factory Asia. Finally, they show that the evolution of production networks in the region can be explained partly by changes in the service cost of linking geographically separated production blocks relative to the cost saving arising from slicing up the value chain.
    Keywords: east asia; foreign direct investment; production networks
    JEL: F21 F23 O53
    Date: 2011–06–24
  10. By: Georgios Fotopoulos (University of Peloponnese and visiting scholar at the Bank of Greece); Helen Louri (Bank of Greece)
    Abstract: International banking is a complex phenomenon. Among its determinants, distance has been found to be critical. But does distance only have a simple negative direct effect? Or is the role of geography more intricate? Applying spatial analysis techniques on BIS data of bank foreign claims in 178 countries in 2006, evidence of positive spatial autocorrelation under alternative spatial weights schemes is brought to light. The geographical aspects of international banking are further explored by a spatial autoregressive gravity model. The results obtained support that the operation of a spatial lag leads to important indirect or third-country effects. Evidence of such financial spillovers is further corroborated by results of a spatial autoregressive Tobit model. Geography is more important than the effect of distance on its own would suggest. Third-country effects operate in a manner that subsequently connects countries through links beyond those immediately involved in borrowing (destination) and lending (origin) relationships. Confirming earlier results, the economic size of sending and recipient countries, cultural similarity and in-phase business cycles enhance international banking, while distance and exchange rate volatility hinder it. Also, while lower political risk has a positive role, so do higher financial and economic risks, reflecting-to some extent-some of the reasons behind the current financial crisis.
    Keywords: international banking ;financial spillovers; gravity model; spatial econometrics
    Date: 2011–03

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