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on International Finance |
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Issue of 2011‒07‒13
eight papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Dino Martellato (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | We investigate in this paper the skirmishes that the US dollar and the euro had from 2007 to 2011 and, in particular, the two distinct sharp falls that the single currency had in 2008 and 2010. We basically consider how impulses coming from domestic money markets impact on the USD/EUR exchange rate through the Eurocurrency market. Our findings show that the cycles in the spreads in the LIBOR rates have a bearing on the direction of change in the spot exchange rate in a way which is different from that predicted by the interest rate parity. The exposure of the value of reserve currencies to the vagaries of the outside circulation in the Eurocurrency and FX markets is only one of the many different policy implications of the current arrangement of the international monetary system. In the final part of the paper we also discuss some of those tied to the very existence of the international money market and to competition among old and emerging global currencies and financial centres. |
| Keywords: | Exchange rates, LIBOR rates, reserve currencies, financial centres. |
| JEL: | F31 F33 F36 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2011_05&r=ifn |
| By: | Martin Evans (Department of Economics, Georgetown University) |
| Abstract: | This article summarizes exchange-rate research using microstructure models. It first lays out the key features of the foreign exchange market and describes how they are incorporated into a canonical model of currency trading. The empirical implications of the model are then examined. The article also discusses how currency trading links spot rate dynamics to macroeconomic conditions, and how this link sheds light on some long-standing puzzles concerning the behavior of exchange rates. Classification-JEL Codes: |
| Keywords: | Currency Trading, Exchange Rates, Exchange Rate Puzzles, Exchange Rate Fundamentals, Foreign Exchange Market, Microstructure, Order Flow, Risk Premium |
| Date: | 2010–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~10-10-03&r=ifn |
| By: | Steven Poelhekke |
| Abstract: | This paper investigates the benefits of banks’ direct investment in foreign subsidiaries and branches for non-financial multinationals. The paper builds on the literature on international banks which has primarily focused on the implications for host countries, rather than for its international clients, and on the literature on foreign direct investment (FDI), which emphasizes significant costs of investment. Using a new detailed data set of non-stationary sector-level outward FDI, this paper finds that the volume of FDI by home market banks boosts FDI by non-financial firms from the same home market. Domestic and third-country foreign banking provide imperfect substitutes, especially in countries that are corrupt or have weak rule of law. The result rests on banks' FDI in local branches and subsidiaries rather than cross-border lending. These findings are consistent with a role for home market multinational banks in intermediating information asymmetry in opaque foreign markets. The sale of a major international bank to third-country counter parties during the recent crisis may thus result in persistently lower volumes of outward FDI from the bank's home market. |
| Keywords: | outward sector-level FDI; banks; asymmetric information; panel non-stationarity |
| JEL: | F21 G21 O16 C33 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:299&r=ifn |
| By: | Sergio Andenmatten; Felix Brill |
| Abstract: | In this paper we test whether the co-movement of sovereign CDS premia increased significantly after the Greek debt crisis started in October 2009. We perform a bivariate test for contagion that is based on an approach proposed by Forbes and Rigobon (2002). Our sample consists of daily data between October 2008 and July 2010 for 39 countries including both emerging and industrialized countries. Our results indicate that there were periods of contagion for CDS markets during the Greek debt crisis, which is in contrast to the results from Forbes and Rigobon (2002) for equity markets after the Hong Kong crash and their conclusion of "no contagion, only interdependence". Especially for European countries we would instead conclude "both contagion and interdependence". |
| Keywords: | CDS market; Contagion; Greek debt crisis; Sovereign credit |
| JEL: | G12 G15 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1104&r=ifn |
| By: | William A. Allen; Richhild Moessner |
| Abstract: | We examine the international propagation of the financial crisis of 2008, and compare it with that of the crisis of 1931. We argue that the collateral squeeze in the United States, which became intense after the failure of Lehman Brothers created doubts about the stability of other financial companies, was an important propagator in 2008. We identify some common features in the propagation of the two crises, the most important being the flight to liquidity and safety. In both crises, deposit outflows were not the only important sources of liquidity pressure on banks: in 1931, the central European acceptances of the London merchant banks were a serious problem, as, in 2008, were the liquidity commitments that commercial banks had provided to shadow banks. And in both crises, the behaviour of creditors towards debtors, and the valuation of assets by creditors, were very important. However, there was a very important difference between the two crises in the range and nature of assets that were regarded as liquid and safe. Central banks in 2008, with no gold standard constraint, could liquefy illiquid assets on a much greater scale. |
| Keywords: | financial crisis, liquidity, international monetary system, Great Depression |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:348&r=ifn |
| By: | Martin Evans and Dagfinn Rime (Department of Economics, Georgetown University) |
| Abstract: | Classification-JEL Codes: F3, F4, G1 |
| Keywords: | Exchange Rate Dynamics, Microstructure, Order Flow |
| Date: | 2010–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~10-10-04&r=ifn |
| By: | Cardone Riportella, Clara; Cazorla Papis, Leonardo |
| Abstract: | Attempts to shed light on strategies and international entry modes of financial services firms, providing a framework of the internationalisation process in one specific industry. This is based upon the analysis of four case studies of Spanish banks entering the Latin American markets at two different stages – before and after the 1990s – to see how internationalisation strategies of financial services have evolved over time. Shows that, in accordance with the perceived market risk and the commitment of resources involved, firms may opt to enter a foreign market in a gradual (lineal) process or in a more opportunistic (contingent) way. The foreign direct investment decision vis-à-vis the resources and risks involved in the operation has been evolving through time, industry and country of destination. |
| Keywords: | Banks; Financial services; Globalization; Market entry; Spain; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/11651&r=ifn |
| By: | Stefano Ugolini (Scuola Normale Superiore, Pisa) |
| Abstract: | As well as the current one, the wave of globalization culminated in 1913 was marked by increasing accumulation of foreign exchange reserves. But what did ‘reserves’ mean in the past, how were they managed, and how much relevant are the differences between then and now? This paper is the first attempt to investigate 19th-century reserve management from central banks’ perspective. Building on a significant case study (the National Bank of Belgium, i.e. the ‘inventor’ of foreign exchange policy, in the 1850s), it shows that risk management practices in the past differed considerably from nowadays. The structure of the international monetary system allowed central banks to minimize financial risk, while poor institutional design enhanced operational risk: this is in stark contrast with the present situation, in which operational risk has been minimized and financial risk has considerably increased. Yet 19th-century reserve management was apparently not conducive to major losses for central banks, while the opposite seems to have been the case in the 21st century. |
| Keywords: | Foreign exchange reserves, international monetary systems, central banking, risk management |
| JEL: | E42 E58 G11 N23 |
| Date: | 2011–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_07&r=ifn |