nep-ifn New Economics Papers
on International Finance
Issue of 2011‒07‒21
eleven papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Did the Indian capital controls work as a tool of macroeconomic policy? By Patnaik, Ila; Shah, Ajay
  2. Sovereign Spreads and Contagion Risks in Asia By D. Filiz Unsal; Carlos Caceres
  3. Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis By Frankel, Jeffrey; Saravelos, George
  4. The External Impact of China's Exchange Rate Policy: Evidence from Firm Level Data By Hui Tong; Barry J. Eichengreen
  5. Global and Regional Spillovers to GCC Equity Markets By Tahsin Saadi Sedik; Oral Williams
  6. The Extrapolative Component in Exchange Rate Expectations and the Not-So-Puzzling Interest Parity: The Case of Uruguay By Gonzalo Varela
  7. Surfing the Capital Waves: A sector-level examination of surges in FDI inflows By Salvatore Dell’Erba; Dennis Reinhardt
  8. ASEAN5 Bond Market Development: Where Does it Stand? Where is it Going? By Mangal Goswami; Shanaka J. Peiris; Simon Gray; Andreas Jobst; Dulani Seneviratne; Joshua Felman; Mahmood Pradhan
  9. Developing ASEAN5 Bond Markets: What Still Needs to be Done? By Simon Gray; Ana Carvajal; Andreas Jobst; Joshua Felman
  10. Global Liquidity: Availability of Funds for Safe and Risky Assets By Akito Matsumoto
  11. International Transmission of Monetary Shocks and the Non-Neutrality of International Money By Wenli Cheng; Dingsheng Zhang

  1. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: In 2010 and 2011, there has been a fresh wave of interest in cap- ital controls. India is one of the few large countries with a complex system of capital controls, and hence offers an opportunity to assess the extent to which these help achieve goals of macroeconomic and fi- nancial policy. We find that the capital controls were associated with poor governance, were unable to sustain the erstwhile exchange rate regime, and did not support financial stability. India's experience is thus inconsistent with the revisionist view of capital controls. Macroe- conomic policy in India has moved away from the erstwhile strategies, towards greater exchange rate flexibility combined with capital ac- count liberalisation.
    Keywords: Capital controls ; Exchange rate regime ; Monetary policy ; Impossible trinity ; Financial stability
    JEL: F32 F33
    Date: 2011–04
  2. By: D. Filiz Unsal; Carlos Caceres
    Abstract: This paper explores how much of the movements in the sovereign spreads of Asian economies over the course of the global financial crisis has reflected shifts in (i) global risk aversion; (ii) country-specific risks, directly from worsening fundamentals, and indirectly from spillovers originating in other sovereigns and the uncertainty surrounding exchange rates. Earlier in the crisis, the increase in market-implied contagion led to higher Asian sovereign bond yield spreads over swaps. But, after the crisis, Asia’s sovereign spreads normalized, despite the debt crisis in the euro area, reflecting a fall in both exchange rate and spillover risks.
    Keywords: Asia , Bond markets , Bonds , Exchange rates , Financial crisis , Financial risk , Global Financial Crisis 2008-2009 , Sovereign debt ,
    Date: 2011–06–08
  3. By: Frankel, Jeffrey (Harvard University); Saravelos, George (Harvard University)
    Abstract: This paper investigates whether leading indicators can help explain the cross-country incidence of the 2008-09 financial crisis. Rather than looking for indicators with specific relevance to the current crisis, the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators. The review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and crises in the past. For the 2008-09 crisis, we use six different variables to measure crisis incidence: drops in GDP and industrial production, currency depreciation, stock market performance, reserve losses, and participation in an IMF program. We find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008-09 crisis, in line with the conclusions of the pre-2008 literature. In addition to reserves, recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis. So is the exchange rate regime. We define the period of the global financial crisis as running from late 2008 to early 2009, which probably explains why we find stronger results than earlier papers such as Obstfeld, Shambaugh and Taylor (2009, 2010) and Rose and Spiegel (2009a,b) which use annual data.
    JEL: F30
    Date: 2011–06
  4. By: Hui Tong; Barry J. Eichengreen
    Abstract: We examine the impact of renminbi revaluation on foreign firm valuations, considering two surprise announcements of changes in China’s exchange rate policy in 2005 and 2010 and employing data on some 6,000 firms in 44 economies. Stock returns rise with renminbi revaluation expectations. This reaction appears to reflect a combination of improvements in general market sentiment and specific trade effects. Expected renminbi appreciation has a positive effect on firms exporting to China but a negative impact on those providing inputs for the country’s processing exports. Stock prices rise for firms competing with China in their home market but fall for firms importing Chinese products with large imported-input content. There is also some evidence that expected renminbi appreciation reduces the valuation of financially-constrained firms, presumably because appreciation implies reduced Chinese purchases of foreign securities. The results carry over when we consider ten instances of market-perceived changes in prospective Chinese currency policy.
    Date: 2011–07–05
  5. By: Tahsin Saadi Sedik; Oral Williams
    Abstract: This paper analyzes the impact of global and regional spillovers to GCC equity markets. GCC equity markets were impacted by spillovers from U.S. equity markets despite varying degrees of foreign participation. Spillovers from regional equity markets were also important but the magnitude of the effects were on average smaller than that from mature markets. The results also illustrated episodes of contagion in particular during the recent global financial crisis. The findings suggest that given the degree of openness, and open capital accounts the financial channel is an important source through which volatility is transmitted. In this regard, GCC equity markets are not immune from global and regional financial shocks. These findings refute the notion of decoupling between the GCC equity and global equity markets.
    Keywords: Cooperation Council for the Arab States of the Gulf , Economic integration , Economic models , External shocks , Regional shocks , Spillovers , Stock markets , United States ,
    Date: 2011–06–15
  6. By: Gonzalo Varela (Department of Economics, University of Sussex)
    Abstract: This paper analyses the importance attached to the past behaviour of the exchange rate when forming expectations and tests for the uncovered interest parity hypothesis. Using interest rate dierentials for Uruguay over 1980-2010, we identify a strong and time-varying extrapolative component in exchange rate expectations. Agents attach more importance to the past behaviour of exchange rates the higher the level of in ation is. Yet agents are able to internalise policy announcements and external events that are likely to aect exchange rate fun- damentals. Further, we nd deviations from the uncovered interest parity hy- pothesis. These are lower than those usually reported for developed economies. Also, they tend to be higher for the period of low in ation and freely oating exchange rates. As long as what it takes to predict well is rather simple | i.e. look backwards, follow policy announcements, the interest rate dierential per- forms well. Once the exchange rate determination model becomes more intricate or less familiar to the agents, they tend to fail at predicting exchange rate depre- ciations. These results point to expectational failures as a likely explanation for the `uncovered interest parity puzzle'.
    Keywords: Exchange rates, Uncovered interest parity, Expectations, Emerging Economies, Bias, Puzzle
    JEL: F31 G14
    Date: 2011–02
  7. By: Salvatore Dell’Erba (Graduate Institute of International and Development Studies (IHEID)); Dennis Reinhardt (Study Center Gerzensee)
    Abstract: We examine episodes of large gross FDI inflows – surges – at the sectoral level between 1994 and 2009 for 95 emerging-market and industrial countries. We find that surges in the primary and manufacturing sectors are less cyclical and associated with lower macroeconomic volatility than surges in the business and finance sectors. The likely explanation for this result seems to be the expansion of credit associated with these flows. Turning to the determinants of surges, we find that global and contagion factors have a stronger effect in the services than the manufacturing sector; surges in financial sector FDI are particularly contagious in emerging market countries. With regard to domestic factors, we find that (i) high public debt reduces the likelihood of experiencing FDI surges in the manufacturing and trade/transport sector, that (ii) high growth pulls in FDI in the manufacturing sector and that (iii) privatization is strongly associated with FDI surges in the manufacturing and financial sector. Finally, we document a role for capital controls: they tend to increase the likelihood of FDI surges in the manufacturing, other services, and financial sector.
    Date: 2011–07
  8. By: Mangal Goswami; Shanaka J. Peiris; Simon Gray; Andreas Jobst; Dulani Seneviratne; Joshua Felman; Mahmood Pradhan
    Abstract: Since the Asian crisis, ASEAN5 countries have expended considerable effort in trying to develop their domestic bond markets. Yet today these markets are not much larger, relative to GDP, than they were a decade before. How can we explain this? And does this mean that domestic markets have not, in fact, developed? The paper argues that bond market growth has been held back by a sharp fall in investment rates, which has left firms with little need for bond borrowing. Even so, markets have developed in other ways, to such an extent that substantial amounts of foreign portfolio investment have begun to flow into ASEAN5 bonds. These developments have important ramifications. With the investor base growing and infrastructure investment likely to rise, ASEAN5 bond markets could expand rapidly over the next decade, holding out the prospect that the region could finally achieve "twin engine" financial systems.
    Keywords: Asia , Bond markets , Bonds , Borrowing , Corporate sector , Demand , Indonesia , Investment , Malaysia , Philippines , Singapore , Thailand ,
    Date: 2011–06–14
  9. By: Simon Gray; Ana Carvajal; Andreas Jobst; Joshua Felman
    Abstract: This paper examines a range of issues relating to bond markets in the ASEAN5 (Indonesia, Malaysia, Philippines, Singapore and Thailand) - physical infrastructure including trading, clearing and settlement; regulation, supervision and legal underpinnings; and derivatives markets - and finds that the frameworks compare well with other Emerging Markets, following a decade of reform. A number of areas where further enhancements could be made are highlighted. The paper also examines the interrelationship between central bank management of short-term interest rates and domestic currency liquidity, and development of the wider money and bond markets; and suggests some lessons from the recent crisis in developed country financial markets which may be important for the future development of the ASEAN5 markets.
    Keywords: Asia , Bond markets , Central banks , Financial crisis , Global Financial Crisis 2008-2009 , Indonesia , Liquidity management , Malaysia , Philippines , Singapore , Taxation , Thailand ,
    Date: 2011–06–09
  10. By: Akito Matsumoto
    Abstract: What is global liquidity and how does it affect an economy? The paper addresses that question by looking at liquidity from two different perspectives: global liquidity as availability of funds in safe and risky asset markets. This distinction between safe and risky asset markets is important due to market segmentation, which called for unconventional monetary policy to restore a function of risky asset markets. To analyze the effect of global liquidity, I construct proxy variables and then asses how they affect an emerging economy whose interest rate is affected by a world risk-free rate and a risk premium. Using the data from four major Latin American countries, I find that these two aspects of global liquidity have similar effects on economic performance in emerging market economies except for their effect on inflation.
    Keywords: Asset prices , Cross country analysis , Economic models , Emerging markets , External shocks , Financial risk , Investment , Latin America , Liquidity , Risk premium ,
    Date: 2011–06–10
  11. By: Wenli Cheng (Department of Economics, Monash University); Dingsheng Zhang (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: This paper investigates how monetary shocks are transmitted internationally. It shows that where a national currency is used as an international medium of exchange, the international money is non-neutral. In particular, an increase in the supply of international money leads to a transfer of real resources to the international money-issuing country from its trading partner. It also induces an expansion of the non-tradable sector in the international money-issuing country, and an expansion the tradable sector in its trading partner. The real impact of a monetary shock is greater under a fixed exchange rate system than under a flexible exchange rate system.
    Keywords: demand for money, demand for international currency, monetary policy, exchange rate, non-neutrality of money
    JEL: F11 F31 E41 E52
    Date: 2011

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