|
on International Finance |
|
Issue of 2011‒09‒05
seventeen papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Marcel Fratzscher |
| Abstract: | The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks – key crisis events as well as changes to global liquidity and risk – have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors (“push” factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants (“pull” factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2010, in particular for emerging markets. |
| JEL: | F21 F30 G11 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17357&r=ifn |
| By: | Philip R. Lane; Gian Maria Milesi Ferretti |
| Abstract: | The period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world. Since the onset of the crisis, these imbalances have contracted to a significant extent. In this paper, we analyze the ongoing process of external adjustment in advanced economies and emerging markets. We find that countries whose pre-crisis current account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance. We subsequently examine the contributions of real exchange rates, domestic demand and domestic output to the adjustment process (allowing for differences across exchange rate regimes) and find that external adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Finally, we show that changes in other investment flows were the main channel of financial account adjustment, with official external assistance and ECB liquidity cushioning the exit of private capital flows for some countries. |
| JEL: | F32 F34 F41 F42 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17352&r=ifn |
| By: | Evzen Kocenda; Vit Bubak; Filip Zikes |
| Abstract: | This paper studies the dynamics of volatility transmission between Central European (CE) currencies and the EUR/USD foreign exchange using model-free estimates of daily exchange rate volatility based on intraday data. We formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates. We find evidence of statistically significant intra-regional volatility spillovers among the CE foreign exchange markets. With the exception of the Czech and, prior to the recent turbulent economic events, Polish currencies, we find no significant spillovers running from the EUR/USD to the CE foreign exchange markets. To measure the overall magnitude and evolution of volatility transmission over time, we construct a dynamic version of the Diebold-Yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty. |
| Keywords: | Foreign exchange markets; Volatility; Spillovers; Intraday data; Nonlinear dynamics; European emerging markets |
| JEL: | C5 F31 G15 |
| Date: | 2011–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-1020&r=ifn |
| By: | Mahvash S. Qureshi; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon |
| Abstract: | We examine whether macroprudential policies and capital controls can contribute to enhancing financial stability in the face of large capital inflows. We construct new indices of foreign currency (FX)-related prudential measures, domestic prudential measures, and financial-sector capital controls for 51 emerging market economies over the period 1995–2008. Our results indicate that both capital controls and FX-related prudential measures are associated with a lower proportion of FX lending in total domestic bank credit and a lower proportion of portfolio debt in total external liabilities. Other prudential policies appear to help restrain the intensity of aggregate credit booms. Experience from the global financial crisis suggests that prudential and capital control policies in place during the boom seem to have enhanced economic resilience during the bust. |
| JEL: | F21 F32 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17363&r=ifn |
| By: | Kristin J. Forbes; Francis E. Warnock |
| Abstract: | This paper analyzes the drivers of international waves in capital flows. We build on the literature on “sudden stops” and “bonanzas” to develop a new methodology for identifying episodes of extreme capital flow movements using quarterly data on gross inflows and gross outflows, differentiating activity by foreigners and domestics. We identify episodes of “surge”, “stop”, “flight”, and “retrenchment” and show how our approach yields fundamentally different results than the previous literature that used measures of net flows. Global factors, especially global risk, are the most important determinants of these episodes. Contagion, especially through trade and the bilateral exposure of banking systems, is important in determining stop and retrenchment episodes. Domestic macroeconomic characteristics are generally less important, although changes in domestic economic growth influence episodes caused by foreigners. We find little role for capital controls in reducing capital flow waves. The results help provide insights for different theoretical approaches explaining crises and capital flow volatility. |
| JEL: | F3 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17351&r=ifn |
| By: | Claudio Raddatz; Sergio L. Schmukler |
| Abstract: | This paper uses micro-level data on mutual funds from different financial centers investing in equity and bonds to study how investors and managers behave and transmit shocks across countries. The paper finds that the volatility of mutual fund investments is driven quantitatively by both the underlying investors and fund managers through (i) injections/redemptions into each fund and (ii) managerial changes in country weights and cash. Both investors and managers respond to country returns and crises and adjust their investments substantially, for example, generating large reallocations during the global crisis. Their behavior tends to be pro-cyclical, reducing their exposure to countries during bad times and increasing it when conditions improve. Managers actively change country weights over time, although there is significant short-run pass-through from returns to these weights. Consequently, capital flows from mutual funds do not seem to have a stabilizing role and expose countries in their portfolios to foreign shocks. |
| JEL: | F3 F32 F36 G1 G11 G15 G2 G23 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17358&r=ifn |
| By: | Andrew K. Rose; Mark M. Spiegel |
| Abstract: | While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness. |
| JEL: | E42 E58 F31 F33 F41 F42 G15 O24 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17359&r=ifn |
| By: | Buch, Claudia M.; Koch, Cathérine Tahmee; Koetter, Michael |
| Abstract: | The World Financial Crisis has shaken the fundamentals of international banking and triggered a downward spiral of asset prices. To prevent a further meltdown of markets, governments have intervened massively through rescues measures aimed at recapitalizing banks and through liquidity support. We use a detailed, banklevel dataset for German banks to analyze how the lending and borrowing of their foreign affiliates has responded to domestic (German) and to US crisis support schemes. We analyze how these policy interventions have spilled over into foreign markets. We identify loan supply shocks by exploiting that not all banks have received policy support and that the timing of receiving support measures has differed across banks. We find that banks covered by rescue measures of the German government have increased their foreign activities after these policy interventions, but they have not expanded relative to banks not receiving support. Banks claiming liquidity support under the Term Auction Facility (TAF) program have withdrawn from foreign markets outside the US, but they have expanded relative to affiliates of other German banks. -- |
| Keywords: | Cross-border banking,financial crisis,government support,Term Auction Facility |
| JEL: | F34 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201115&r=ifn |
| By: | Pierre-Olivier Gourinchas; Hélène Rey; Kai Truempler |
| Abstract: | This paper studies the geography of wealth transfers during the 2008 global financial crisis. We construct valuation changes on bilateral external positions in equity, direct investment and portfolio debt at the height of the crisis to map who benefited and who lost on their external exposure. We find a very diverse set of fortunes governed by the structure of countries' external portfolios. In particular, we are able to relate the gains and losses on debt portfolios to the country's exposure to ABCP conduits and the extent of dollar shortage. |
| JEL: | F3 F33 F41 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17353&r=ifn |
| By: | Chen, Qianying |
| Abstract: | This paper re-investigates the implications of monetary policy rules on changes in exchange rate, in a risk-adjusted, uncovered interest parity model with unrestricted parameters, emphasizing the importance of modeling market expectations of monetary policy. I use consensus forecasts as a proxy for market expectations. The analysis on the Deutsche mark, Canadian dollar, Japanese yen, and the British pound relative to the U.S. dollar from 1979 to 2008 shows that, through the expectations of future monetary policy, Taylor rule fundamentals are able to forecast changes in the exchange rate, even over short-term horizons of less than two years. Furthermore, the market expectation formation processes of short-term interest rates change over time and differ across countries, which contributes to the time varying relationship between exchange rates and macroeconomic fundamentals, together with the time varying currency risk premia and exchange rate forecast errors. -- |
| Keywords: | Exchange Rate,Monetary Policy,Expectation,Learning,VAR,Consensus Forecast |
| JEL: | F31 E52 D83 C32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201118&r=ifn |
| By: | Nicola Cetorelli; Linda S. Goldberg |
| Abstract: | The recent crisis highlighted the importance of globally active banks in linking markets. One channel for this linkage is through how these banks manage liquidity across their entire banking organization. We document that funds regularly flow between parent banks and their affiliates in diverse foreign markets. We use the Great Recession as an opportunity to identify the balance sheet shocks to parent banks in the United States, and then explore which foreign affiliate features are associated with those businesses being protected, for example their status as important locations in sourcing funding or as destinations for foreign investment activity. We show that distance from the parent organization lays a significant role in this allocation, where distance is bank-affiliate specific and depends on the ex ante relative importance of such locations as local funding pools and in their overall foreign investment strategies. These flows are a form of global interdependence previously unexplored in the literature on international shock transmission. |
| JEL: | F3 G15 G21 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17355&r=ifn |
| By: | Kathryn M.E. Dominguez; Yuko Hashimoto; Takatoshi Ito |
| Abstract: | This study examines whether pre-crisis international reserve accumulations, as well as exchange rate and reserve policy decisions made during the global financial crisis, can help to explain cross-country differences in post-crisis economic performance. Our approach focuses not only on the total stock of official reserves held by countries, but also on the decisions by governments to purchase or sell reserve assets during the crisis period. We introduce new data made available through the IMF Special Data Dissemination Standard (SDDS) Reserve Template, which allow us to distinguish interest income and valuation changes in the stock of official reserves from the actively managed component of reserves. We use this novel data to gauge how (and whether) reserve accumulation policies influenced the economic and financial performance of countries during and after the global crisis. Our findings support the view that higher reserve accumulations prior to the crisis are associated with higher post-crisis GDP growth. |
| JEL: | F3 F31 F32 F33 F41 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17362&r=ifn |
| By: | Shakill Hassan; Sean Smith |
| Abstract: | We analyze the returns to targeting the Australian, New Zealand, and South African currencies, through Japanese yen-funded speculation - with a particular focus on the South African rand, for which the carry trade is often seen as a source of exchange rate volatility. Targeting the rand through forward currency speculation produces returns which are as volatile, but with higher mean, and smaller probability of rare but large losses, than a buy-and-hold investment in the stock market - which is stochastically dominated in the second-order sense by the rand-targeting trade; and generates a larger return-to-volatility ratio than the Australian and New Zealand dollars - the two most common carry targets. Speculative positions and debt ‡ows driven by the carry trade cause an exchange rate process characterized by gradual appreciations punctuated by infrequent but potentially large and rapid depreciations. The consequent level of currency instability is a¤ected by whether in‡ows cause overheating, and how the central bank responds to the associated in‡ationary pressure |
| Keywords: | Currency speculation; carry trade; forward premium; skewness and crash risk; exchange rate instability; capital ‡ows |
| JEL: | F31 G15 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:235&r=ifn |
| By: | Carol Bertaut; Laurie Pounder DeMarco; Steven B. Kamin; Ralph W. Tryon |
| Abstract: | The “global saving glut” (GSG) hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. We present a more complete picture of how capital flows contributed to the crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. By adding to domestic demand for private-label ABS, substantial foreign acquisitions of these securities contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates. |
| JEL: | F3 G1 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17350&r=ifn |
| By: | Stijn Claessens; Hui Tong; Shang-Jin Wei |
| Abstract: | Using accounting data for 7722 non-financial firms in 42 countries, we examine how the 2007-2009 crisis affected firm performance and how various linkages propagated shocks across borders. We isolate and compare effects from changes in external financing conditions, domestic demand, and international trade on firms’ profits, sales and investment using both sectoral benchmarks and firm-specific sensitivities estimated prior to the crisis. We find that the crisis had a bigger negative impact on firms with greater sensitivity to demand and trade, particularly in countries more open to trade. Interestingly, financial openness appears to have made limited difference. |
| JEL: | F3 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17360&r=ifn |
| By: | Kalemli-Ozcan, Sebnem; Nikolsko-Rzhevskyy, Alex |
| Abstract: | Estimating the effect of trade on capital flows is difficult given the inherent identification problem. We use fluctuations in rainfall to capture the exogenous variation in trade between Germany, France, the U.K., and the Ottoman Empire during 1859-1913. The provisionistic policy of the Ottoman Empire--only surplus production was exported--constitutes the basis of our identification strategy. We find that one standard deviation in rainfalls from the mean leads to a 3.5 percent increase in Ottoman exports, which in turn causes a 10 percent increase in capital inflows from the three source countries. Our findings support trade theories predicting complementarity between trade and capital flows. |
| Keywords: | capital flows; default; empire; exports; FDI; rainfalls |
| JEL: | F10 F30 F40 N10 N20 N70 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8550&r=ifn |
| By: | Bergljot Barkbu; Barry Eichengreen; Ashoka Mody |
| Abstract: | We review the modern history of financial crises, providing a context for analyses of the world’s recent bout of financial instability. Along with indicators of economic performance in the subject countries, we present a comprehensive description of multilateral rescue efforts spanning the last 30 years. We show that while emergency lending has grown, reliance on debt restructuring has declined. This leads us to ask what can be done to rebalance the management of debt problems toward a better mix of emergency lending and private sector burden sharing. Building on the literature on collective action clauses, we explore the idea of sovereign cocos, contingent debt securities that automatically reduce payment obligations in the event of debt-sustainability problems. |
| JEL: | F0 F4 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17361&r=ifn |