nep-ifn New Economics Papers
on International Finance
Issue of 2011‒11‒01
fifteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Exports, Foreign Direct Investments and Productivity: Are Services Firms Different? By Wagner, Joachim
  2. Role Reversal in Global Finance By Prasad, Eswar
  3. Financial Flows, Financial Crises, and Global Imbalances By Obstfeld, Maurice
  4. The Demand for Safe Assets in Emerging Economies and Global Imbalances: New Empirical Evidence By Rudiger Ahrend; Cyrille Schwellnus
  5. Why didn't the Global Financial Crisis hit Latin America? By Tjeerd M. Boonman; Jan P. A. M. Jacobs; Gerard H. Kuper
  6. Prospects for Monetary Cooperation in East Asia By Park, Yung Chul; Song, Chi-Young
  7. Financial protectionism: the first tests By Rose, Andrew; Wieladek, Tomasz
  8. Exchange Rate Exposure under Liquidity Constraints By Sarah Guillou; Stefano Schiavo
  9. Explosive Volatility: A Model of Financial Contagion By Nicholas G. Polson; James G. Scott
  10. Asia and Global Financial Governance By C. Randall Henning; Mohsin S. Khan
  11. Are the Markets Afraid of Kim Jong-Il? By Byung-Yeon Kim; Gerard Roland
  12. Estimating Trade and Investment Flows: Partners and Volumes By Alessandro Barattieri
  13. How Far Away is an Intangible? Services FDI and Distance By Ronald B Davies; Amélie Guillin
  14. Is foreign-bank efficiency in financial centers driven by homecountry characteristics? By Claudia Curi; Paolo Guarda; Ana Lozano-Vivas; Valentin Zelenyuk
  15. Explaining the Appreciation of the Brazilian <i>real</i> By Annabelle Mourougane

  1. By: Wagner, Joachim (Leuphana University Lüneburg)
    Abstract: This paper contributes to the literature on international firm activities and firm performance by providing the first evidence on the link of productivity and both exports and foreign direct investment (fdi) in services firms from a highly developed country. It uses unique new data from Germany - one of the leading actors on the world market for services - that merge information from regular surveys and from a one-time special purpose survey performed by the Statistical Offices. Descriptive statistics, parametric and non-parametric statistical tests and regression analyses (with and without explicitly taking differences along the conditional productivity distribution and firms with extreme values, or outliers, into account) indicate that the productivity pecking order found in numerous studies using data for firms from manufacturing industries – where the firms with the highest productivity engage in fdi while the least productive firms serve the home market only and the productivity of exporting firms is in between – does not exist among firms from services industries. In line with the theoretical model and the empirical results for software firms from India provided by Bhattacharya, Patnaik and Shah (2010) there is evidence that firms with fdi are less productive than firms that export.
    Keywords: exports, foreign direct investments, productivity, services firms
    JEL: F14 F21
    Date: 2011–10
  2. By: Prasad, Eswar (Cornell University)
    Abstract: I document that emerging markets have cast off their "original sin" – their external liabilities are no longer dominated by foreign-currency debt and have instead shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves held in advanced economy government bonds. Given the enormous and rising public debt burdens of reserve currency economies, this means that the long-term risk on emerging markets' external balance sheets is shifting to the asset side. However, emerging markets continue to look for more insurance against balance of payments crises, even as self-insurance through reserve accumulation itself becomes riskier. I propose a mechanism for global liquidity insurance that would meet emerging markets' demand for insurance with fewer domestic policy distortions while facilitating a quicker adjustment of global imbalances. I also argue that emerging markets have become less dependent on foreign finance and more resilient to capital flow volatility. The main risk that increasing financial openness poses for these economies is that capital flows exacerbate vulnerabilities arising from weak domestic policies and institutions.
    Keywords: emerging markets, international investment positions, structure of external assets and liabilities, foreign exchange reserves, global liquidity insurance
    JEL: F3 F4
    Date: 2011–10
  3. By: Obstfeld, Maurice
    Abstract: In this lecture I document the proliferation of gross international asset and liability positions and discuss some of the consequences for individual countries’ external adjustment processes and for global financial stability. In light of the rapid growth of gross global financial flows and the serious risks associated with them, one might wonder about the continuing relevance of the net financial flow measured by the current account balance. I argue that global current account imbalances remain an essential target for policy scrutiny, for financial as well as macroeconomic reasons. Nonetheless, it is critically important for policymakers to monitor as well the rapidly evolving structure of global gross assets and liabilities.
    Keywords: current account balance; financial instability; global imbalances; international asset positions; international financial flows
    JEL: F32 F34 F36
    Date: 2011–10
  4. By: Rudiger Ahrend; Cyrille Schwellnus
    Abstract: Mismatches between the supply and the demand of safe financial assets in fast-growing emerging countries have been singled out by economic theory as drivers of international capital flows and, ultimately, global current account imbalances. This paper assesses empirically the contribution of the search for safe assets to the size and composition of emerging countries’ international asset portfolios. Excess demand for safe assets in financially less-developed countries would imply that these countries hold disproportionately high shares of their total portfolios in foreign assets. Moreover, financially lessdeveloped countries would be expected to hold disproportionately high shares of their foreign portfolios in financially highly-developed countries, as ostensibly safe assets are predominantly produced by the latter. This paper finds little empirical support for these predictions. Financially less-developed countries allocate a larger proportion of their total holdings to domestic assets. Even when focusing on less-developed countries’ foreign portfolios, there is no evidence of a general bias toward the assets of financially highlydeveloped countries. Overall, asset mismatches do not appear to be significant drivers of asset allocation of financially less-developed countries.
    JEL: F2 F3 F4 G1
    Date: 2011–10–26
  5. By: Tjeerd M. Boonman; Jan P. A. M. Jacobs; Gerard H. Kuper
    Abstract: Latin America has a rich history of financial crises. However, it was relatively unharmed by the 2007-2009 Global Financial Crisis (GFC). This paper investigates why, and in particular the role of commodity prices and its institutional framework - in line with the fourth generation financial crisis model. We set up Early Warning Systems (EWS) for Argentina, Brazil and Mexico. These consist of an ordered logit model for currency crises for the period 1990-2007 with a dynamic factor model to deal with the large number of explanatory variables. We present forecasts for the period 2008-2009. <p> We find that international indicators play an important role in explaining currency crises in Mexico, while banking indicators and commodities explain the currency crisis in Argentina and Brazil. Furthermore, debt and domestic economy indicators are relevant for Argentina and Mexico. Finally, we observe that currency crises in all three countries are related to institutional indicators. For none of the countries the Early Warning System would have issued an early warning for the GFC. <P>
    Keywords: Financial crises, Early Warning Systems, Latin America, dynamic factor models, ordered logit model,
    JEL: C25 N26
    Date: 2011–10–01
  6. By: Park, Yung Chul (Asian Development Bank Institute); Song, Chi-Young (Asian Development Bank Institute)
    Abstract: The purpose of this paper is to reexamine the exchange rate policy of the Republic of Korea, and its role in promoting financial and monetary cooperation in East Asia in the wake of the 2008 global financial crisis. The Republic of Korea would not actively participate in any discussion of establishing a regional monetary and exchange rate arrangement as it is expected to maintain a weakly managed floating regime. The People’s Republic of China (PRC) has been fostering the yuan as an international currency, which will lay the groundwork for forming a yuan area among the PRC; the Association of Southeast Asian Nations (ASEAN); Hong Kong, the PRC; and Taipei,China. Japan has shown less interest in assuming a greater role in East Asia’s economic integration due to deflation, a strong yen, slow growth, and political instability. Japan would not eschew free floating. These recent developments demand a new modality of monetary cooperation among the Republic of Korea, Japan, and the PRC. Otherwise, ASEAN+3 will lose its rationale for steering regional economic integration in East Asia.
    Keywords: exchange rate policy; republic of korea; financial monetary cooperation; east asia; global financial crisis; regional economic integration
    JEL: F30 F40
    Date: 2011–10–23
  7. By: Rose, Andrew (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: We provide the first empirical tests for financial protectionism, defined as a nationalistic change in banks' lending behaviour, as the result of public intervention, which leads domestic banks either to lend less or at higher interest rates to foreigners. We use a bank-level panel data set spanning all British and foreign banks providing loans within the United Kingdom between 1997 Q3 and 2010 Q1. During this time, a number of banks were nationalised, privatised, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the 'loan mix', domestic (British) loans of a bank expressed as a fraction of its total loan activity. We also study effective short-term interset rates, though our data set here is much smaller. We examine the loan mix for both British and foreign banks, both before and after unusual public interventions such as nationalisations and public capital injections. We find strong evidence of financial protectionism. After nationalisations, foreign banks reduced the fraction of loans going to the United Kingdom by around 11 precentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalised British banks did not significantly change either their loan mix or effect interest rates. Succinctly, foreign nationalised banks seem to have engaged in financial protectionism, while British nationalised banks have not.
    Keywords: Bank; nationalisation; privatisation; crisis; loan; domestic; foreign; empirical; panel
    JEL: F36 G21
    Date: 2011–05–01
  8. By: Sarah Guillou; Stefano Schiavo
    Abstract: We develop a simple model where exporting firms are characterized by het- erogeneous productivity and may face a liquidity constraint, which in turn is affected by exchange rate changes. This setup is used to analyze exchange rate exposure, i.e. the sensitivity of profits to exchange rate changes, and to derive testable implications that we bring to the data. The key innovation of our setup is to assume that exchange rate changes can either boost or depress liquidity: this allows us to study exposure profits under different scenarios. We find that profits of more productive firms should be more sensitive to ex- change rate fluctuations. Moreover, an increase in the cost of external funds (relative to cash flow) makes profits less sensitive to exchange rate shocks for firms whose liquidity is positively affected by an appreciation of the exchange rate. We test these predictions derived from the model using a large dataset of French exporting firms. Results confirm that exposure tends to increase with productivity but in a non linear way. Furthermore, empirical results confirm that for firm whose cash flow is negatively correlated with exchange rate movements, an increase in financial costs lowers exposure.
    Keywords: export, exchange rate, exposure, financial constraints, heterogeneity, productivity
    JEL: F23 F31 G32
    Date: 2011
  9. By: Nicholas G. Polson; James G. Scott
    Abstract: This paper proposes a model of financial contagion that accounts for explosive, mutually exciting shocks to market volatility. We fit the model using country-level data during the European sovereign debt crisis, which has its roots in the period 2008--2010, and was continuing to affect global markets as of October, 2011. Our analysis shows that existing volatility models are unable to explain two key stylized features of global markets during presumptive contagion periods: shocks to aggregate market volatility can be sudden and explosive, and they are associated with specific directional biases in the cross-section of country-level returns. Our model repairs this deficit by assuming that the random shocks to volatility are heavy-tailed and correlated cross-sectionally, both with each other and with returns. We find evidence for significant contagion effects during the major EU crisis periods of May 2010 and August 2011, where contagion is defined as excess correlation in the residuals from a factor model incorporating global and regional market risk factors. Some of this excess correlation can be explained by quantifying the impact of shocks to aggregate volatility in the cross-section of expected returns---but only, it turns out, if one is extremely careful in accounting for the explosive nature of these shocks. We show that global markets have time-varying cross-sectional sensitivities to these shocks, and that high sensitivities strongly predict periods of financial crisis. Moreover, the pattern of temporal changes in correlation structure between volatility and returns is readily interpretable in terms of the major events of the periods in question.
    Date: 2011–10
  10. By: C. Randall Henning (Peterson Institute for International Economics); Mohsin S. Khan (Peterson Institute for International Economics)
    Abstract: Currently, Asia’s influence in global financial governance is not consistent with its weight in the world economy. This paper examines the role of Asia in the International Monetary Fund (IMF) and the Group of Twenty (G-20). It looks in particular at how the relationship between East Asian countries and the IMF has evolved since the Asian financial crisis of 1997-98 and outlines how Asian regional arrangements for crisis financing and economic surveillance could constructively interact with the IMF in the future. It also considers ways to enhance the effectiveness of Asian countries in the G-20 process.
    Keywords: Asia, G-20, IMF, regional financial arrangements, global governance
    JEL: F02
    Date: 2011–10
  11. By: Byung-Yeon Kim (Department of Economics, Seoul National University, Institute of Economic Research, Kyoto University); Gerard Roland (University of California, Berkeley and CEPR)
    Abstract: We perform event analysis on particular episodes of the tension in the Korean peninsula between 2000 and 2008, and investigate their effect on South Korean financial markets (stock markets, bond yield spreads and the exchange rate) given that South Korea would be the first affected by a military aggression from North Korea. Surprisingly, in nearly all cases, these events, which have often been dramatized in the world media, have no significant impact on either of these variables or only a very small one. We also find no significant impact of events on listed firms that would a priori be likely to suffer from increased tension between the two Koreas. Since financial markets contain often better predictions than expert opinions or surveys, these results strongly suggest that the North Korean threat is non credible.
    Date: 2011–10
  12. By: Alessandro Barattieri
    Abstract: I present a new stylized fact from a large sample of countries for the period 2000-2006: bilateral foreign direct investment (FDI) flows are almost never observed in the absence of bilateral trade flows. I document a similar pattern using bilateral foreign affiliate sales (FAS), aggregating them up from a large firm level dataset (ORBIS), which includes over 45,000 firms. I propose a model where heterogeneous firms can decide whether to serve foreign markets through export or FDI. I derive theory-based gravity-type equations for the aggregate bilateral trade and foreign affiliate sales (FAS) flows. I then suggest a two-stage estimation procedure structurally derived from the model. In the first stage, an ordered Probit model is used to retrieve consistent estimates of the terms needed to correct the flows equations for firms’ heterogeneity and selection into exports and FDI. In the second stage, a maximum likelihood estimator is applied to the corrected trade and FAS equations. The main results of the analysis are as follows: 1) The impact of distance, border and regional trade agreements on the amount bilateral foreign affiliate sales becomes substantially smaller after controlling for selection and firms’ heterogeneity (hence separating the impact on the extensive versus the intensive margin). 2) The same “attenuation” result is found also for the trade equations, consistently with previous literature. 3) When FAS are observed, failing to take this into account when correcting for heterogeneity and selection in the trade equations does not leads to significant differences in the estimated coefficients.
    Keywords: Trade Flows, Investment Flows, Gravity, Two-stage Estimation Procedure
    JEL: F10 F14 F21 F23
    Date: 2011
  13. By: Ronald B Davies (University College Dublin); Amélie Guillin (University College Dublin)
    Abstract: Foreign direct investment (FDI) in services has grown significantly in recent years. Evidence of spatial relationships in FDI decisions have been provided for goods man- ufacturing by utilizing physical distance-based measures of trade costs. This paper investigates spatial interactions for services FDI using several distance measures, in- cluding physical distance, genetic distance, and transport time. Across different mea- sures of distance, the traditional determinants of outbound FDI activity remain valid for services. We also find spatial interdependence for services FDI that is generally supportive of complex vertical motivations.
    Keywords: Foreign direct investment, Services, Spatial econometric techniques
    Date: 2011–09–30
  14. By: Claudia Curi; Paolo Guarda; Ana Lozano-Vivas; Valentin Zelenyuk
    Abstract: This paper investigates the effects of home country banking regulations on the performance of foreign banks in Luxembourg?s financial center. We control for the main regulatory indicators, such as capital requirements, private monitoring, official disciplinary power and restrictions on bank activities, accounting for the regulatory regime applied to foreign banks. We also control for the level of GDP in the home country and its position in the business cycle. The two-stage bootstrap method proposed by Simar and Wilson (2007) is applied to bank panel data covering 1999-2009. The analysis carries policy implications for bank regulators in both home and host countries and provides insight into the choice between establishing a branch or a subsidiary, when developing cross-border activities through financial centers.
    Keywords: Foreign bank efficiency, Home-host country characteristics, Bank regulation, Data Envelopment Analysis, Bootstrap
    JEL: G15 G21 G28 C14
    Date: 2011–10
  15. By: Annabelle Mourougane
    Abstract: This paper seeks to identify factors explaining the appreciation of the Brazilian real observed since 2003, which was temporarily interrupted only during episodes of financial turbulence. Net foreign assets and the productivity differential relative to Brazil’s main trade partners are found to be significant determinants of the real effective exchange rate in the long run. In the short term, exchange-rate developments are mostly explained by movements in net foreign assets. The production of oil is also found to explain developments in the real effective exchange rate in the long run. These results are robust to a wide range of tests. There is evidence of an over-valuation of the real in 2010, but the extent of the misalignment is hard to gauge. FEER estimations point to an overvaluation between 3-10% in 2010. Dynamic simulations of behavioural exchange-rate equations generally suggest an overvaluation of between 10-20%. However, these estimations remain subject to large uncertainties.<P>Comment expliquer l'appréciation du real Brésilien<BR>Ce papier cherche à identifier les facteurs expliquant l’appréciation du real Brésilien observé depuis 2003, qui a été temporairement interrompu uniquement durant des épisodes de turbulences financières. Les avoirs extérieurs nets et le différentiel de productivité relatifs aux principaux partenaires commerciaux du Brésil apparaissent comme des déterminants importants du taux de change effectif réel à long terme. À court terme, les évolutions des taux de change sont principalement expliquées par le mouvement des avoirs extérieurs nets. La production de pétrole explique également l'évolution du taux de change effectif réel à long terme. Ces résultats sont robustes à un large éventail de tests. Si la surévaluation du real en 2010 est évidente, l'ampleur de l'écart à l’équilibre reste difficile à mesurer. Les estimations FEER font état d'une surévaluation de 3 à 10% en 2010. Les simulations dynamiques des équations de comportement du taux de change suggèrent généralement une surévaluation de 10 à 20%. Ces estimations restent cependant soumises à de grandes incertitudes.
    Keywords: Brazil, currency, equilibrium exchange rate, FEER, BEER, Brésil, Monnaie, taux de change d’équilibre, FEER, BEER
    JEL: C10 F31
    Date: 2011–10–21

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