nep-ifn New Economics Papers
on International Finance
Issue of 2011‒11‒14
eight papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. The Self-insurance Role of International Reserves and the 2008-2010 Crisis By Antonio Francisco A. Silva Jr
  2. Determinants of Financial Stress and Recovery during the Great Recession By Joshua Aizenman; Gurnain Kaur Pasricha
  3. The Effect of Episodes of Large Capital Inflows on Domestic Credit By Davide Furceri; Stéphanie Guichard; Elena Rusticelli
  4. Episodes of Large Capital Inflows and the Likelihood of Banking and Currency Crises and Sudden Stops By Davide Furceri; Stéphanie Guichard; Elena Rusticelli
  5. Exchange Rate Pass-Through to Prices: Evidence from Mexico By Carlos Capistrán; Raúl Ibarra-Ramírez; Manuel Ramos Francia
  6. Trilemma and Financial Stability Configurations in Asia By Aizenman, Joshua
  7. China's dominance hypothesis and the emergence of a tri-polar global currency system By Marcel Fratzscher; Arnaud Mehl
  8. The financial trilemma in China and a comparative analysis with India By Aizenman, Joshua; Sengupta, Rajeswari

  1. By: Antonio Francisco A. Silva Jr
    Abstract: There is no standard rule for the definition of an “optimal level” of international reserves and several assumptions underlie the rationale behind holding reserves. There are various theoretical approaches, but no standard for the evaluation of the performance of “optimal level” models, and their parameters are difficult to estimate. The literature suggests that the benefits of holding reserves are high, but the accumulation of reserves is a costly strategy. In fact, in a world of high liquidity and free capital flow, establishing an adequate level of international reserves is still a puzzle. The strategy of accumulating international reserves is evaluated here using data from the 2008-2010 crisis and it is shown that countries with higher international reserve levels had less adjustment costs between 2008 and 2010. The cost-benefit relationship of holding reserves in the 2008-2010 crisis is also discussed based on a sample with 71 countries.
    Date: 2011–11
  2. By: Joshua Aizenman; Gurnain Kaur Pasricha
    Abstract: In this paper, we explore the link between stress in the domestic financial sector and the capital flight faced by countries in the 2008-9 global crisis. Both the timing of emergence of internal financial stress in developing economies, and the size of the peak-trough declines in the stock price indices was comparable to that in high income countries, indicating that there was no decoupling, even before Lehman Brothers’ demise. Deleveraging of OECD positions seemed to dominate the patterns of capital flows during the crisis. While high income countries on average saw net capital inflows and net portfolio inflows during the crisis quarters, compared to net outflows for developing economies, the indicators of banking sector stress were higher for high income economies on average than for developing economies. Internal and external distress during crisis was closely interlinked with common underlying causes of both the severity of stress during the crisis and the recovery. External vulnerabilities were important in both phases, and higher international reserves did not insulate countries from stress.
    Keywords: Balance of payments and components; Financial markets; International topics
    JEL: F32 G15
    Date: 2011
  3. By: Davide Furceri; Stéphanie Guichard; Elena Rusticelli
    Abstract: This paper analyses the effect of capital inflow shocks on the evolution of domestic credit. Using a panel of developed and emerging economies from 1970 to 2007, it is shown that in the two years following the beginning of a capital inflow shock the credit-to-GDP ratio increases by about 2 percentage points. The effect is reversed in the medium-term with the credit-to-GDP ratio decreased by almost 4 percentage points seven years after the initial shock. The paper also finds that the effect is different depending on the type of flows characterising the episode (debt vs. portfolio equity vs. FDI), with large capital inflows that are debt-driven having the largest effect. The results of the paper also suggest that the short-term effect of capital inflow shocks on domestic credit depends on countries’ macroeconomic policy stances. In particular, it is found that this effect is lower in countries with higher real exchange rate flexibility and fiscal policy counter-cyclicality.<P>L'effet des épisodes d'entrées massives de capitaux sur le crédit intérieur<BR>Cette étude analyse l'effet des chocs d’entrées de capitaux sur l'évolution du crédit domestique. À l'aide d'un panel de pays développés et émergents de 1970 à 2007, il est montré que dans les deux années qui suivent le début d'un choc d’entrées de capitaux, le crédit rapporté au PIB augmente d'environ 2 points de pourcentage. L'effet est renversé à moyen terme, avec un rapport du crédit au PIB plus bas de près de 4 points de pourcentage, sept ans après le choc initial. Cette étude montre également que l'effet est différent selon le type de flux de capitaux qui caractérisent l'épisode (dette vs portefeuille en action vs IDE), avec un effet maximal pour les entrées dominées par la dette. Les résultats de l'étude suggèrent également que l'effet à court terme de chocs d'entrées de capitaux sur le crédit domestique dépend de l’orientation des politiques macroéconomiques des pays. En particulier, cet effet est plus faible dans les pays où la flexibilité du taux de change réel est plus élevée et la politique fiscale plus contracyclique.
    Keywords: capital inflows, credit booms, domestic credit, entrées de capitaux, crédit intérieur, flambée du crédit
    JEL: F30 F32
    Date: 2011–05–17
  4. By: Davide Furceri; Stéphanie Guichard; Elena Rusticelli
    Abstract: This paper provides an empirical investigation of the relationship between surges in capital inflows and the probability of subsequent banking, currency and balance-of-payment crises. Using a panel of developed and emerging economies from 1970 to 2007, it is shown that a large capital inflow episode increases substantially the probability of having a banking or a currency crisis in the two following years. The effect is especially large for the case of balance-of-payment crises. The paper also finds that the effect of large capital inflows is different depending on the type of flows characterising the episode. In particular, large capital inflows that are debt-driven significantly increase the probability of banking, currency and balance of payment crises, whereas if inflows are driven by equity portfolio investment or FDI there is a negligible effect. This means that structural reforms that modify the composition of capital flows towards a lower share of debt are likely to reduce the financial vulnerabilities to large capital inflows. At the same time, however, structural reforms may also increase the overall size of capital flows.<P>Épisodes d'entrées massive de capitaux et risqué de crises bancaires et de changes et d'arrêt brutal du financement extérieur<BR>Ce document presente une etude empirique de la relation entre les fortes entrees de capitaux et la probabilite de crises bancaires, financiere ou de balance des paiements ulterieures. Les resultats obtenus sur un panel d'economies developpees et emergentes de 1970 a 2007 suggerent que les episodes de fortes entrees de capitaux ou ¡ìmannes¡í augmentent fortement la probabilite d'avoir une crise bancaire ou une crise de change dans les deux annees suivantes. L'effet est particulierement grand pour les crises de balance des paiements. Le document montre egalement que l'effet des mannes de capitaux est different selon le type de flux de capitaux qui les caracterisent. En particulier les mannes de dette augmentent de maniere tres significative la probabilite de crise bancaire, de change et de balance des paiements, alors que les mannes d.investissements de portefeuille en actions et de l'IDE ont un effet negligeable. Cela signifie que les reformes structurelles qui modifient la composition des flux de capitaux vers une plus faible part de la dette sont susceptibles de reduire la vulnerabilite financiere associee aux larges entrees de capitaux. Toutefois, les reformes structurelles risquent aussi d.augmenter le montant total the flux de capitaux.
    Keywords: capital flows, financial crisis, banking crisis, sudden stops, flux de capitaux, crise financière, crise bancaire, arrêt brutal des entrées de capitaux
    JEL: E44 E51 F1 F34
    Date: 2011–05–18
  5. By: Carlos Capistrán; Raúl Ibarra-Ramírez; Manuel Ramos Francia
    Abstract: This paper analyzes the pass-through of exchange rate to different price indexes in Mexico. The analysis is based on a vector autoregressive model (VAR) using monthly data from January 1997 to December 2010. The pass-through effects are calculated by means of accumulated impulse response functions to a recursively identified exchange rate shock. The results show that the exchange rate pass-through to import prices is complete, but it declines along the distribution chain in such a way that the impact on consumer prices is below 20 percent. Moreover, we find that the exchange rate pass-through seems to have decreased substantially from 2001 onwards, which coincides with the adoption of an inflation targeting regime by Banco de Mexico.
    Keywords: Exchange rate pass-through, import price, consumer price, distribution chain, inflation.
    JEL: E31 F31 F41
    Date: 2011–11
  6. By: Aizenman, Joshua (Asian Development Bank Institute)
    Abstract: This paper takes stock of recent research dealing with the degree to which the trilemma choices of Asian countries facilitated a smoother adjustment during the global crisis of 2008–2009, and the way the region has been coping with the adjustment to the postcrisis challenges. We point out that emerging Asia has converged to a middle ground of the trilemma configuration: limited financial integration, a degree of monetary independence, and controlled exchange rate buffered by sizable international reserves.
    Keywords: trilemma choices; financial stability; global crisis 2008–2009
    JEL: F31 F32 F33 F36
    Date: 2011–11–02
  7. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.)
    Abstract: This paper assesses whether the international monetary system is already tripolar and centred around the US dollar, the euro and the Chinese renminbi (RMB). It focuses on what we call China’s “dominance hypothesis”, i.e. whether the renminbi is already the dominant currency in Asia, exerting a large influence on exchange rate and monetary policies in the region, a direct reference to the old “German dominance hypothesis” which ascribed to the German mark a dominant role in Europe in the 1980s-1990s. Using a global factor model of exchange rates and a complementary event study, we find evidence that the RMB has become a key driver of currency movements in emerging Asia since the mid-2000s, and even more so since the global financial crisis. These results are consistent with China’s dominance hypothesis and with the view that the international monetary system is already tri-polar. However, we also find that China’s currency movements are to some extent affected by those in the rest of Asia. JEL Classification: F30, F31, F33, N20.
    Keywords: International monetary system, exchange rates, tri-polarity, China, renminbi, US dollar, euro, German dominance hypothesis.
    Date: 2011–10
  8. By: Aizenman, Joshua; Sengupta, Rajeswari
    Abstract: A key challenge facing most emerging market economies today is how to simultaneously maintain monetary independence, exchange rate stability and financial integration subject to the constraints imposed by the Trilemma, in the era of deepening globalization. In this paper we study the Trilemma choices of the two key drivers of global growth, China and India. We overview and contrast the policy choices of the two, and test their Trilemma choices and tradeoffs. China’s Trilemma configurations are unique relative to the one characterizing other emerging markets in the predominance of exchange rate stability, and in the failure of the Trilemma regression to capture any significant role for financial integration. One possible interpretation is that the segmentation of the domestic capital market in China, its array of capital controls and the large hoarding of international reserves imply that the “policy interest rate” does not reflect the stance of monetary policy. In contrast, the Trilemma configurations of India are in line with the regression results of other emerging countries, and are consistent with the predictions of the Trilemma tradeoffs. India like other emerging economies has overtime converged towards a middle ground between the three policy objectives, and has achieved comparable levels of exchange rate stability and financial integration buffered by sizeable international reserves.
    Keywords: Financial trilemma; International reserves; Foreign exchange intervention; Monetary policy; Capital account openness
    JEL: E58 F3 E52 F41
    Date: 2011–11–01

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