nep-ifn New Economics Papers
on International Finance
Issue of 2012‒01‒03
seven papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Capital Inflows, Exchange Rate Flexibility, and Credit Booms By Nicolas E. Magud; Carmen M. Reinhart; Esteban R. Vesperoni
  2. Global imbalances and capital account openness: an empirical analysis By Saadaoui, Jamel
  3. The Great Intervention and Massive Money Injection: The Japanese Experience 2003-2004 By Tsutomu Watanabe; Tomoyoshi Yabu
  4. Currency intervention and the global portfolio balance effect: Japanese and Swiss lessons, 2003-2004 and 2009-2010 By Petra Gerlach, Robert N McMauley, Kazuo Ueda
  5. Effects of monetary policy on the $/£ exchange rate. Is there a 'delayed overshooting puzzle'? By Reinhold Heinlein; Hans-Martin Krolzig
  6. An equilibrium model of 'global imbalances' revisited By Körner, Finn Marten
  7. Global Imbalances, the International Crisis and the Role of the Dollar By Riccardo Fiorentini

  1. By: Nicolas E. Magud; Carmen M. Reinhart; Esteban R. Vesperoni
    Abstract: The prospects of expansionary monetary policies in the advanced countries for the foreseeable future have renewed the debate over policy options to cope with large capital inflows that are, at least partly, driven by low interest rates in the financial centers. Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, we analyze the impact of exchange rate flexibility on credit markets during periods of large capital inflows. We show that credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. Our findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks’ incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency-dependent liquidity requirements, and higher capital requirement and/or dynamic provisioning on foreign exchange loans.
    JEL: E5 F2 G15
    Date: 2011–12
  2. By: Saadaoui, Jamel
    Abstract: We investigate if capital account openness has played a major role in the evolution of global imbalances on the period 1980-2003. We estimate, with panel regression techniques, the impact of capital account openness on medium run current account imbalances for industrialized and emerging countries by using a de jure measure of capital account openness (the Chinn-Ito index of capital account openness, 2002, 2006) and a de facto measure of capital account openness (the gross foreign assets measured as the sum of foreign assets and foreign liabilities). By increasing the opportunities of overseas investments, the relative capital account openness has had positive impact on medium run current account balances of industrialized countries (because of downward pressures on domestic investment rates). Conversely, the relative capital account openness has had negative impact on medium run current account balances of emerging countries (because of upward pressures on domestic investment rates). The evolutions of domestic and foreign capital account openness have allowed increasing medium run current account balances in absolute value during this period.
    Keywords: Global Imbalances; Capital Account Openness; Chinn-Ito index
    JEL: F41 F31
    Date: 2011–11
  3. By: Tsutomu Watanabe (Faculty of Economics, The University of Tokyo); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University)
    Abstract: From the beginning of 2003 to the spring of 2004, Japan's monetary authorities conducted large-scale yen-selling/dollar-buying operations in what Taylor (2006) has labeled the "Great Intervention." This paper examines the relationship between this "Great Intervention" and the quantitative easing policy the Bank of Japan was pursuing at that time. First, we find that about 40 percent of the yen funds supplied to the market by yen-selling interventions were not offset by the BOJ's monetary operations and remained in the market for a while; this is in contrast with the preceding period, when almost 100 percent were immediately offset. Second, comparing interventions and other government payments, the extent to which the funds were offset was much smaller in the case of interventions, suggesting that the BOJ differentiated between, and responded differently to, interventions and other government payments. These two findings indicate that it is likely that the BOJ intentionally did not sterilize yen-selling interventions to achieve its policy target of maintaining the current account balances of commercial banks at the BOJ at a high level. Finally, we find that an unsterilized intervention had a greater impact on the yen-dollar rate than a sterilized one, suggesting that it matters whether an intervention is sterilized or not even when the economy is in a liquidity trap
    Date: 2011–12
  4. By: Petra Gerlach, Robert N McMauley, Kazuo Ueda (Economic and Research Institute,BIS, University of Tokyo)
    Abstract: This paper shows that the Japanese and Swiss foreign exchange interventions in 2003/04 and 2009/10 seem to have lowered long-term interest rates in a range of industrial countries, including Japan and Switzerland. It seems that this decline was triggered by the investment of the intervention funds in US and euro area bonds and that a global portfolio balance effect made this decline in interest rate spread to other markets, thus easing monetary conditions at home and abroad.
    Date: 2011–12
  5. By: Reinhold Heinlein; Hans-Martin Krolzig
    Abstract: The determination of the $/£ exchange rate is studied in a small symmetric macroeconometric model including UK-US differentials in inflation, output gap, short and long-term interest rates for the four decades since the breakdown of Bretton Woods. The key question addressed is the possible presence of a ‘delayed overshooting puzzle’ in the dynamic reaction of the exchange rate to monetary policy shocks. In contrast to the existing literature, we follow a data-driven modelling approach combining (i) a VAR based cointegration analysis with (ii) a graph-theoretic search for instantaneous causal relations and (iii) an automatic general-to-specific approach for the selection of a congruent parsimonious structural vector equilibrium correction model. We find that the long-run properties of the system are characterized by four cointegration relations and one stochastic trend, which is identified as the long-term interest rate differential and that appears to be driven by long-term inflation expectations as in the Fisher hypothesis. It cointegrates with the inflation differential to a stationary ‘real’ long-term rate differential and also drives the exchange rate. The short-run dynamics are characterized by a direct link from the short-term to the long-term interest rate differential. Jumps in the exchange rate after short-term interest rate variations are only significant at 10%. Overall, we find strong evidence for delayed overshooting and violations of UIP in response to monetary policy shocks.
    Keywords: Exchange Rates; Monetary Policy; Cointegration; Structural VAR; Model Selection
    JEL: C22 C32 C50
    Date: 2011–12
  6. By: Körner, Finn Marten
    Abstract: Global imbalances are almost universally regarded as a disequilibrium phenomenon. Caballero, Farhi, and Gourinchas (2008) challenge this notion with their dynamic general equilibrium model of global imbalances. The authors conclude that current account deficit nations need not worry about long-lasting deficits as long as the model is in equilibrium. The joint model in this paper combines the two model extensions for exchange rates and FDI which are disjunct in the original model. An analytical solution to the new joint model is neither as straightforward as for the separate models nor can previous results from calibrated simulation be confirmed without restriction. The model is highly dependent on parameter assumptions: A variation of calibrated parameters highlights the prime impact of investment costs previously assumed away. Sustainable equilibrium paths for global imbalances are much narrower in updated simulations than previously predicted. Policy recommendations on the sustainability of international debt holdings therefore need to be a lot more cautious. --
    Keywords: international debt,financial market development,foreign direct investment,real exchange rate,international macro-finance
    JEL: F31 F34 G15 O41
    Date: 2011–07
  7. By: Riccardo Fiorentini (Department of Economics (University of Verona))
    Abstract: The paper investigates the links between international global imbalances and the recent international financial crisis. It also focuses on the asymmetries of the dollar standard exchange rate regime. Global imbalances preceded the crisis but were one of the ingredients that led to the financial crash of 2007-2008. The paper rejects the ‘saving glut' explanation of the US trade deficit and shows that the key role of the dollar in the international monetary system allows the USA to exert seignorage in the international economy and created a circuit where Asian and oil-producing countries financed the US deficit. The inflow of foreign capitals increased the US domestic credit supply contributing to the development of the sub-prime bubble. The paper concludes that only the creation of a supranational monetary authority can eliminate the dangers of the asymmetric dollar standard regime.
    Keywords: Imbalances, crisis, dollaer
    JEL: F33 E21
    Date: 2011–12

This nep-ifn issue is ©2012 by Ajay Shah. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.