nep-ifn New Economics Papers
on International Finance
Issue of 2012‒01‒25
sixteen papers chosen by
Vimal Balasubramaniam
National Institute of Public Finance and Policy

  1. The impact of Sovereign Wealth Fund investments on the performance of listed companies By Bao Ngoc Dinh
  2. Crisis, Capital Controls and Covered Interest Parity: Evidence from China in Transformation By Jinzhao Chen
  3. Do External Political Pressures Affect the Renminbi Exchange Rate? By Laurent Pauwels; Li-Gang Liu
  4. Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities. By Marc Flandreau; Kim Oosterlinck
  5. Are the Effects of Monetary Policy Asymmetric in India? Evidence from a Nonlinear Vector Autoregression Approach By Goodness C. Aye; Rangan Gupta
  6. How do credit supply shocks propagate internationally? A GVAR approach By Eickmeier, Sandra; Ng, Tim
  7. Exchange rate exposure under liquidity constraints By Sarah Guillou; Stefano Schiavo
  8. The Euro crisis and the new impossible trinity By Jean Pisani-Ferry
  9. The internationalization of Italian firms in India: some empirical evidences By Massimo Cortili; Alessia Pisoni; Alberto Onetti
  10. Surviving the global financial crisis : foreign ownership and establishment performance By Alfaro, Laura; Chen, Maggie Xiaoyang
  11. The dollar squeeze of the financial crisis By Jean-Marc Bottazzi; Jaime Luque; Mario R. Pascoa; Suresh Sundaresan
  12. The Impact of External Shocks in East Asia: Lessons from a Structural VAR Model with Block Exogeneity By Jean-Pierre Allegret; Cécile Couharde; Cyriac Guillaumin
  13. The Flows of the Pacific: Asian foreign exchange markets through tranquility and turbulence By Dagfinn Rime and Hans Jørgen Tranvåg
  14. International Reserves and the Composition of Equity Capital Inflows By Xingwang Qian; Andreas Steiner
  15. Barriers to Internationalisation: Firm-Level Evidence from South Africa By Marianne Matthee; Waldo Krugell
  16. Financial Frictions and the Interest-Rate Differential in a Dollarized Economy By Vega, Hugo

  1. By: Bao Ngoc Dinh (CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II)
    Abstract: In this study, we attempt to shed some light on the effects of SWF investment activities by analyzing the short-term impact of SWF investments on the performance of those companies in which they invest. We collect both direct and indirect data on equity investments for each SWF. The sample consists of 60 investments by 11 important SWFs from around the world (SWF of the United Arab Emirates, China, Kuwait, Russia, France, Singapore...) during the period 2003 to 2009. To quantify the valuation effects of SWF investments, we use the event study methodology to estimate abnormal returns to the shares around the times that news of the transactions of SWFs becomes publicly available. We find that the announcement effect of SWF investments in listed companies is positive and the level of transparency of SWFs influence the positive impact of SWF investments on the performance of those companies in which they invest.
    Keywords: Sovereign wealth funds; performance; event study
    Date: 2011
  2. By: Jinzhao Chen (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper aims to investigate the intensity and the effectiveness of the capital controls in China from 2003 to 2010, with special attention to the period of financial turbulence that erupted in the summer of 2007. We employ a two-regime threshold autoregressive model to study the Renminbi yield differential between the onshore interest rate and its non-deliverable forward (NDF)-implied offshore interest rate. We find that the de facto intensity of capital controls measured by the threshold increases over time, even during the period of financial turbulence. Moreover, a slightly lower speed of adjustment to the threshold implies that the capital controls are effective in this context.
    Keywords: Covered Interest Parity ; Capital Control ; China ; Threshold Autoregressive model ; GARCH effect ; Financial Crisis
    Date: 2012–01–17
  3. By: Laurent Pauwels (The University of Sydney Business School); Li-Gang Liu (ANZ Research ANZ, Hong Kong)
    Abstract: This paper investigates whether external political pressure for faster renminbi (RMB) appreciation affect both the daily returns and the conditional volatility of the RMB central parity rate. We construct several political pressure indicators pertaining to the RMB exchange rate, with a special emphasis on the US pressure, to test the hypothesis. After controlling for Chinese macroeconomic surprise news, we find that US and non-US political pressure does not have a significant influence on RMB's daily returns. However, evidence suggests that political pressures, and especially those from the US, have statistically significant impacts on the conditional volatility of the RMB. Furthermore, we conduct the same exercise on the 12-month RMB nondeliverable forward rate (NDF). We find that the NDF market is highly responsive to macroeconomic surprise news and there is some evidence that Sino-US bilateral meetings affect the conditional volatility of the RMB NDF.
    Keywords: Renminbi exchange rate, Event studies, Political pressures, Non-deliverable forward, Macroeconomic news
    JEL: F31 G10
    Date: 2011–07
  4. By: Marc Flandreau (Graduate Institute of International Studies and Development, Geneva); Kim Oosterlinck (Solvay Brussels School of Economics and Management, Université Libre de Bruxelles)
    Abstract: The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.
    Keywords: Exchange rate regime, gold standard, bimetallism, credibility, silver risk
    JEL: F33 N20
    Date: 2011–01
  5. By: Goodness C. Aye (Department of Agricultural Economics, University of Agriculture, Makurdi, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper uses Indian quarterly data for the period of 1960:Q2-2011:Q2 to test for nonlinearity in a standard monetary vector autoregression (VAR) model comprising of output, price and money, using an estimation strategy that is consistent with wide range of structural models. We find that positive and negative monetary policy shocks have an immediate short-live and a delayed persistent asymmetric effect on output and price respectively. In addition, we show that compared to a linear VAR, the nonlinear VAR has a bigger impact of a monetary policy shock on output and price. In general, we conclude that there are clear gains from modelling monetary policy using a nonlinear VAR framework.
    Keywords: Asymmetric Effects, Monetary Policy, Linear and Nonlinear VAR, India
    JEL: C32 E23 E31 E51 E52
    Date: 2012–01
  6. By: Eickmeier, Sandra; Ng, Tim
    Abstract: We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a flight to quality to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample. --
    Keywords: international business cycles,credit supply shocks,trade and financial integration,Global VAR,sign restrictions
    JEL: F41 F44 F36 F15 C3
    Date: 2011
  7. By: Sarah Guillou (Observatoire Français des Conjonctures Économiques); Stefano Schiavo (Università di Trento)
    Keywords: Export,exchange rate,exposure,financial constraints, heterogeneity,productivity .
    JEL: F23 F31 G
    Date: 2011–06
  8. By: Jean Pisani-Ferry
    Abstract: The search for solutions to the euro crisis is based on a partial diagnosis that overemphasises the lack of enforcement of existing fiscal rules. Europeâ??s leaders should rather address the euro areaâ??s inherent weaknesses revealed by the crisis.At the core of euro-area vulnerability is an impossible trinity of strict no-monetary financing, bank-sovereign interdependence and no co-responsibility for public debt. This Policy Contribution assesses the corresponding three options for reform: a broader European Central Bank (ECB) mandate, the building of a banking federation, and fiscal union with common bonds. None will be easy.The least feasible option is a change to the ECBâ??s mandate; changing market perceptions would require the ECB to credibly commit overwhelming forces, and the ECB is simply not in a position to make such a commitment.The building of a banking federation, meanwhile, involves reforms that are bound to be difficult. Incremental progress is likely, but a breakthrough less so.This leaves fiscal union. It faces major obstacles, but a decision to move in this direction would signal to the markets and ECB a commitment to stronger Economic and Monetary Union. One possibility would be to introduce a limited, experimental scheme through which trust could be rebuilt. This Policy Contribution draws on presentations made at the XXIV Moneda y Crédito Symposium, Madrid, 3 November 2011, at the Asia-Europe Economic Forum conference in Seoul, 9 December, and at De Nederlandsche Bank in Amsterdam on 17 December. I am very grateful to Silvia Merler for excellent research assistance. I thank participants in these seminars and Bruegel colleagues for comments and criticisms.
    Date: 2012–01
  9. By: Massimo Cortili (Department of Economics, University of Insubria, Italy); Alessia Pisoni (Department of Economics, University of Insubria, Italy); Alberto Onetti (Department of Economics, University of Insubria, Italy)
    Abstract: This study explores the characteristics of Italian foreign direct investment (FDI) in India and aims at filling the gap identified in the literature by providing a comprehensive empirical analysis on this issue. More specifically, we try to understand the reasons behind internationalization decisions in India, the strategic goals associated with them (i.e. manufacturing vs. commercial), the role played by the Indian subsidiary and its value chain configuration. In order to investigate the research questions, a unique database of Italian firms that invested in India was created. The first empirical confirmation we collected was about the low number of Italian companies with subsidiaries in India. In terms of internationalization goals it emerges clearly from the research that the main target is market seeking. In order to acquire that market share Italian companies have organized their subsidiaries as partially independent companies, adopting a typical “Multidomestic” approach customizing products and services to the local needs and demands.Moreover, the industry fragmentation suggests that so far only the best in each class hav approached India. This is indirectly confirmed by the fact that it is indeed almost impossible to find two Italian competitors present at the same in India.
    Keywords: India, internationalization, FDI, value chain
    Date: 2012–01
  10. By: Alfaro, Laura; Chen, Maggie Xiaoyang
    Abstract: This paper examines how different establishments performed during the recent global financial crisis, focusing on the role of foreign ownership. The paper investigates how foreign ownership affected establishments'responses to negative economic shocks, using a cross-country panel dataset with detailed information on operation, location and industry for more than 12 million establishments from 2005-2008. The evidence shows that multinational subsidiaries on average fared better than local counterfactuals with similar economic characteristics. Among multinational subsidiaries, establishments with stronger production and financial linkages with parent companies showed greater resilience. Finally, in contrast to the crisis period, the impact of foreign ownership and linkages on an establishment's performance was insignificant in non-crisis years.
    Keywords: Economic Theory&Research,Investment and Investment Climate,Bankruptcy and Resolution of Financial Distress,Emerging Markets,Economic Conditions and Volatility
    Date: 2012–01–01
  11. By: Jean-Marc Bottazzi; Jaime Luque; Mario R. Pascoa; Suresh Sundaresan
    Abstract: By Covered Interest rate Parity (CIP), the FX swap implied currrency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro- Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the “convenience yield” associated with that currency. This is similar to specialness in repo markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.
    Keywords: FX swaps, Repo, Euro-Dollar currency basis, The 2008 dollar squeeze, Possession
    JEL: D52 D53 G12 G14 G15 G18
    Date: 2011–12
  12. By: Jean-Pierre Allegret; Cécile Couharde; Cyriac Guillaumin
    Abstract: In this paper, we examine the relative importance of external shocks in domestic fluctuations of East Asian countries and check if these shocks lead to asymmetric or symmetric reactions between the considered economies. To this end, we estimate, over the period 1990.1-2010.4, a structural VAR model with block exogeneity (SVARX model) relying on a comprehensive set of external shocks. We firstly document a rising impact of these external shocks on domestic variables since the mid 1990s. Finally, real oil price and U.S. GDP shocks have a significant impact on domestic activity and lead to more symmetric responses, compared to U.S. monetary shock and MSCI Index financial shocks.
    Keywords: external shocks, East Asia, SVARX model
    JEL: F32 F33 F42
    Date: 2012
  13. By: Dagfinn Rime and Hans Jørgen Tranvåg (Department of Economics, Norwegian University of Science and Technology)
    Abstract: Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for eleven Asian and Australasian currencies, we find that order flow has a potentially strong impact on all exchange rates in the sample. The effect is strongest on floating exchange rates, both economically and statistically, but is sizeable also on the other exchange rates, especially during periods of turbulence. By creating a measure of regional order flow, we show that all exchange rates depreciate as flows are moved out of Asia/Australasia and into US dollars. This is true both across regimes and if their own flow is not included in the structure of the regional flow.
    Date: 2012–01–06
  14. By: Xingwang Qian; Andreas Steiner (Universitaet Osnabrueck)
    Abstract: We study the effect of central banks’ international reserve hoardings on the composition of equity capital inflows, namely the ratio of portfolio equity investment (PEI) to foreign direct investment (FDI). Foreign investors’ decisions regarding the location and the type of equity capital investment might be influenced by a country’s level of international reserves. In a simple theoretical model, we show that higher reserves, thanks to their ability to lower exchange rate risk, reduce the risk premium of portfolio equity inflows. Hence, higher reserves are expected to increase the inflow of portfolio equity investment relative to FDI. We test this hypothesis for a sample of emerging markets during the period 1980-2007 using static and dynamic panel data methods. The results suggest that higher levels of reserves are associated with a larger ratio of PEI inflows relative to FDI. This result points to a collateral benefit of reserves that has been neglected so far: Reserves contribute to deeper domestic financial markets and facilitate domestic firms’ access to foreign financing.
    Keywords: International Reserves, Capital Inflows, Equity Capital
    JEL: F3 F4
    Date: 2012–01–12
  15. By: Marianne Matthee (School of Economics, North-West University, Potchefstroom, South Africa); Waldo Krugell (School of Economics, North-West University, Potchefstroom, South Africa)
    Abstract: The internal resource barriers that firms experience influence their capability to export. This in turn influences the export performance of the country and the extent to which exports contribute to economic growth. The aim of this paper is to analyse the impact of resource barriers, more specifically firm size, productivity, firm-specific capital and labour market constraints, on South African firms' decision to internationalise. The literature on South African exporting firms presents some interesting glimpses of the exporting behaviour of firms in South Africa. However, these were cross-sectional studies focusing on earlier NES data and the 2003 ICA data. This paper tries to provide another dimension in terms of data, by taking the 2007 ICA data into account and by constructing a unique panel from the World Bank Enterprise Survey data for 2003 and 2007. Using panel data allows for better understanding of South African firms in that it enables one to consider the dynamic nature of firms over time. Also, the earlier South African contributions examined the export behaviour of South African firms, but did not control for unobserved heterogeneity. This paper takes the analysis a step further by estimating a panel data two-step Heckman selection model of the predictors of firms’ export propensities and intensities. From the overall results of the model, it is clear that the unobserved factors that make export more likely tend to be associated with lower levels of exports. The main findings are that firm size, productivity and finance matter for exports. Also, barriers to doing business, such as electricity, customs delays and transportation and the use of imported inputs influence exporting firms’ supply-side capabilities.
    JEL: F14 F23 O55 D21
    Date: 2011–07
  16. By: Vega, Hugo (Banco Central de Reserva del Perú; London School of Economics)
    Abstract: This paper presents a partial equilibrium characterization of the credit market in an economy with partial …financial dollarization. Financial frictions, in the form of costly state veri…cation and banking regulation restrictions, are introduced and their impact on lending and deposit interest rates denominated in domestic and foreign currency studied. The analysis shows that reserve requirements act as a tax that leads banks to decrease deposit rates, while the wedge between foreign and domestic currency lending rates is decreasing in exchange rate volatility and increasing in the degree of correlation between entrepreneurs returns and the exchange rate.
    Date: 2012–01

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