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on International Finance |
|
Issue of 2012‒02‒27
four papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Jean-Marc Bottazzi (Centre d'Economie de la Sorbonne - Paris School of Economics); Jaime Luque (Universidad Carlos III de Madrid); Mário R. Páscoa (NOVA - Business School of Economics and Finance); Suresh Sundaresan (Columbia University) |
| Abstract: | By Covered Interest rate Parity (CIP), the FX swap implied currency 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 repro 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: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12009&r=ifn |
| By: | Fang, Ying (BOFIT); Huang, Shicheng (BOFIT); Niu, Linlin (BOFIT) |
| Abstract: | We employ Bayesian method to estimate a time-varying coefficient version of the de facto currency basket model of Frankel and Wei (2007) for the RMB of China, using daily data from February 2005 to July 2011. We estimate jointly the implicit time-varying weights of all 11 currencies in the reference basket announced by the Chinese government. We find the dollar weight has been reduced and sometimes significantly smaller than one, but there is no evidence of systematic operation of a currency basket with discernable pattern of significant weights on other currencies. During specific periods, the reduced dollar weight has not been switched to other major international currencies, but to some East Asian currencies, which is hard to explain by trade importance to or trade competition with China. We examine currency baskets of these East Asian Economies, including major international currencies and the RMB in their baskets. We find an evident tendency of Malaysia and Singapore to increase the weights of RMB in their own currency baskets, and a steadily and significantly positive weight of RMB in the basket of Thailand. These evidences suggest that, the positive weights of some East Asian currencies in RMB currency basket during specific periods largely reflect the fact that these East Asia economies have been systematically placing greater weights on RMB under the new regime of RMB exchange rate. |
| Keywords: | RMB currency basket; time-varying regressions; East Asia; China; US |
| JEL: | C11 F31 F41 |
| Date: | 2012–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2012_002&r=ifn |
| By: | Yun Jung Kim (University of Michigan); Linda L. Tesar (University of Michigan and NBER); Jing Zhang (University of Michigan) |
| Abstract: | Using Korean firm-level data on publicly-listed and privately-held firms together with firm exit data, we find strong evidence of the balance-sheet effect for small firms at both the intensive and extensive margins. During the crisis, small firms with more short-term foreign debt are more likely to go bankrupt, and experience larger sales declines conditional on survival. The extensive margin accounts for a large fraction of small firmsÕ adjustment during the crisis. Consistent with many studies in the literature, large firms with larger exposure to foreign debt paradoxically have better performance during the crisis at both the intensive and extensive margin. |
| Keywords: | financial crisis, firm-level data, balance-sheet effects, Korean economy |
| JEL: | F32 F34 E44 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:620&r=ifn |
| By: | Chernenko, Sergey (OH State University); Sunderam, Adi (Harvard University) |
| Abstract: | We show that money market funds transmitted distress across firm during the European sovereign debt crisis. Using a novel data set of US money market fund holdings, we show that funds with large exposures to Eurozone banks suffered significant outflows between June and August 2011. These outflows have significant short-run spillover effects on other firms: non-Eurobank issuers that typically rely on these funds raise less financing in this period. The results are not driven by issuer riskiness or direct exposure to Europe: for the same issuer, money market funds with greater exposure to Eurozone banks decrease their holdings more than other funds. Our results illustrate that instabilities associated with money market funds persist despite recent changes to the regulations governing them. |
| JEL: | G01 G18 G21 G28 G32 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2012-04&r=ifn |