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on International Finance |
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Issue of 2012‒03‒08
nine papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Jean-Marc Bottazzi (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jaime Luque (Universidad Carlos III de Madrid - Departamento de Economía); Mário R. Páscoa (NOVA - School of Business and Economics - School of Business and Economics); Suresh Sundaresan (Columbia University - Columbia Business School) |
| 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. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00673982&r=ifn |
| By: | Esteban Vesperoni; Nicolas E. Magud; Carmen Reinhart |
| 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 bank 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. |
| Date: | 2012–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/41&r=ifn |
| By: | Juan Zalduendo; Jun Il Kim; Mahvash Saeed Qureshi; Atish R. Ghosh |
| Abstract: | This paper examines why surges in capital flows to emerging market economies (EMEs) occur, and what determines the allocation of capital across countries during such surge episodes. We use two different methodologies to identify surges in EMEs over 1980-2009, differentiating between those mainly caused by changes in the country's external liabilities (reflecting the investment decisions of foreigners), and those caused by changes in its assets (reflecting the decisions of residents). Global factors-including US interest rates and risk aversion¡-are key to determining whether a surge will occur, but domestic factors such as the country's external financing needs (as implied by an intertemporal optimizing model of the current account) and structural characteristics also matter, which explains why not all EMEs experience surges. Conditional on a surge occurring, moreover, the magnitude of the capital inflow depends largely on domestic factors including the country's external financing needs, and the exchange rate regime. Finally, while similar factors explain asset- and liability-driven surges, the latter are more sensitive to global factors and contagion. |
| Keywords: | Capital flows , Cross country analysis , Developing countries , Economic models , Emerging markets , |
| Date: | 2012–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/22&r=ifn |
| By: | Charalambos G. Tsangarides; Atish R. Ghosh; Jonathan David Ostry |
| Abstract: | Why have emerging market economies (EMEs) been stockpiling international reserves? We find that motives have varied over time—vulnerability to current account shocks was relatively important in the 1980s but, as EMEs have become more financially integrated, factors related to the magnitude of potential capital outflows have gained in importance. Reserve accumulation as a by-product of undervalued currencies has also become more important since the Asian crisis. Correspondingly, using quantile regressions, we find that the reason for holding reserves varies according to the country’s position in the global reserves distribution. High reserve holders, who tend to be more financially integrated, are motivated by insurance against capital account rather than current account shocks, and are more sensitive to the cost of holding reserves than are low-reserve holders. Currency undervaluation is a significant determinant across the reserves distribution, albeit for different reasons. |
| Date: | 2012–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/34&r=ifn |
| By: | Maurice Obstfeld |
| Abstract: | Do global current account imbalances still matter in a world of deep international financial markets where gross two-way financial flows often dwarf the net flows measured in the current account? Contrary to a complete markets or “consenting adults” view of the world, large current account imbalances, while very possibly warranted by fundamentals and welcome, can also signal elevated macroeconomic and financial stresses, as was arguably the case in the mid-2000s. Furthermore, the increasingly big valuation changes in countries’ net international investment positions, while potentially important in risk allocation, cannot be relied upon systematically to offset the changes in national wealth implied by the current account. The same factors that dictate careful attention to global imbalances also imply, however, that data on gross international financial flows and positions are central to any assessment of financial stability risks. The balance sheet mismatches of leveraged entities provide the most direct indicators of potential instability, much more so than do global imbalances, though the imbalances may well be a symptom that deeper financial threats are gathering. |
| JEL: | F32 F34 F36 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17877&r=ifn |
| By: | V. Crispolti; George C. Tsibouris |
| Abstract: | This paper provides a historical perspective on the role of international reserves in low-income countries as a cushion against large external shocks over the last three decades - including the current global crisis. The results suggest that international reserves have played a role in buffering external shocks, with the resulting macroeconomic costs varying with the nature of the shock, the economy’s structural characteristics, and the level of reserves. |
| Keywords: | External shocks , Financial crisis , Global Financial Crisis 2008-2009 , Low-income developing countries , Reserves , Reserves adequacy , |
| Date: | 2012–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/7&r=ifn |
| By: | Joshua Aizenman; Kenta Inoue |
| Abstract: | We study the curious patterns of gold holding and trading by central banks during 1979-2010. With the exception of several discrete step adjustments, central banks keep maintaining passive stocks of gold, independently of the patterns of the real price of gold. We also observe the synchronization of gold sales by central banks, as most reduced their positions in tandem, and their tendency to report international reserves valuation excluding gold positions. Our analysis suggests that the intensity of holding gold is correlated with ‘global power’ – by the history of being a past empire, or by the sheer size of a country, especially by countries that are or were the suppliers of key currencies. These results are consistent with the view that central bank’s gold position signals economic might, and that gold retains the stature of a ‘safe haven’ asset at times of global turbulence. The under-reporting of gold positions in the international reserve/GDP statistics is consistent with loss aversion, wishing to maintain a sizeable gold position, while minimizing the criticism that may occur at a time when the price of gold declines. |
| JEL: | E58 F31 F33 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17894&r=ifn |
| By: | Stijn Claessens; Neeltje van Horen |
| Abstract: | This paper introduces a comprehensive database on bank ownership for 137 countries over 1995-2009, and reviews foreign bank behavior and impact. It documents substantial increases in foreign bank presence, with many more home and host countries. Current market shares of foreign banks average 20 percent in OECD countries and 50 percent elsewhere. Foreign banks have higher capital and more liquidity, but lower profitability than domestic banks do. Only in developing countries is foreign bank presence negatively related with domestic credit creation. During the global crisis foreign banks reduced credit more compared to domestic banks, except when they dominated the host banking systems. |
| Keywords: | Banking systems , Banks , Financial stability , Foreign investment , Globalization , International banking , |
| Date: | 2012–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/10&r=ifn |
| By: | Selim Elekdag; Harun Alp; Subir Lall |
| Abstract: | Korea was one of the Asian economies hardest hit by the global financial crisis. Anticipating the downturn that would follow the episode of extreme financial stress, the Bank of Korea (BOK) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 325 basis points. But did it work? This paper seeks a quantitative answer to the following question: Were it not for an inflation targeting framework underpinned by a flexible exchange rate regime, how much deeper would the recession have been? Taking the most intense year of the crisis as our baseline (2008:Q4–2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.1 percent contraction, the outturn would have been -2.9 percent if the BOK had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -7.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BOK helped substantially soften the impact of the global financial crisis on the Korean economy. These counterfactual experiments are based on an estimated structural model, which, along with standard nominal and real rigidities, includes a financial accelerator mechanism in an open-economy framework. |
| Keywords: | Economic growth , Economic indicators , Economic models , Economic recession , Exchange rate regimes , Financial crisis , Fiscal policy , Flexible exchange rate policy , Global Financial Crisis 2008-2009 , Inflation targeting , Korea, Republic of , Monetary policy , Monetary transmission mechanism , |
| Date: | 2012–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/5&r=ifn |