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on International Finance |
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Issue of 2012‒03‒21
seven papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Herman Kamil |
| Abstract: | Using a unique dataset with information on the currency composition of firms’ assets and liabilities in six Latin-American countries, I investigate how the choice of exchange rate regime affects firms’ foreign currency borrowing decisions and the associated currency mismatches in their balance sheets. I find that after countries switch from pegged to floating exchange rate regimes, firms reduce their levels of foreign currency exposures, in two ways. First, they reduce the share of debt contracted in foreign currency. Second, firms match more systematically their foreign currency liabilities with assets denominated in foreign currency and export revenues--effectively reducing their vulnerability to exchange rate shocks. More broadly, the study provides novel evidence on the impact of exchange rate regimes on the level of un-hedged foreign currency debt in the corporate sector and thus on aggregate financial stability. |
| Date: | 2012–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/69&r=ifn |
| By: | Joshua Aizenman (Asian Development Bank Institute (ADBI)); Yothin Jinjarak; Donghyun Park |
| Abstract: | Motivated by the unprecedented rise of swap agreements between the central banks of developed economies and their developing economy counterparts, this paper evaluates Asian swap arrangements and their association with the build-up of foreign reserves prior to the 2008–2009 global financial crisis. The evidence suggests that there is a limited scope for swaps to substitute for reserves. Furthermore, the selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation. |
| Keywords: | Swaps, swap agreements, central banks, Asia, foreign reserves, global financial crisis, dollar standards |
| JEL: | F15 F31 F32 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23239&r=ifn |
| By: | Gustavo Adler; Camilo Ernesto Tovar Mora; Pedro Castro |
| Abstract: | Heavy foreign exchange intervention by central banks of emerging markets have lead to sizeable expansions of their balance sheets in recent years—accumulating foreign assets and non-money domestic liabilities (the latter due to sterilization operations). With domestic liabilities being mostly of short-term maturity and denominated in local currency, movements in domestic monetary policy interest rates can have sizable effects on central bank's net worth. In this paper we examine empirically whether balance sheet considerations influence the conduct of monetary policy. Our methodology involves the estimation of interest rate rules for a sample of 41 countries and testing whether deviations from the rule can be explained by a measure of central bank financial strength. Our findings, using linear and nonlinear techniques, suggests that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from "optimal" levels. |
| Keywords: | Capital , Central banks , Developed countries , Emerging markets , Monetary policy , |
| Date: | 2012–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/60&r=ifn |
| By: | Yanliang Miao; Malika Pant |
| Abstract: | Capital flows data from Balance of Payments statistics often lag 3-6 months, which renders timely surveillance and policy deliberation difficult. To address the tension, we propose two coincident composite indicators for capital flows that improve upon existing proxies. We find that the most widely used proxy, the capital tracker, often overpredicts net flows by 30 percent. We augment the tracker into a composite indicator by assigning to it a lesser but optimally estimated weight while incorporating other regional and global coincident correlates of capital flows. The proposed composite indicator of net flows outperforms the capital tracker in its original format. To complement the indicator with an even timelier variant, we also utilize the EPFR high frequency coverage of gross bond and equity flows as an indicator on foreign investors’ sentiment. |
| Keywords: | Balance of payments statistics , Capital flows , Economic indicators , |
| Date: | 2012–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/55&r=ifn |
| By: | Yang Jiao; Yi Wen |
| Abstract: | This paper proposes a model of international trade with capital accumulation and financial intermediation. This is achieved by embedding the Melitz (2003) model into an incomplete-markets neoclassical framework with an endogenous credit market. The model preserves the analytical tractability of the original Melitz model despite non-trivial distribution of firms’ net worth and capital stocks. We use the model to examine the differential effects of financial and non-financial shocks on aggregate output and international trade flows. The model predicts that trade volume declines far more sharply and significantly than that of output (with an elasticity larger than 3) under financial shocks than under non-financial shocks. The prediction is consistent with the stylized fact that most countries that experienced major financial crises had significantly larger and sharper contraction in exports than aggregate output (as is also true during the recent financial crisis). In the long run, however, a deeper financial market is a great source of "comparative advantage"— it raises not only the level of aggregate productivity but also the ratio of trade volume to domestic output.> |
| Keywords: | Financial crises ; Credit ; International trade |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-003&r=ifn |
| By: | Paul R. Bergin; Ju Hyun Pyun |
| Abstract: | Not only are investors biased toward home assets, but when they do invest abroad, they appear to favor countries with returns more correlated with home assets, reducing diversification yet further. This paper argues that understanding this correlation puzzle requires a multi-county theoretical perspective, and we construct an N-country DSGE model that allows for heterogeneous stock return correlations. It shows that bilateral asset holdings depend not only upon the stock return correlation with the destination country, but also on the correlation with all other countries. This effect is analogous to ‘multilateral resistance’ in the trade literature. An empirical study controlling for this multilateral resistance in correlations overturns the result of preceding literature, finding that higher stock return correlation lowers bilateral equity asset holdings as theory predicts, reducing the losses of home bias. |
| JEL: | F36 F41 G11 G15 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17907&r=ifn |
| By: | Thorsten Beck (Tilburg University and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Tao Chen (The Chinese University of Hong Kong); Chen Lin (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research); Frank M. Song (The University of Hong Kong) |
| Abstract: | "Everybody talks about financial innovation, but (almost) nobody empirically tests hypotheses about it." Frame and White (2004) The financial turmoil from 2007 onwards has spurred renewed debates on the "bright" and "dark" sides of financial innovation. Using bank-, industry- and country-level data for 32, mostly high-income, countries between 1996 and 2006, this paper is the first to explicitly assess the relationship between financial innovation in the banking sector and (i) real sector growth, (ii) real sector volatility, and (iii) bank fragility. We find evidence for both bright and dark sides of financial innovation. On the one hand, we find that a higher level of financial innovation is associated with a stronger relationship between a country's growth opportunities and capital and GDP per capita growth and with higher growth rates in industries that rely more on external financing and depend more on innovation. On the other hand, we find that financial innovation is associated with higher growth volatility among industries more dependent on external financing and on innovation and with higher idiosyncratic bank fragility, higher bank profit volatility and higher bank losses during the recent crisis. |
| Keywords: | Financial Innovation, Financial R&D Intensity, Bank Risk Taking, Financial Crisis, Industrial Growth, Finance and Growth |
| JEL: | G2 G15 G28 G01 O3 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:052012&r=ifn |