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on International Finance |
|
Issue of 2012‒04‒03
six papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | Over the past 10 years, central banks and governments throughout the developing world have accumulated foreign exchange reserves and other official assets at an unprecedented rate. This paper shows that this official asset accumulation has driven a substantial portion of the recent large global current account imbalances. These net official capital flows have become large relative to the size of the industrial economies, and they are a significant factor contributing to the weakness of the economic recovery in the major industrial economies. |
| Keywords: | current account, foreign exchange reserves |
| JEL: | F30 F31 F32 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp12-5&r=ifn |
| By: | Taro Esaka (Kobe City University of Foreign Studies); Shinji Takagi (Graduate School of Economics, Osaka University) |
| Abstract: | The paper tests the effectiveness of marginal reserve requirements employed by the Japanese authorities in the 1970s to influence short-term capital flows, thereby contributing to the ongoing debate on the use of capital controls\market- or price-based ones in particular. While the case for using market-based controls almost entirely relies on the mixed evidence from the experience of Chile with unremunerated reserve requirements in the 1990s, testing for their effectiveness on the volume of inflows is hampered by the endogeneity of such a measure, which is typically imposed or intensified when inflows surge. We address this problem by applying the method of propensity score matching and find that an increase in marginal reserve requirements modestly reduced the volume of short-term capital inflows through non-resident free-yen accounts. The impact was not statistically significant, however, implying that the price elasticity of short-term capital flows was small. We conclude that market-based controls must be nearly prohibitive, perhaps combined with administrative measures, to be effective in a meaningful way. |
| Keywords: | market-based capital controls; price-based capital controls; effectiveness of capital controls; Japanese capital controls; propensity score matching |
| JEL: | F32 N25 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1203&r=ifn |
| By: | Olga Bogach (Department of Economics, University of Hawaii at Manoa); Ilan Noy (Department of Economics, University of Hawaii at Manoa) |
| Abstract: | In this paper, we analyze the evolution of foreign direct investment (FDI) inflows to developing and emerging countries around financial crises. We empirically and thoroughly examine the Fire-Sale FDI hypothesis and describe the pattern of FDI inflows surrounding financial crises. We also add a more granular detail about the types of financial crises and their potentially differential effects on FDI. We distinguish between Mergers and Acquisitions (M&A) and Greenfield investment, as well as between different motivations for FDI—horizontal (tariff jumping) and vertical (integrating production stages). We find that financial crises have a strong negative effect on inward FDI in our sample. Crises are also shown to reduce the value of horizontal and vertical FDI. We do not find empirical evidence of Fire-Sale FDI. On the contrary, financial crises are shown to affect FDI flows and M&A activity adversely. |
| Keywords: | International investment, Foreign direct investment (FDI), Financial crises, Mergers and Acquisitions, Multinational firms |
| JEL: | F21 F23 F29 G01 G34 |
| Date: | 2012–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201205&r=ifn |
| By: | Shinji Takagi (Graduate School of Economics, Osaka University); Kenichi Hirose (Otaru University of Commerce); Issei Kozuru (Kosei Securities Testing the Effectiveness of Market-B) |
| Abstract: | The paper tests the effectiveness of marginal reserve requirements employed by the Japanese authorities in the 1970s to influence short-term capital flows, thereby contributing to the ongoing debate on the use of capital controls\market- or price-based ones in particular. While the case for using market-based controls almost entirely relies on the mixed evidence from the experience of Chile with unremunerated reserve requirements in the 1990s, testing for their effectiveness on the volume of inflows is hampered by the endogeneity of such a measure, which is typically imposed or intensified when inflows surge. We address this problem by applying the method of propensity score matching and find that an increase in marginal reserve requirements modestly reduced the volume of short-term capital inflows through non-resident free-yen accounts. The impact was not statistically significant, however, implying that the price elasticity of short-term capital flows was small. We conclude that market-based controls must be nearly prohibitive, perhaps combined with administrative measures, to be effective in a meaningful way.The paper presents a political economy model of official foreign exchange market intervention and tests the model against the recent experience of Japan. In several industrial countries, the government is responsible for intervention decisions while the central bank is given operational independence in its conduct of monetary policy. The paper models the interaction between the two agencies, empirically tests the central bank reaction function, and considers conditions under which intervention might change monetary policy. Daily Japanese intervention data give broad support to the prediction of the model with respect to central bank behavior. Although it is difficult to be definitive about the hidden motive of central bank actions, during the extraordinary period of 2001-04 when Japan remained under deflationary pressure, the central bank, faced with large political costs of sterilization, accommodated a considerable portion of the massive interventions made by the government. Under normal conditions coordination between the two agencies might be desirable, not least to make the signal of any intervention credible, but giving an alternative agency the authority over intervention decisions can be a means of enhancing democratic accountability for an independent central bank while preserving the credibility of monetary policy. |
| Keywords: | foreign exchange market intervention; central banking; quantitative easing; Japanese intervention |
| JEL: | E42 E58 F31 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1204&r=ifn |
| By: | Kurronen, Sanna (BOFIT) |
| Abstract: | This paper examines financial sector characteristics in resource-dependent economies. Using a unique dataset covering 133 countries, we present empirical evidence that the banking sector tends to be smaller in resource-dependent economies, even when controlling for several other factors which have been shown to have a significant effect on financial sector development in previous studies. Moreover, the threshold level at which the increasing resource-dependence begins to be harmful for domestic banking sector is very low. We also find evidence that the use of market-based and foreign financing is more common in resource-dependent economies. Further, we argue that a relatively small financial sector used to cater the needs of the resource sector might be unfavorable for emerging businesses, thereby hampering economic diversification and reinforcing the resource curse. |
| Keywords: | resource dependence; resource curse; financial sector; banks; panel data |
| JEL: | G20 O16 O57 Q32 |
| Date: | 2012–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2012_006&r=ifn |
| By: | João Barata Ribeiro Blanco Barroso |
| Abstract: | This paper estimates optimal capital flow taxes for Latin American economies based on early warning models for sudden stops. The paper adopts the externality view advanced by Korinek (2010), according to which domestic agents do not internalize the costs of high debt in bad states of nature. Capital flow taxes realign private and social incentives, therefore avoiding credit constraints problems in the future. The early warning estimates of crisis likelihood, severity and amplification dynamics provide new stylized evidence on the externality view. The most relevant and statistically significant conditioning states were found to be international risk aversion, net foreign asset position, international reserves and overvaluation indicators. An interesting rule of thumb that emerged from the empirical estimates is that capital flow taxes should be proportional to the square of the likelihood of an external crisis. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:268&r=ifn |