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on International Finance |
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Issue of 2012‒04‒10
eight papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Carmen M. Reinhart |
| Abstract: | We document that the global scope and depth of the crisis the began with the collapse of the subprime mortgage market in the summer of 2007 is unprecedented in the post World War II era and, as such, the most relevant comparison benchmark is the Great Depression (or the Great Contraction, as dubbed by Friedman and Schwartz, 1963) of the 1930s. Some of the similarities between these two global episodes are examined but the analysis of the aftermath of severe financial crises is extended to also include the most severe post-WWII crises as well. As to the causes of these great crises, we focus on those factors that are common across time and geography. We discriminate between root causes of the crises, recurring crises symptoms, and common features (such as misguided financial regulation or inadequate supervision) which serve as amplifiers of the boom-bust cycle. There are recurring temporal patterns in the boom-bust cycle and their broad sequencing is analyzed. |
| JEL: | E32 E44 E50 F30 F33 G01 N20 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17941&r=ifn |
| By: | Mouhamadou Sy (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, Département Economie - Finances - Centre d'analyse stratégique) |
| Abstract: | This paper proposes theoretical and empirical analysis of the effect of capital controls and alternative exchange rate regimes on the patterns of speculative capital. I argue that the exchange rate regime and its interaction with the monetary regime can explain the patterns of speculative capital around the world. I show that speculative capitals are more likely to flow into countries in which there is a contradiction between the monetary and the exchange regimes, e.g. more likely in countries with managed exchange rates. I model exchange-rate as a jump process in a stochastic dynamic portfolio optimization. Through this approach, the influence of the frequency and the size of "jumps" in the exchange rate on the allocation of speculative capital can be determined. It will also allow inflows to be endogenous. By linking the jumps to the frequency of exchange rate movements, this paper determines the effectiveness of different exchange rate regimes in fending off "hot money" for a given monetary regime. On the empirical side, I use a newly constructed data set to verify the theoretical predictions of the determinants and the patterns of speculative capital. Capital controls do not affect speculative capital. |
| Keywords: | Short-term Capital Flows ; Exchange Rate Regimes ; Financial Openness |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00684591&r=ifn |
| By: | Müller-Plantenberg, Nikolas (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.) |
| Abstract: | When the current account balance and net capital outflows do not exactly offset each other, net payment flows arise. Payment inflows into a country push the real exchange rate up, outflows push it down. This paper uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom-and-bust cycles. It shows that during such cycles, capital inflows first exceed the deficit on current account, strengthening the currency. Later on, when returns on domestic investments revert to their normal levels, the current account recovers, yet the overall decline of the international investment position provokes a fall of the real exchange rate even below its initial level. Case studies of countries experiencing rapid economic expansions followed by financial collapse confirm the paper’s theoretical predictions. |
| Keywords: | boom-and-bust cycles, optimal consumption and portfolio choice, capital inflows, current account deterioration, currency flows, crises. |
| JEL: | F31 F32 F34 G01 G11 N10 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:uam:wpaper:201210&r=ifn |
| By: | Silvia Merler; Jean Pisani-Ferry |
| Abstract: | The single currency was expected to make balance of payments irrelevant between the euro-area member states. This benign view has been challenged by recent developments, especially as imbalances between euro-area central banks have widened within the TARGET2 settlement system. Current-account developments can be misleading as indicators of financial account developments in countries that receive significant official support. Greece, Ireland, Italy, Portugal and Spain experienced significant private-capital inflows from 2002 to 2007-09, followed by unambiguously massive outflows. We show that such reversals qualify as â??sudden stopsâ??. Euro-area sudden-stop episodes were clustered in three periods: the global financial crisis, a period following the agreement of the Greek programme and summer 2011. The timeline suggests contagion effects were present. We find evidence of substitution of the private capital flows with publiccomponents. In particular, weak banks in distressed countries took up a major share of the central bank refinancing. The steady divergence of intra Eurosystem net balances mirrors this. In the short term, TARGET2 imbalances could be addressed by tightening collateral requirements for central bank liquidity. For the longer term, the evidence that the euro area has been subject to internal balance-of-payment crises should be taken as a strong signal of weakness and as an invitation to reform its structures. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:718&r=ifn |
| By: | Aki-Hiro Sato; Takaki Hayashi; Janusz A. Ho{\l}yst |
| Abstract: | We investigate quotation and transaction activities in the foreign exchange market for every week during the period of June 2007 to December 2010. A scaling relationship between the mean values of number of quotations (or number of transactions) for various currency pairs and the corresponding standard deviations holds for a majority of the weeks. However, the scaling breaks in some time intervals, which is related to the emergence of market shocks. There is a monotonous relationship between values of scaling indices and global averages of currency pair cross-correlations when both quantities are observed for various window lengths $\Delta t$. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1204.0426&r=ifn |
| By: | Paolo Canofari (Faculty of Economics, University of Rome "Tor Vergata"); Giancarlo Marini (Faculty of Economics, University of Rome "Tor Vergata"); Giovanni Piersanti (University of Teramo) |
| Abstract: | This paper aims to propose a new measure of exchange market pressure for countries operating in hard peg regimes, such as currency unions, currency boards or full dollarization. We use a general model of currency crisis to derive a sustainability index based upon the relationship between the shadow exchange rate and the output gap required to maintain the currency peg. We apply the new index to European Union countries in order to assess the sustainability of the Euro. |
| Keywords: | shadow exchange rate, currency crisis, exchange market pressure |
| JEL: | F3 F31 F41 G01 |
| Date: | 2012–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:226&r=ifn |
| By: | John Ammer; Sara B. Holland; David C. Smith; Francis E. Warnock |
| Abstract: | U.S. investors are the largest group of international equity investors in the world, but to date conclusive evidence on which types of foreign firms are able to attract U.S. investment is not available. Using a comprehensive dataset of all U.S. investment in foreign equities, we find that the single most important determinant of the amount of U.S. investment a foreign firm receives is whether the firm cross-lists on a U.S. exchange. Correcting for selection biases, cross-listing leads to a doubling (or more) in U.S. investment, an impact greater than all other factors combined. We also show that our firm-level analysis has implications for country-level studies, suggesting that research investigating equity investment patterns at the country-level should include cross-listing as an endogenous control variable. We describe easy-to-implement methods for including the importance of cross-listing at the country level. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1044&r=ifn |
| By: | Jeremy Greenwood (University of Pennsylvania); Juan M. Sanchez (Federal Reserve Bank of St. Louis); Cheng Wang (Iowa State University) |
| Abstract: | How important is financial development for economic development? A costly state veriÂ…cation model of financial intermediation is presented to address this question. The model is calibrated to match facts about the U.S. economy, such as the intermediation spreads and the firm-size distributions for 1974 and 2004. It is then used to study the international data using cross-country interest-rate spreads and per-capita GDPs. The analysis suggests a country like Uganda could increase its output by 116 percent if it could adopt the worldÂ’s best practice in the financial sector. Still, this amounts to only 29 percent of the gap between UgandaÂ’s potential and actual output. |
| Keywords: | costly state veriÂ…cation, economic development, Â…financial intermediation, fiÂ…rm-size distribution, interest-rate spreads, cross-country output differences, cross-country differences in Â…financial sector productivity, cross-country TFP differences |
| JEL: | E13 O11 O16 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:572&r=ifn |