nep-ifn New Economics Papers
on International Finance
Issue of 2012‒04‒23
six papers chosen by
Vimal Balasubramaniam
National Institute of Public Finance and Policy

  1. Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies By Menkhoff, Lukas
  2. Fire-Sale FDI? The impact of financial crises on foreign direct investment By Bogach, Olga; Noy, Ilan
  3. Analysis of an unannounced foreign exchange regime change By Khemraj, Tarron; Pasha, Sukrishnalall
  4. Rapid credit growth and international credit: Challenges for Asia By Stefan Avdjiev; Robert McCauley; Patrick McGuire
  5. Exchange Rate Volatility Under Peg: Do Trade Patterns Matter? By Constant Lonkeng Ngouana
  6. Spillover Effects of Exchange Rates: A Study of the Renminbi By Aaditya Mattoo; Prachi Mishra; Arvind Subramanian

  1. By: Menkhoff, Lukas
    Abstract: Nowadays foreign exchange interventions occur in emerging market economies whereas empirical studies on interventions mainly refer to advanced economies. However, interventions in emerging markets are different from those in advanced economies: they occur "regularly" and central banks have considerable leverage, derived from relatively high reserves, some non-sterilization, the central bank's information advantage and capital controls. Consequently, these interventions often successfully impact the level and volatility of exchange rates. Nevertheless, more research on interventions in emerging markets is needed analyzing the influence of heterogeneous institutional circumstances, examining the role of central bank communication and using high-frequency data.
    Keywords: foreign exchange, central bank intervention, emerging markets, transmission channels
    JEL: F31 E58 O23
    Date: 2012–04
  2. By: Bogach, Olga; Noy, Ilan
    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,
    Date: 2012–03–30
  3. By: Khemraj, Tarron; Pasha, Sukrishnalall
    Abstract: Starting in 2004 the Guyanese foreign exchange rate has been remarkably stable relative to earlier periods. This paper explores the reasons for the stability of the rate. First, the degree of concentration in the foreign exchange market has increased, thus making the task of moral suasion relatively straightforward once this policy tool comes to bear on the dominant trader (s). Second, long-term or non-volatile capital inflows make the exchange rate less susceptible to sudden reversal. Third, commercial banks, the dominant foreign exchange traders, have large outlays of assets in domestic currency, thus their desire for exchange rate stability. The econometric exercise is consistent with the notion that trader market power has contributed to lower volatility in the G$/US exchange rate. The paper also presents a model that analyzes monetary policy effects in the presence of a mark-up or threshold interest rate.
    Keywords: exchange rate; foreign exchange market; market power
    JEL: F21 F41 F31 G21
    Date: 2011–05–02
  4. By: Stefan Avdjiev; Robert McCauley; Patrick McGuire
    Abstract: Very low interest rates in major currencies have raised concerns over international credit flows to robustly growing economies in Asia. This paper examines three components of international credit and highlights several of the policy challenges that arise in constraining such credit. Our empirical findings suggest that international credit enables domestic credit booms in emerging markets. Furthermore, we demonstrate that higher levels of international credit on the eve of a crisis are associated with larger subsequent contractions in overall credit and real output. In Asia today, international credit generally is small in relation to overall credit - as was not the case before the Asian crisis. So even though dollar credit is growing very rapidly in some Asian economies, its contribution to overall credit growth has been modest outside the more dollarised economies of Asia.
    Keywords: international credit, credit booms, cross-border lending, emerging markets
    Date: 2012–04
  5. By: Constant Lonkeng Ngouana
    Abstract: This paper assesses the role of trade patterns in shaping the volatility of the effective exchange rate under two alternative peg regimes: a hard peg to a single currency and a peg to a basket of currencies. I link the changes in the nominal effective exchange rate of a pegged currency to the fluctuations of its anchor vis-a-vis other major currencies, with an emphasis on the dynamics of trade patterns. In an application to the WAEMU (West African Economic and Monetary Union), I find that the nominal effective exchange rate of the union was twice as volatile under the hard peg to the euro as it would have been under a hypothetical basket peg over the past decade. This result was driven by the substantial shifts that occurred in WAEMU trade patterns, away from euro area countries and toward the Â"BICs" (Brazil, India, and China). These findings suggest that policymakers should pay as much attention to the type of peg as to pegging in itself, with a particular focus on the dynamics of trade patterns.
    Keywords: Currency pegs , Exchange rates , Trade , West African Economic and Monetary Union ,
    Date: 2012–03–09
  6. By: Aaditya Mattoo; Prachi Mishra; Arvind Subramanian
    Abstract: This paper estimates the impact of China’s exchange rate changes on exports of competitor countries in third markets, which we call the "spillover effect". We use recent theory to develop an identification strategy in which competition between China and its developing country competitors in specific products and destinations plays a key role. We exploit the variation - afforded by disaggregated trade data - across exporters, importers, product, and time to estimate this spillover effect. We find robust evidence of a statistically and quantitatively significant spillover effect. Our estimates suggest that a 10 percent appreciation of China’s real exchange rate boosts on average a developing country’s exports of a typical 4-digit HS product category to third markets by about 1.5-2 percent. The magnitude of the spillover effect varies systematically with product characteristics as implied by theory.
    Keywords: China , Competition , Developing countries , Exchange rate adjustments , Exchange rates , Exports , Spillovers ,
    Date: 2012–03–27

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