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on International Finance |
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Issue of 2012‒05‒02
six papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Clarke, George R.G.; Cull, Robert; Kisunko, Gregory |
| Abstract: | Two data sets are used to study how country and firm characteristics affected firms'financial constraints and their likelihood of survival during the early phase of the recent global financial crisis in Eastern Europe and Central Asia, a region that was especially hard hit. The first data source provides information on the reported severity of financial constraints for 360 firms from 23 countries in 2002, 2005, and 2008. By following the same firms over time, the study summarizes both the gradual easing of financial constraints from 2002 to 2005 and their tightening during the crisis. Key findings are that financial constraints during the crisis were less severe in countries with well-established foreign banks (entered prior to year 2000), and that changes in the severity of financial constraints were more pronounced for large firms than others during the crisis (although large firms continued to have less severe constraints on average). The second data source provides information on whether firms remained in operation in 2009 in six countries in Eastern Europe and Central Asia. Controlling for other relevant characteristics, firms were more likely to survive the crisis if they had access to external credit. |
| Keywords: | Banks&Banking Reform,Access to Finance,Debt Markets,Microfinance,Bankruptcy and Resolution of Financial Distress |
| Date: | 2012–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6050&r=ifn |
| By: | Joshua Aizenman (University of California, Santa Cruz and National Bureau of Economic Research and Hong Kong Institute for Monetary Research); Hiro Ito (Portland State University) |
| Abstract: | We examine the development of open macroeconomic policy choices among developing economies from the perspective of the powerful "trilemma" hypothesis. We construct an index of divergence of the three trilemma policy choices, and evaluate its patterns in recent decades. We find that the three dimensions of the trilemma configurations are converging towards a "middle ground" among emerging market economies, equipped with managed exchange rate flexibility, underpinned by sizable holdings of international reserves, and intermediate levels of monetary independence and financial integration. We also find emerging market economies with more converged policy choices tend to experience smaller output volatility in the last two decades. Emerging markets with relatively low international reserves/GDP could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence while this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding. |
| Keywords: | Impossible Trinity, International Reserves, Financial Liberalization, Exchange Rate Regime |
| JEL: | F31 F36 F41 O24 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:112012&r=ifn |
| By: | Bacchetta, Philippe (University of Lausanne, CEPR); Benhima, Kenza (University of Lausanne); Kalantzis, Yannick (Banque de France) |
| Abstract: | Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2012-009&r=ifn |
| By: | Antonakakis, Nikolaos |
| Abstract: | This paper examines co-movements and volatility spillovers in the returns of the euro, the British pound, the Swiss franc and the Japanese yen vis-a-vis the US dollar before and after the introduction of the euro. Based on dynamic correlations, variance decompositions, generalized VAR analysis, and a newly introduced spillover index, the results suggest significant co-movements and volatility spillovers across the four exchange returns, but their extend is, on average, lower in the latter period. Return co-movements and volatility spillovers show large variability though, and are positively associated with extreme economic episodes and, to a lower extend, with appreciations of the US dollar. Moreover, the euro (Deutsche mark) is the dominant currency in volatility transmission with a net volatility spillover of 8\% (15\%) to all other markets, while the British pound is the dominant net receiver of volatility with a net volatility spillover of -11\% (-13\%), in the post- (pre-) euro period. The nature of cross-market volatility spillovers is found to be bidirectional though, with the highest volatility spillovers occurring between the European markets. The economic implications of these findings for central bank interventions, international portfolio diversification and currency risk management are then discussed. |
| Keywords: | Exchange returns co-movement; Volatility spillover; Vector autoregression; Variance decomposition; Spillover index; Multivariate GARCH |
| JEL: | C32 G15 F31 |
| Date: | 2012–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37869&r=ifn |
| By: | YiLi Chien; Kanda Naknoi |
| Abstract: | Our paper investigates whether the valuation effect caused by a large risk premium and a low risk-free rate can help to explain the enormous US current account and trade deficit observed in the past decade. To answer this question, we set up an endowment growth model in which investors are endowed with heterogeneous trading technologies. In our model, the average US investors load up more aggregate risk by investing in a risky asset abroad and issuing a risk-free asset. Thanks to the large risk premium as well as the low risk-free rate, the US can sustain a long-run trade deficit even as a debtor country. Quantitatively, we find that the valuation effect caused solely by the high risk premium and the low risk-free rate in our model, which is calibrated to match the external assets and liabilities of the US economy, can account for more than half of the observed trade deficit and current account deficit. Our results suggest that the current US trade deficit might not necessarily lead to net export increases or dollar depreciation in the future. |
| Keywords: | International trade ; Risk management |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-009&r=ifn |
| By: | Gupta, Abhijit Sen (Asian Development Bank Institute) |
| Abstract: | This paper evaluates the extent of exchange rate coordination among Asian economies using a hypothetical Asian Currency Unit. Rising interdependence among Asian economies makes it vital for these economies to have a certain degree of exchange rate stability. However, the empirical evidence using an Asian Currency Unit suggests a widening deviation in exchange rate movements of the Asian currencies. The deviation has been driven by the adoption of different exchange rate regimes by the participating countries indicating diverse policy objectives. |
| Keywords: | exchange rate coordination; asia; asian currency unit; exchange rate regimes |
| JEL: | F15 F36 F55 |
| Date: | 2012–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0356&r=ifn |