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on International Finance |
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Issue of 2012‒07‒23
six papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Yothin Jinjark (SOAS, University of London); Ilan Noy (University of Hawaii and Victoria Business School in Wellington); Huanhuan Zheng (The Chinese University of Hong Kong) |
| Abstract: | Controls on capital inflows have been experiencing a period akin to a renaissance since the beginning of the global financial crisis in 2008, with several prominent countries choosing to impose controls; e.g., Thailand, Korea, Peru, Indonesia, and Brazil. We focus on the case of Brazil, a country that instituted five changes in its capital account regime in 2008-2011, and ask what the impacts of these policy changes were. Using the Abadie et al. (2010) synthetic control methodology, we construct counterfactuals (i.e., Brazil with no capital account policy change) for each policy change event. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls are relaxed as was done in the immediate aftermath of the Lehman bankruptcy in 2008 and in January 2011 by the newly inaugurated government of Dilma Rousseff. We hypothesize that price-based capital controls’ only perceptible effect are to be found in the content of the signal they broadcast regarding the government’s larger intentions and sensibilities. Brazil’s left-of-center government was widely perceived as ambivalent to markets. An imposition of controls was not perceived as ‘news’ and thus had no impact. A willingness to remove controls was perceived, however, as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be. |
| Keywords: | Capital control; Brazil; Global financial crisis; Mutual fund flows; Exchange rate |
| JEL: | F32 G15 G18 G23 E60 |
| Date: | 2012–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201213&r=ifn |
| By: | Samir Jahjah; Bin Wei; Vivian Zhanwei Yue |
| Abstract: | This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1049&r=ifn |
| By: | Julian Caballero |
| Abstract: | This paper asks whether bonanzas (surges) in net capital inflows increase the probability of banking crises and whether this is necessarily through a lending boom mechanism. A fixed effects regression analysis indicates that a baseline bonanza, identified as a surge of one standard deviation from trend, increases the odds of a banking crisis by three times, even in the absence of a lending boom. Thus, a bonanza raises the likelihood of a crisis from an unconditional probability of 4. 4 percent to 12 percent. Larger windfalls of capital (two-s. d. bonanzas) increase the odds of a crisis by eight times. The joint occurrence of a bonanza and a lending boom raises these odds even more. Decomposing flows into FDI, portfolio-equity and debt indicates that bonanzas in all flows increase the probability of crises when the windfall takes place jointly with a lending boom. Thus, windfalls in all types of flows exacerbate the deleterious effects of credit. However, surges in portfolio-equity flows seem to have an independent effect, even in the absence of a lending boom. Furthermore, emerging economies exhibit greater odds of crises after a windfall of capital. |
| JEL: | E44 E51 F21 F32 F34 G01 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4775&r=ifn |
| By: | Kalemli-Ozcan, Sebnem; Papaioannou, Elias; Perri, Fabrizio |
| Abstract: | We study the effect of financial integration on the transmission of international business cycles. In a sample of 20 developed countries between 1978 and 2009 we find that, in periods without financial crises, increases in bilateral financial linkages are associated with more divergent output cycles. This relation is significantly weaker during financial turmoil periods, suggesting that financial crises induce co-movement among more financially integrated countries. We also show that countries with stronger, direct and indirect, financial ties to the U.S. experienced more synchronized cycles with the U.S. during the recent 2007-2009 crisis. We then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity. The model suggests that the change in the relation between integration and synchronization can be driven by changes in the nature of shocks hitting the world economy, and that shocks to global banks played an important role in triggering and spreading the 2007-2009 crisis. |
| Keywords: | co-movement; crisis; financial integration; international business cycles |
| JEL: | E32 F15 F36 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9044&r=ifn |
| By: | Guillermo A. Calvo; Alejandro Izquierdo; Rudy Loo-Kung |
| Abstract: | This paper addresses the issue of the optimal stock of international reserves in terms of a statistical model in which reserves affect both the probability of a Sudden Stop–as well as associated output costs–by reducing the balance-sheet effects of liability dollarization. Optimal reserves are derived under the assumption that central bankers conservatively choose reserves by balancing the expected cost of a Sudden Stop against the opportunity cost of holding reserves. Results are obtained without using calibration to match observed reserves levels, providing no a priori reason for our concept of optimal reserves to be in line with observed holdings. Remarkably, however, observed reserves on the eve of the global financial crisis were–on average–not distant from optimal reserves as derived in this model, indicating that reserve over-accumulation in Emerging Markets was not obvious. However, heterogeneity prevailed across regions: from a precautionary standpoint, Latin America was closest to model-based optimal levels, while reserves in Eastern Europe lay below optimal levels, and those in Asia lay above. Nonetheless, there are other motives for reserve accumulation: we find that differences between observed reserves and precautionary-motive optimal reserves are partly explained by the perceived presence of a lender of last resort, or characteristics such as being a large oil producer. However, to a first approximation, there is no clear evidence supporting the so-called neo-mercantilist motive for reserve accumulation. |
| JEL: | E42 E58 F15 F31 F32 F33 F41 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18219&r=ifn |
| By: | Owen, Ann L.; Temesvary, Judit |
| Abstract: | Recent research has shown that there is significant cross-country heterogeneity in the previously well-established relationship of finance and long-run growth. We explore this heterogeneity by estimating finite mixture models and by considering the effects of foreign and domestic lending separately. We find that bank lending does not have the same effect on growth or savings in all countries. Country characteristics such as the extent of stock market development, the degree of rule of law, and even the development of the banking sector itself vary considerably across countries and affect the productivity of bank lending in encouraging growth and savings. Furthermore, the effect of bank finance on growth and the effect of foreign bank involvement depend on 1) how well developed the banking sector is, and 2) if foreign banks are involved via loans made by affiliates located within the country or via cross-border loans. The experience of lenders with a presence in the country is important, but only once a threshold level of financial sector development is reached. In countries with underdeveloped banking sectors, the influence of foreign-owned lenders relative to locally-owned banks can be detrimental to growth. |
| Keywords: | finance and growth; finite mixture models; cross-border lending |
| JEL: | F43 O4 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39978&r=ifn |