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on International Finance |
| By: | Bong-Han Kim; Hyeongwoo Kim; Bong-Soo Lee |
| Abstract: | We examine spillover effects of the recent U.S. financial crisis on five emerging Asian countries by estimating conditional correlations of financial asset returns across countries using multivariate GARCH models. We propose a novel approach that simultaneously estimates the conditional correlation coefficient and the effects of its determining factors over time, which can be used to identify the channels of spillovers. We find some evidence of financial contagion around the collapse of Lehman Brothers in September 2008. We further find a dominant role of foreign investment for the conditional correlations in international equity markets. The dollar Libor-OIS spread, the sovereign CDS premium, and foreign investment are found to be significant factors affecting foreign exchange markets. |
| Keywords: | Financial Crisis; Spillover Effects; Contagion; Emerging Asian Countries; Dynamic Conditional Correlation; DCCX-MGARCH |
| JEL: | C32 F31 G15 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2012-06&r=ifn |
| By: | Graham Bird (University of Surrey); Alex Mandilaras (University of Surrey); Helen Popper (Santa Clara University) |
| Abstract: | Issues surrounding exchange rates continue to fascinate both economists and political scientists. Although a relatively large literature has grown around attempting to explain the choice of exchange rate regime, empirical estimation has failed to find a generally satisfactory explanation of it. Shifts between exchange rate regimes are even less well understood. This paper focuses on such shifts and examines them by estimating both an economics only specification and one that is augmented with political variables. As a robustness check we also estimate a data driven specification using a large and comprehensive set of economic and political variables. In addition, we examine shifts between international macroeconomic archetypes to see whether similar factors are at work. In terms of exchange rate regime shifts, we find that although unobservable country specific factors are significant, there are other systematically important factors including, in particular, economic growth and IMF involvement. Central bank independence, financial openness and the incidence of crises may also exert an influence. In contrast, we find that selected political variables are generally insignificant in affecting shifts, although they may influence the size of shifts, once they happen. |
| JEL: | F30 F33 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1312&r=ifn |
| By: | Ambrogio Cesa-Bianchi; M. Hashem Pesaran; Alessandro Rebucci; TengTeng Xu |
| Abstract: | The international business cycle is very important for Latin America’s economic performance as the recent global crisis vividly illustrated. This paper investigates how changes in trade linkages between China, Latin America, and the rest of the world have altered the transmission mechanism of international business cycles to Latin America. Evidence based on a Global Vector Autoregressive (GVAR) model for 5 large Latin American economies and all major advanced and emerging economies of the world shows that the long-term impact of a China GDP shock on the typical Latin American economy has increased by three times since mid-1990s. At the same time, the long-term impact of a US GDP shock has halved, while the transmission of shocks from Latin America and the rest of emerging Asia (excluding China and India) GDP has not undergone any significant change. Contrary to common wisdom, we find that these changes owe more to the changed impact of China on Latin America’s traditional and largest trading partners than to increased direct bilateral trade linkages boosted by the decade-long commodity price boom. These findings help to explain why Latin America did so well during the global crisis, but point to the risks associated with a deceleration in China’s economic growth in the future for both Latin America and the rest of the world economy. The evidence reported also suggests that the emergence of China as an important source of world growth might be the driver of the so called “decoupling” of emerging markets business cycle from that of advanced economies reported in the existing literature. |
| Keywords: | International topics; Business fluctuations and cycles; Econometric and statistical methods; Regional economic developments; Recent economic and financial developments |
| JEL: | C32 F44 E32 O54 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-32&r=ifn |
| By: | Luis Felipe Céspedes; Roberto Chang; Andrés Velasco |
| Abstract: | This paper develops an open economy model in which financial intermediation is subject to occasionally binding collateral constraints, and uses the model to study unconventional policies such as credit facilities and foreign exchange intervention. The model highlights the interaction between the real exchange rate, interest rates, and financial frictions. The exchange rate can affect the financial intermediaries' international credit limit via a net worth effect and a leverage ratio effect; the latter is novel and depends on the equilibrium link between exchange rates and interest spreads. Unconventional policies are nonneutral if and only if financial constraints are binding in equilibrium. Credit programs are more effective if targeted towards financial intermediaries rather than the corporate sector. Sterilized foreign exchange interventions matter because the increased availability of tradables, resulting from the sterilizing credit, can relax financial frictions; this perspective is new in the literature. Finally, self fulfilling expectations can lead to the coexistence of financially constrained and unconstrained equilibria, justifying a policy of defending the exchange rate and the accumulation of international reserves. |
| JEL: | E58 F34 F41 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18431&r=ifn |