nep-ifn New Economics Papers
on International Finance
Issue of 2012‒10‒27
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Financial Globalization in Emerging Countries: Diversification vs. Offshoring By Ceballos, Francisco; Didier, Tatiana; Schmukler, Sergio L.
  2. The "Big C": Identifying Contagion By Kristin Forbes
  3. Financial Reforms and Capital Flows: Insights from General Equilibrium By Martin, Alberto; Ventura, Jaume
  4. The Cost of Financial Frictions for Life Insurers By Motohiro Yogo; Ralph Koijen
  5. Diasporas and Outsourcing: Evidence from oDesk and India By Ejaz Ghani; William R. Kerr; Christopher T. Stanton
  6. Optimal policy for macro-financial stability By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young

  1. By: Ceballos, Francisco (Asian Development Bank Institute); Didier, Tatiana (Asian Development Bank Institute); Schmukler, Sergio L. (Asian Development Bank Institute)
    Abstract: Financial globalization has gathered attention since the early 1990s because of its macro-financial and crisis implications and its perceived large expansion. But financial globalization has taken different forms over time. This paper examines two important concurrent dimensions of financial globalization relevant for emerging countries: diversification and offshoring. We find that globalization via the diversification channel has expanded throughout during the 2000s as domestic residents invested more abroad and foreigners increased their domestic investments. However, financial globalization via offshoring has displayed more mixed patterns, with variations across markets and countries.
    Keywords: financial globalization; emerging economies; diversification; offshoring
    JEL: F36 G15 G20
    Date: 2012–10–19
  2. By: Kristin Forbes
    Abstract: This paper surveys and assesses the academic literature on defining, measuring, and identifying financial contagion and the various channels by which it can occur. It also includes new empirical analysis of recent trends and causes of contagion, highlighting contagion risks in the euro area. The paper defines “interdependence” as high correlations across markets during all states of the world and “contagion” as the spillovers from extreme negative events. Interdependence has increased dramatically over time, especially within the euro area, even after controlling for global shocks and changes in volatility. Not surprisingly, negative events in one country also quickly affect others. Regression analysis shows that a country is more vulnerable to contagion if it has a more levered banking system, greater trade exposure, weaker macroeconomic fundamentals, and larger international portfolio investment liabilities. Countries are less vulnerable, however, if they have larger international portfolio investment assets (which can provide a buffer against shocks) and are less reliant on debt (versus equity) for international financing. These results have important implications for understanding contagion and for analyzing policies designed to mitigate contagion, especially for the current crisis in the euro area.
    JEL: F0 F1 F15 F2 F3 G01 G15 G2
    Date: 2012–10
  3. By: Martin, Alberto; Ventura, Jaume
    Abstract: As a result of debt enforcement problems, many high-productivity firms in emerging economies are unable to pledge enough future profits to their creditors and this constrains the financing they can raise. Many have argued that, by relaxing these credit constraints, reforms that strengthen enforcement institutions would increase capital flows to emerging economies. This argument is based on a partial equilibrium intuition though, which does not take into account the origin of any additional resources that flow to high-productivity firms after the reforms. We show that some of these resources do not come from abroad, but instead from domestic low-productivity firms that are driven out of business as a result of the reforms. Indeed, the resources released by these low-productivity firms could exceed those absorbed by high-productivity ones so that capital flows to emerging economies might actually decrease following successful reforms. This result provides a new perspective on some recent patterns of capital flows in industrial and emerging economies.
    Keywords: capital flows; economic growth; financial globalization; financial reforms; productivity
    JEL: F34 F36 G15 O19 O43
    Date: 2012–10
  4. By: Motohiro Yogo (Federal Reserve Bank of Minneapolis); Ralph Koijen (University of Chicago)
    Abstract: During the financial crisis, life insurers sold long-term insurance policies at firesale prices. In January 2009, the average markup, relative to actuarial value, was $-25$ percent for 30-year term annuities as well as life annuities and $-52$ percent for universal life insurance. This extraordinary pricing behavior was a consequence of financial frictions and statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. Using exogenous variation in required reserves across different types of policies, we identify the shadow cost of financial frictions for life insurers. The shadow cost of raising a dollar of excess reserve was nearly \$5 for the average insurance company in January 2009.
    Date: 2012
  5. By: Ejaz Ghani; William R. Kerr; Christopher T. Stanton
    Abstract: This study examines the role of the Indian diaspora in the outsourcing of work to India. Our data are taken from oDesk, the world’s largest online platform for outsourced contracts, where India is the largest country in terms of contract volume. We use an ethnic name procedure to identify ethnic Indian users of oDesk in other countries around the world. We find very clear evidence that diaspora-based links matter on oDesk, with ethnic Indians in other countries 32% (9 percentage points) more likely to choose a worker in India. Yet, the size of the Indian diaspora on oDesk and the timing of its effects make clear that the Indian diaspora was not a very important factor in India becoming the leading country on oDesk for fulfilling work. In fact, multiple pieces of evidence suggest that diaspora use of oDesk increases with familiarity of the platform, rather than a scenario where diaspora connections serve to navigate uncertain environments. We further show that diaspora-based contracts mainly serve to lower costs for the company contacts outsourcing the work, as the workers in India are paid about the market wage for their work. These results and other observations lead to the conclusion that diaspora connections continue to be important even as online platforms provide many of the features that diaspora networks historically provided (e.g., information about potential workers, monitoring and reputation foundations).
    JEL: F15 F22 J15 J31 J44 L14 L24 L26 L84 M55 O32
    Date: 2012–10
  6. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
    Abstract: In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any precautionary intervention. Second, we show that the extent to which policymakers should intervene in a preemptive manner depends critically on the set of policy tools available and what these instruments can achieve when a crisis strikes. For example, in the context of our model, we find that, if the policy tools is constrained so that the first best cannot be achieved and the policy maker has access to only one tax instrument, it is always desirable to intervene before the crisis regardless of the instrument used. If however the policy maker has access to two instruments, it is optimal to act only during crisis times. Third and finally, we propose a computational algorithm to solve Markov-Perfect optimal policy for problems in which the policy function is not differentiable.
    Keywords: Monetary policy ; Financial stability
    Date: 2012

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