nep-ifn New Economics Papers
on International Finance
Issue of 2012‒12‒06
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Federal Reserve, Emerging Markets, and Capital Controls: A High Frequency Empirical Investigation By Sebastian Edwards
  2. Financial Globalization in Emerging Countries : Diversification vs. Offshoring By Francisco Ceballos; Tatiana Didier; Sergio L. Schmukler
  3. How Should We Bank With Foreigners?—An Empirical Assessment of Lending Behavior of International Banks to Six East Asian Economies By Victor Pontines; Reza Y. Siregar
  4. Gross inflows gone wild : gross capital inflows, credit booms and crises By Calderon, Cesar; Kubota, Megumi
  5. Global excess liquidity and asset prices in emerging countries: a pvar approach By Sophie Brana; Marie-Louise Djigbenou; Stéphanie Prat
  6. Free Lunch! Arbitrage Opportunities in the Foreign Exchange Markets By Takatoshi Ito; Kenta Yamada; Misako Takayasu; Hideki Takayasu

  1. By: Sebastian Edwards
    Abstract: In this paper I use weekly data from seven emerging nations – four in Latin America and three in Asia – to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short term interest rates during the 2000s. The results suggest that there is indeed an interest rates “pass through” from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different – in terms of impact, steady state effect, and dynamics – in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a “twist” policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.
    JEL: F30 F32
    Date: 2012–11
  2. By: Francisco Ceballos (Asian Development Bank Institute (ADBI)); Tatiana Didier; Sergio L. Schmukler
    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. The diversification dimension of globalization refers to the increase in foreign assets and liabilities in countries’ portfolios. Offshoring, instead, is related to the reallocation of financial activities to international markets, namely, to where transactions take place regardless of who holds the assets. 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. We also show that the nature of financing through both diversification and offshoring has improved for emerging countries.
    Keywords: Financial Globalization, Emerging Countries
    JEL: F36 G15 G20
    Date: 2012–10
  3. By: Victor Pontines (Asian Development Bank Institute (ADBI)); Reza Y. Siregar
    Abstract: The possible crucial role of international bank lending in transmitting adverse economic disturbance from developed economies to emerging economies in the 2008–2009 global financial crisis has placed capital flows into sharper scrutiny in academic and policy discussions. The authors construct macro-and micro-panel data on international bank lending to six Asian economies—Indonesia, the Republic of Korea, Malaysia, Philippines, Singapore, and Thailand—to analyze a number of objectives. The paper first examines the influence of critical determinants not only to overall international bank lending but also to cross-border bank lending, and obtained one finding that cross-border lending by international banks tend to pull out from host economies during difficult times in source economies, whereas such retrenchments are not evident on an aggregated basis. This suggests that encouraging brick-and-mortar affiliates of international banks to “set up shop†in recipient economies may be the judicious choice for these economies. The paper next examines the differences between subsidiaries and branches of international banks in terms of their ability to shield themselves from the financial difficulties of their global parent banks and thus their ability to continue lending in destination markets. The results show that foreign bank subsidiaries are more capable in this regard. This finding carries with it the attraction of favoring an organizational banking structure that is biased toward subsidiaries. However, national banking regulators should remember that apart from encouraging a host of other domestic and cross-border initiatives, encouraging the entry of brick-and-mortar subsidiaries of international banks should not be viewed as a panacea to financial stability concerns of economies in Asia and in emerging markets in general.
    Keywords: international bank lending, Lending Behavior, East Asian Economies, emerging economies, international banks, Emerging Markets
    JEL: C23 F34 F36 G15 N25
    Date: 2012–10
  4. By: Calderon, Cesar; Kubota, Megumi
    Abstract: The main goal of the paper is to examine whether surges in private capital inflows lead to credit booms. The authors built a quarterly database on gross capital inflows, credit to the private sector, and other macro-financial indicators for a sample of 71 countries from 1975q1 to 2010q4. Identifying credit booms is not trivial: they use different criteria implemented in the literature. The estimates suggest that: (i) Surges in gross private capital inflows are overall good predictors of credit booms. (ii) The likelihood of credit booms is higher if the surges in foreign flows are driven by private other investment inflows and, to a lesser extent, portfolio investment inflows. (iii) Surges in gross inflows are also good predictors of credit booms that end up in a financial crisis --"bad"credit booms. This finding holds even after controlling for the appreciation of the local currency and the build-up of leverage. (iv) Bad credit booms are more likely to occur when surges are driven by other investment inflows. At best, foreign direct investment inflow-driven surges help mitigate the incidence of this type of credit boom. (v) The predictive ability of gross other investment inflows is primarily driven by bank inflows. (vi) Consistent with the literature, the analysis finds that the build-up of leverage and the real overvaluation of the currency help predict credit booms that are followed by a systemic crisis. Controlling for these factors, capital flows are still a significant predictor of credit booms.
    Keywords: Financial Crisis Management&Restructuring,Economic Theory&Research,Banks&Banking Reform,Currencies and Exchange Rates,Bankruptcy and Resolution of Financial Distress
    Date: 2012–11–01
  5. By: Sophie Brana; Marie-Louise Djigbenou; Stéphanie Prat (Larefi, Université Bordeaux IV)
    Abstract: The overly accommodating monetary policy is often accused of creating surplus liquidity and bubbles on the asset markets. In particular, it could have contributed to strong capital inflows in emerging countries, which may have had a significant impact on financial stability in these countries, affecting domestic financing conditions and creating a risk of upward pressures on asset prices. We focus in this paper on the impact of global excess liquidity on good and asset prices for a set of emerging market countries by estimating a panel VAR model. We define first global liquidity and highlight situations of excess liquidity. We then find that excess liquidity at the global level has spillover effects on output and price level in emerging countries. The impact on real estate and commodity prices in emerging countries is less clear.
    Keywords: Global liquidity, excess liquidity indicators, crises indicators, emerging countries, financial crisis
    JEL: E44 E52 F3 G01
    Date: 2012–04
  6. By: Takatoshi Ito; Kenta Yamada; Misako Takayasu; Hideki Takayasu
    Abstract: Using the “firm” quotes obtained from the tick-by-tick EBS (electronic broking system that is a major trading platform for foreign exchanges) data, it is found that risk-free arbitrage opportunities—free lunch—do occur in the foreign exchange markets, but it typically last only a few seconds. “Free lunch” is in the form of (a) negative spreads in a currency pair and (b) triangular arbitrage relationship involving three currency pairs. The latter occur much more often than the former. Such arbitrage opportunities tend to occur when the markets are active and volatile. Over the 12-year, tick-data samples, the number of free lunch opportunities has dramatically declined and the probability of the opportunities disappearing within one second has steadily increased. The size of expected profits is higher than transaction costs; trades that simultaneously take place on both sides of ask and bid (or three currency trades in case of triangular arbitrage) occur more often when free lunch appeared one second earlier than otherwise, suggesting that free lunch opportunities are actively taken. The probability of its disappearance within one second was less than 50% in 1999, but increased to about 90% by 2009. Less frequent occurrence and quicker disappearance in recent years are attributable to changes in trading microstructure: an introduction and proliferation of the Primary Customer system (weaker banks can use stronger banks’ credit lines) and of direct connection of traders’ programmed computers to the EBS computer.
    JEL: F31 G12 G14 G15 G23 G24
    Date: 2012–11

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