nep-ifn New Economics Papers
on International Finance
Issue of 2013‒03‒02
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Export Performance, Invoice Currency, and Heterogeneous Exchange Rate Pass-Through By Richard Fabling; Lynda Sanderson
  2. IMF Lending and Banking Crises By Luca Papi; Andrea Filippo Presbitero; Alberto Zazzaro
  3. An analytic multi-currency model with stochastic volatility and stochastic interest rates By Alessandro Gnoatto; Martino Grasselli
  4. Exchange Rates in Target Zones - Evidence from the Danish Krone By Mark P. Taylor; Stefan Reitz
  5. If Foreign Investment Is not Foreign: Round-Trip Versus Genuine Foreign Investment in Russia By Svetlana Ledyaeva; Päivi Karhunen; John Whalley
  6. Exchange Rate Transmission and Export Activity at the Firm Level By Andrea Lassmann

  1. By: Richard Fabling (Motu Economic and Public Policy Research); Lynda Sanderson (New Zealand Treasury)
    Abstract: Using comprehensive, shipment-level merchandise trade data, we examine the extent to which New Zealand exporters maintain stable New Zealand dollar prices by passing on exchange rate changes to foreign customers. We find that the extent to which firms absorb exchange rate fluctuations in the short run is significantly related to both invoice currency choice and exporter characteristics when these are analysed separately. However, when jointly accounted for, the role of exporter characteristics largely disappears. That is, some firm types are more inclined to invoice in the New Zealand dollar, while others use either the importer or a third currency. In the short run, this translates into differences in exchange rate pass-through because of price rigidity in the invoice currency. Differences across invoice currencies diminish, but do not disappear, over time as prices adjust to reflect bilateral exchange rate movements.
    Keywords: Exchange rate pass-through, firm performance
    JEL: D12 F14 F31
    Date: 2013–02
  2. By: Luca Papi (Universit… Politecnica delle Marche, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, MoFiR)
    Abstract: In this paper we look at the effect of International Monetary Fund (IMF) lending programs on banking crises in a large sample of developing countries, over the period 1965-2010. The endogeneity of the Fund intervention is addressed by adopting an instrumental variable (IV) strategy, in which the degree of political similarity between IMF borrowers and the G-7 is taken as an instrument for the likelihood of a country signing an IMF lending arrangement. Controlling for the standard determinants of banking crises, the IV estimates suggest that previous IMF borrowers are significantly less likely to experience a banking crisis. We also provide evidence suggesting that compliance with conditionality matters, consistent with the importance of IMF-supported financial reform, and that the positive effect of the Fund intervention on banking sector stability works through a direct liquidity provision effect.
    Keywords: Banking crises, IMF programs, Political economy
    JEL: F33 F34 F35 O11
    Date: 2013–02
  3. By: Alessandro Gnoatto; Martino Grasselli
    Abstract: We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX rates can be performed effciently through the FFT methodology thanks to the affinity of the model. A joint calibration exercise of the implied volatility surfaces of a triangle of FX rates shows the flexibility of our framework in dealing with the typical symmetries that characterize the FX market. Our framework is also able to describe many non trivial links between FX rates and interest rates: a second calibration exercise highlights the ability of the model to fit simultaneously FX implied volatilities while being coherent with interest rate products.
    Date: 2013–02
  4. By: Mark P. Taylor; Stefan Reitz
    Abstract: Although the ERM II rules allow the Danish krone to fluctuate against the euro within an official target zone of 4.5%, most of the time the exchange rate has remained in a narrow range around its unconditional mean. Estimating a Smooth Transition Autoregression Target Zone (STARTZ) model confirms that the exchange rate exhibits target zone dynamics consistent with a band of approximately 0.75 percent around its unconditional mean. We conclude that the Danmark Nationalbank intervention policy of intra-marginal operations successfully managed an informal target zone in the foreign exchange market.
    Keywords: Target Zone, STARTZ model, Intervention
    JEL: E58 F31 G15
    Date: 2013–02
  5. By: Svetlana Ledyaeva; Päivi Karhunen; John Whalley
    Abstract: In this paper we study the phenomenon of round-trip investment between Russia and key offshore financial centers (OFCs), namely, Cyprus and British Virgin Islands, which is now a significant part of foreign investment into Russia. Using firm-level data we study differences in location strategies between round-trip and genuine foreign investors into Russia and the factors which determine the fraction of round-trip investment in total foreign investment into Russian regions. In empirical analysis we also distinguish between different firm size and industries. We conclude that round-trip investors tend to invest more in corrupt and resource abundant Russian regions compared to genuine foreign investors. Furthermore, the share of round-trip investment in total foreign investment is significantly higher in corrupt Russian regions. In general, these results point to the corruption component of round-trip investment. Second, we find that genuine foreign investors tend to invest more in regions with higher level of skilled labour and use sea ports more compared to round-trip investors, indicating that genuine foreign investment is more technologically advanced and more oriented towards international markets than round trip.
    Keywords: Russia;round-trip investment;capital flight;foreign investment
    JEL: F21 F23
    Date: 2013–02
  6. By: Andrea Lassmann (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyses how exchange rate shocks are transmitted at the firm level and establishes a nexus to firm-level export activity. Using precise survey data from a sample of Swiss firms, I find that an appreciation increases the probability of a decrease in firm-level costs, prices and profits. Exchange rate movements are passed through to import prices, absorbed in firm selling prices and lead to adjustments in firm profits. The pattern is non-linear across firms with a varying degree of international exposure. The likelihood of adjustments is increasing in firm-level export share in total turnover. I also show that exchange rate variability affects adjustment probabilities. The analysis suggests that Swiss firms take prices as given. Exchange rate shocks are absorbed through a reduction in both costs and prices, however, these adjustments are not proportional such that overall profits decline during appreciation periods.
    Keywords: exchange rate, exchange rate pass-through, market structure, firm-level data, costs, local prices, profits, exports
    JEL: D22 D4 E31 F14 F31
    Date: 2013–02

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