nep-ifn New Economics Papers
on International Finance
Issue of 2013‒03‒16
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets By Robert N. McCauley
  2. Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flow concerns By Joshua Aizenman; Gurnain Kaur Pasricha
  3. Fire-sale FDI or Business as Usual? By Ron Alquist; Rahul Mukherjee; Linda Tesar
  4. The impact of yuan internationalization on the euro-dollar exchange rate. By Agnès Bénassy-Quéré; Yeganeh Forouheshfar

  1. By: Robert N. McCauley (Asian Development Bank Institute (ADBI))
    Abstract: This paper describes the international flow of funds associated with calm and volatile global equity markets. During calm periods, portfolio investment by real money and leveraged investors in advanced countries flows into emerging markets. When central banks in the receiving countries resist exchange rate appreciation and buy dollars against domestic currency, they end up investing in medium-term bonds in reserve currencies. In the process they fund themselves (or “sterilize†the expansion of local bank reserves) by issuing safe assets in domestic currency to domestic investors. Thus, calm periods, marked by leveraged investing in emerging markets, lead to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. In declining and volatile global equity markets, these flows reverse, and, contrary to some claims, emerging market central banks draw down reserves substantially. In effect emerging market central banks then release safe assets from their reserves, supplying safe havens to global investors.
    Keywords: global equity markets, porfolio investment, Emerging Markets, central banks
    JEL: E58 F3 G15
    Date: 2013–01
  2. By: Joshua Aizenman; Gurnain Kaur Pasricha
    Abstract: Most of the recent policy debate on the appropriateness of capital controls has focused on the use of capital inflow controls in the face of surges in net capital inflows. However, countries that have existing capital outflow controls have another potential tool to reduce net capital inflows (NKI) - the liberalization of outflows. It follows that the decision to liberalize outflow controls in response to surging inflows could potentially involve weighing the benefits of reducing NKI by facilitating greater outflows against the lost revenues from financial repression. In this paper, we weigh the evidence on the complex motivations for capital outflow controls policy by examining the various macroeconomic and fiscal factors at the time these controls were liberalized. Our results indicate that concerns related to net capital inflows took predominance over fiscal concerns in the decision to liberalize capital outflow controls in the 2000’s. Emerging market economies (EMEs) facing sudden stops, high volatility in net capital inflows and higher balance sheet exposures liberalized less. Countries eased more in response to higher net capital inflows, and when these inflows translated into higher appreciation pressure in the exchange market, higher real exchange rate volatility, and greater accumulation of reserves. Unlike the 1980’s, we find very limited importance of fiscal variables in explaining liberalization of capital outflow controls. This lack of association is consistent with the decline in repression revenues and growth accelerations for EMEs in the 2000’s.
    JEL: F3 F31 F32 F36
    Date: 2013–03
  3. By: Ron Alquist; Rahul Mukherjee; Linda Tesar
    Abstract: Using a new data set, we examine the characteristics and dynamics of cross-border mergers and acquisitions during emerging-market financial crises, that is, so-called “fire-sale FDI”. Our findings shed fresh light on whether the transactions undertaken during crisis periods differ in fundamental ways from those undertaken during more tranquil periods. The increase in foreign acquisitions during crises is mainly driven by non-financial acquirers targeting firms in the same industry rather than foreign financial firms. This increase in acquisition activity in a given industry is unrelated to the industry’s dependence on external finance. There is also no evidence of an increase in the size of stakes bought during crises. In terms of the effect of crises on emerging-market mergers and acquisitions, we find little evidence that foreign acquisitions are resold, or “flipped”, more frequently than domestic acquisitions. Moreover, flipping rates are uncorrelated with the industry’s dependence on external finance. Finally, the probability of being flipped to a domestic buyer does not differ across crisis and non-crisis periods. All of these results are robust to alternative empirical specifications, different definitions of crises, and the inclusion of macroeconomic controls. Contrary to conventional wisdom, fire-sale FDI and asset flipping by foreign firms appear to have been “business as usual”.
    JEL: F2 F41
    Date: 2013–02
  4. By: Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics et CESIfo); Yeganeh Forouheshfar (Université Paris-Dauphine)
    Abstract: We study the implication of a multipolarization of the international monetary system on cross-currency volatility. More specifically, we analyze whether the internationalization of the yuan could modify the impact of asset supply and trade shocks on the euro-dollar exchange rate, within a three-country, three-currency portfolio model. Our static model shows that the internationalization of the yuan (defined as a rise in the yuan in international portfolios) would be either neutral or stabilizing for the euro-dollar rate, whatever the exchange-rate regime of China. Moving to a dynamic, stock-flow framework, we show that the internationalization of the yuan would make exchange-rate variations more efficient to stabilize net foreign asset positions after a trade shock.
    Keywords: China, yuan, exchange-rate regime, euro, dollar.
    JEL: F31 F33
    Date: 2013–02

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