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on International Finance |
| By: | Gauvin, L.; McLoughlin, C.; Reinhardt, D. |
| Abstract: | We study the extent to which uncertainty in advanced country macroeconomic policy spills over to emerging markets via portfolio bond and equity flows. We find that increases in US policy uncertainty significantly reduce portfolio bond and equity flows into EMEs. Conversely, increases in EU policy uncertainty have different effects on equity vs. bond flows into EMEs: equity inflows increase, but bond inflows decrease. The spillover effect of policy uncertainty on capital flows depends on the time period as well as on global and domestic economic conditions. After the financial crisis more of the effect of policy uncertainty on capital flows was transmitted via overall financial market uncertainty than previously. We also find evidence for a structural break in the direction and explanatory power of portfolio flow determinants including policy uncertainty in Q2 2007 at the onset of the financial crisis, and again in Q4 2010. For both bond and equity flows, the level of global financial market uncertainty is the chief driver of the nonlinearities, while in addition to the global factor the level of country specific default risk matters for equity flows only. |
| Keywords: | Policy Uncertainty, Portfolio Capital Flows, Emerging Market Economies, Nonlinearity. |
| JEL: | F21 F32 F42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:435&r=ifn |
| By: | Michael B. Devereux; James Yetman |
| Abstract: | The 'International Policy Trilemma' refers to the constraint on independent monetary policy that is forced on a country which remains open to international financial markets and simultaneously pursues an exchange rate target. This paper shows that, in a global economy with open financial markets, the problem of the zero bound introduces a new dimension to the international policy trilemma. International financial market openness may render monetary policy ineffective, even within a system of fully flexible exchange rates, because shocks that lead to a 'liquidity trap' in one country are propagated through financial markets to other countries. But monetary policy effectiveness may be restored by the imposition of capital controls, which inhibit the transmission of these shocks across countries. We derive an optimal monetary policy response to a global liquidity trap in the presence of capital controls. We further show that, even though capital controls may facilitate effective monetary policy, except in the case where monetary policy is further constrained (beyond the zero lower bound constraint), capital controls are not desirable in welfare terms. |
| JEL: | F3 F32 F33 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19091&r=ifn |
| By: | Valentina Bruno; Hyun Song Shin |
| Abstract: | This paper develops methods for assessing the sensitivity of capital flows to global financial conditions, and applies the methods in assessing the impact of macroprudential policies introduced by Korea in 2010. Relative to a comparison group of countries, we find that the sensitivity of capital flows into Korea to global conditions decreased in the period following the introduction of macroprudential policies. |
| JEL: | F32 F33 F34 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19084&r=ifn |
| By: | Juan José Echavarría; Luis Fernando Melo Velandia; Santiago Téllez; Mauricio Villamizar |
| Abstract: | The adoption of a managed regime assumes that interventions are relatively successful. However, while some authors consider that foreign exchange interventions are ineffective, arguing that domestic and foreign assets are close substitutes, others advocate their use and maintain that their effects can even last for months. There is also a lack of consensus on the related question of how to intervene. Are dirty interventions more powerful than pre-announced ones? This paper compares the effects of day-to-day interventions with discretionary interventions by combining a Tobit-GARCH reaction function with an asymmetric power PGARCH(1,1) impact function. Our results show that the impact of pre-announced and transparent US$ 20 million daily interventions, adopted by Colombia in 2008–20–12, has been much larger than the impact of dirty interventions adopted in 2004–2007.We find that the impact of a change in daily interventions (from US$ 20 million to US$ 40 million) raises the exchange rate by approximately Col $2, implying that actual interventions of US$ 1,000 million increase the exchange rate in one day by 5.50%. We also find that capital controls have a positive effect. |
| Date: | 2013–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:010767&r=ifn |
| By: | Ai-ru (Meg) Cheng; Kuntal Das (University of Canterbury); Takeshi Shimatani |
| Abstract: | This paper presents new empirical evidence on the effectiveness of Bank of Japan's foreign exchange interventions on the daily realized volatility of USD/JPY exchange rates using high frequency data. Following Huang and Tauchen (2005) and Barndorff-Nielsen and Shephard (2004, 2006), we use bi-power variation to decompose daily realized volatility into two components: the smooth persistent and the discontinuous jump components. We model exchange rate returns, the different components of realized volatility and the central bank intervention using a system of simultaneous equations. We find strong support that interventions by Bank of Japan had increased both the continuous and the jump components of daily realized volatility. This suggests that the interventions by Bank of Japan had increased market volatility which not only caused short-lived positive jumps but were also persistent over time. We did not find any evidence that interventions were effective in influencing the exchange rate returns for the entire sample period. |
| Keywords: | Foreign exchange intervention, Realized volatility, Simultaneous equations, Tobit model |
| JEL: | C34 E58 F31 F33 |
| Date: | 2013–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:13/19&r=ifn |