nep-ifn New Economics Papers
on International Finance
Issue of 2013‒12‒20
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Real financial market exchange rates and capital flows By Gelman, Maria; Jochem, Axel; Reitz, Stefan
  2. Foreign Exchange Interventions in Peru By Rossini, Renzo; Quispe, Zenón; Serrano, Enrique

  1. By: Gelman, Maria; Jochem, Axel; Reitz, Stefan
    Abstract: Foreign exchange rates and capital movements are expected to be closely related to each other as international capital markets become more and more integrated. To account for this fact we construct an index of real effective exchange rates as a weighted average of cross-country asset price ratios. The empirical analysis reveals that a country's real financial effective exchange rate is cointegrated with net foreign holdings of its assets. Comparing the empirical performance of the new index with a standard effective exchange rate deflated by goods prices we find that only the former exhibits an influence on the international flow of capital. --
    Keywords: Real Effective Exchange Rate,Capital Flows,Financial Markets
    JEL: F31 G15 E58
    Date: 2013
  2. By: Rossini, Renzo (Banco Central de Reserva del Perú); Quispe, Zenón (Banco Central de Reserva del Perú); Serrano, Enrique (Banco Central de Reserva del Perú)
    Abstract: The unprecedented monetary expansion implemented by central banks in developed economies during recent years has induced an extraordinary flow of funds to emerging economies and supported high commodity prices. This has created upward pressures on the value of local currencies and a further expansion of available funds and lending. This situation gave rise to concerns about a posible misalignment of the real exchange rate relative to its equilibrium level, especially because it can be deemed a temporary response to the current phase of the cycle in developed economies, but with a potentially lasting negative impact on the tradable sector of the economy. In Peru, the response to this situation has been an intensification of sterilized intervention in the foreign exchange market and the use of reserve requirements on local banks foreign currency liabilities, reinforcing macro-financial stability in an economy with a partially dollarized financial system. Both instruments have contributed significantly to reducing excessive exchange rate volatility, building up an international reserve buffer, and ensuring a normal flow of bank credit.
    Keywords: Monetary policy, central banking, foreign exchange intervention, reserve requirements
    JEL: E52 E58 F31
    Date: 2013–12

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