nep-ifn New Economics Papers
on International Finance
Issue of 2014‒02‒02
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls By Straub, Roland; Forbes, Kristin; Fratzscher, Marcel; Kostka, Thomas
  2. Capital Inflows and Exchange Rate Volatility in Korea By Kyuil Chung

  1. By: Straub, Roland; Forbes, Kristin; Fratzscher, Marcel; Kostka, Thomas
    Abstract: We use changes in Brazil s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling i.e. changes in investor expectations about future policies rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries. --
    JEL: F32 F42 G11
    Date: 2013
  2. By: Kyuil Chung (The Bank of Korea)
    Abstract: High exchange rate volatility threatens international trade and exacerbates the currency mismatch problem, hence generating economic instability. However, low exchange rate volatility may cause another problem. Low volatility induces speculative capital inflows as speculative investors, who are usually concerned both with the interest rate differential and exchange rate risk, become concerned with the interest rate differential only. In this paper we use several techniques to identify the relationship between exchange rate volatility and capital inflows in Korea. First, estimation of a Markov switching model shows that all kind of capital inflows increase under low volatility regimes, while capital inflows with the exception of FDI all decrease under high volatility regimes. Second, estimation of a multivariate GARCH-in-Mean Model and the impulse response function derived from it provide evidence that lower exchange rate volatility tends to increase most types of capital inflows other than FDI. These results imply that a medium level of exchange rate volatility is most beneficial for economic stability
    Date: 2013

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