nep-ifn New Economics Papers
on International Finance
Issue of 2014‒05‒17
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International Reserves and Gross Capital Flows Dynamics. By Enrique Alberola; Aitor Erce; José Maria Serena
  2. Firm dollar debt and central bank dollar reserves: Empirical evidence from Latin America By Rajeswari Sengupta
  3. What Makes Systemic Risk Systemic? Contagion and Spillovers in the International Sovereign Debt Market By Elena Kalotychou; Eli Remolona; Eliza Wu

  1. By: Enrique Alberola; Aitor Erce; José Maria Serena
    Abstract: This paper explores the role of international reserves as a stabilizer of international capital flows, in particular during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behavior of gross capital flows. We analyze an extensive cross-country quarterly database -63 countries, 1991-2010- using standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves act as a buffer during financial stress. A robust result of the analysis is that international reserves facilitate financial disinvestment overseas by residents –a fall in capital outflows-. This partially offsets the drop in foreign capital inflows in such periods, which are only marginally mitigated by reserves under some specifications of the model. For the whole period, we also find that larger stocks of reserves are linked to higher gross inflows and lower gross outflows.
    Date: 2014–01–11
  2. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research; Institute of Economic Growth)
    Abstract: I explore an empirically robust but previously undocumented association between the foreign exchange reserves accumulated by central banks of emerging market economies and dollar-denominated debt held in the balance sheets of non financial sector firms. Borrowing in dollars can have damaging effects on corporate balance sheets in the event of exchange rate depreciation. However, firms may discount such risk because of the implicit insurance provided by the central banks ex-ante reserve accumulation: in the event of a currency depreciation, firms may expect the central bank to stabilize the exchange rate using its stock of reserves. Using a novel firm-level balance sheet database, I investigate this possibility for close to 1500 firms in six of the largest Latin American economies, Argentina, Brazil, Chile, Colombia, Mexico and Peru. Results suggest that over the sample period, 1995-2007, an increase in the level of reserves is statistically and economically associated with an increase in the dollar borrowing of non financial sector firms of these economies. This could hint at a possible paradox: a higher level of reserves need not necessarily signify an economy that is more resilient to shocks. While reserve accumulation enables governments to weather macroeconomic risks arising from sudden stops in international capital flows, it can also increase the vulnerability of the corporate sector to currency risks by distorting incentives. Thus central banks, while formulating their foreign exchange intervention policies, may need to take into consideration the impact of the resultant reserve stockpiling on the private sector.
    Keywords: Foreign exchange reserves, foreign currency denominated debt, exchange rate regimes, currency crisis
    JEL: F3 F4
    Date: 2014–04
  3. By: Elena Kalotychou (City University London); Eli Remolona (Bank for International Settlements); Eliza Wu (University of Technology, Sydney and Hong Kong Institute for Monetary Research)
    Abstract: We analyze the cross-border propagation of systemic risk in the international sovereign debt market. Using daily data on CDS spreads for 67 sovereign borrowers from 2002 to 2013 we define sovereign credit events as those in which the spread widens by more than 99.9% of all spread changes within regions. We find a total of 89 such credit events, most of them taking place after 2007. We analyze contagion by studying the immediate effects of these events on CDS spreads of other sovereigns within the region and in the rest of the world. Although a few events had effects that were global in scope, we find that such "fast and furious" contagion has been by and large a regional phenomenon. To analyze "slow burn" spillover effects, we extract the first principal component of CDS spread changes to identify a global sovereign risk factor. The corresponding loadings on this factor then serve to measure the sensitivity of individual sovereign CDS spreads to the global factor. We allow these loadings to vary over time and interpret them as measures of vulnerability to global systemic risk. We find that the global "slow-burn" spillover of credit events works through the global risk factor rather than through sovereign obligors' systemic vulnerabilities. While the global factor and regional vulnerabilities are both influenced by investors' risk appetites, such vulnerabilities also depend on economic fundamentals, including the sovereign's level of government debt.
    JEL: G15 F30 F31
    Date: 2014–04

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