nep-ifn New Economics Papers
on International Finance
Issue of 2014‒06‒02
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Euro and the Geography of International Debt Flows By Hale, Galina B; Obstfeld, Maurice
  2. Capital Controls and Macroprudential Measures: What Are They Good For? By Forbes, Kristin; Fratzscher, Marcel; Straub, Roland
  3. Carry By Koijen, Ralph; Moskowitz, Tobias J; Pedersen, Lasse Heje; Vrugt, Evert B.
  4. The Mother of All Sudden Stops: Capital Flows and Reversals in Europe, 1919-1932 By Accominotti, Olivier; Eichengreen, Barry
  5. Capital controls and the resolution of failed cross-border banks: the case of Iceland By Baldursson, Fridrik Mar; Portes, Richard

  1. By: Hale, Galina B; Obstfeld, Maurice
    Abstract: Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro's introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery.
    Keywords: EMU; euro crisis; global imbalances; international banking; international debt
    JEL: F32 F34 F36
    Date: 2014–04
  2. By: Forbes, Kristin; Fratzscher, Marcel; Straub, Roland
    Abstract: Are capital controls and macroprudential measures successful in achieving their objectives? Assessing their effectiveness is complicated by selection bias and endogeneity; countries which change their capital-flow management measures (CFMs) often share specific characteristics and are responding to changes in variables that the CFMs are intended to influence. This paper addresses these challenges by using a propensity-score matching methodology. We also create a new database with detailed information on weekly changes in controls on capital inflows, capital outflows, and macroprudential measures from 2009 to 2011 for 60 countries. Results show that macroprudential measures can significantly reduce some measures of financial fragility. Most CFMs do not significantly affect other key targets, however, such as exchange rates, capital flows, interest-rate differentials, inflation, equity indices, and different volatilities. One exception is that removing controls on capital outflows may reduce real exchange rate appreciation. Therefore, certain CFMs can be effective in accomplishing specific goals—but most popular measures are not “good for” accomplishing their stated aims.
    Keywords: capital controls; capital flows; emerging markets; macroprudential measures; propensity-score matching; selection bias
    JEL: F3 F4 F5 G0 G1
    Date: 2014–01
  3. By: Koijen, Ralph; Moskowitz, Tobias J; Pedersen, Lasse Heje; Vrugt, Evert B.
    Abstract: Any security’s expected return can be decomposed into its “carry” and its expected price appreciation, where carry is a model-free characteristic that can be observed in advance. While carry has been studied almost exclusively for currencies, we find that carry predicts returns both in the cross section and time series for a variety of different asset classes including global equities, global bonds, commodities, US Treasuries, credit, and options. This predictability rejects a generalized version of the uncovered interest rate parity and expectations hypothesis in favor of models with varying risk premia. Our global carry factor across markets delivers strong average returns and, while it is exposed to recession, liquidity, and volatility risks, its performance presents a challenge to asset pricing models.
    Keywords: bonds; carry trade; commodities; corporate bonds; currencies; global recessions; liquidity risk; options; predictability stocks; volatility risk
    JEL: E44 F30 F31 G11 G12 G13 G14 G15
    Date: 2013–12
  4. By: Accominotti, Olivier; Eichengreen, Barry
    Abstract: We present new data documenting European capital issues in major financial centers from 1919 to 1932. Push factors (conditions in international capital markets) perform better than pull factors (conditions in the borrowing countries) in explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centers at the end of the 1920s figured importantly in the decline in foreign lending. We draw parallels with Europe today.
    Keywords: Capital flows; Europe; Great Depression; Sudden Stop
    JEL: F21 F32 F34 N13 N24
    Date: 2013–10
  5. By: Baldursson, Fridrik Mar; Portes, Richard
    Abstract: We examine Iceland’s capital controls, which were imposed in October 2008 in order to prevent massive capital flight and a complete collapse of the exchange rate. The controls have not been lifted yet, primarily because of the risk of outflows of domestic holdings of the failed cross-border Icelandic banks. A substantial restructuring of domestic holdings of foreign creditors of the old banks is required before capital controls can be lifted. We argue that even if the controls are damaging, the gains from lifting them are likely to be much lower than the costs associated with a potential currency crisis following a premature liberalisation of capital outflows. The case of Iceland illustrates the difficulty of resolving large cross-border banks situated in a small currency area.
    Keywords: capital controls; cross-border banking; Icelandic banks; resolution of failed banks
    JEL: E58 F31 G21
    Date: 2013–10

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