nep-ifn New Economics Papers
on International Finance
Issue of 2014‒07‒13
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global Liquidity through the Lens of Monetary Aggregates By Kyuil Chung; Jong-Eun Lee; Elena Loukoianova; Hail Park; Hyun Song Shin
  2. Global Liquidity and Drivers of Cross-Border Bank Flows By Eugenio Cerutti; Stijn Claessens; Lev Ratnovski
  3. Global Financial Shocks and Foreign Asset Repatriation: Do Local Investors Play a Stabilizing Role? By Gustavo Adler; Marie-Louise Djigbenou; Sebastian Sosa
  4. Effectiveness of Capital Outflow Restrictions By Christian Saborowski; Sarah Sanya; Hans Weisfeld; Juan Yepez
  5. Exchange Rate Flexibility and Credit during Capital Inflow Reversals: Purgatory…not Paradise By Nicolas E. Magud; Esteban Vesperoni

  1. By: Kyuil Chung; Jong-Eun Lee; Elena Loukoianova; Hail Park; Hyun Song Shin
    Abstract: This paper examines how the financial activities of non-financial corporates (NFCs) in international markets potentially affects domestic monetary aggregates and financial conditions. Monetary aggregates reflect, in part, the activities of NFCs, who channel capital market financing into the domestic banking system, thereby influencing funding conditions and credit availability. Periods of capital inflows are also those when the domestic currency is appreciating, and such periods of rapid exchange rate appreciation coincide with increases in the central bank’s foreign exchange reserves, increasing the stock of narrow money. The paper examines economic significance of cross-country panel data on monetary aggregates and other measures of non-core bank liabilities. Non-core liabilities that reflect the activities of NFCs reflect broad credit conditions and predict global trade and growth.
    Keywords: Monetary aggregates;Corporate sector;International capital markets;Capital inflows;Liquidity;Exchange rate appreciation;Banking sector;capital flows, debt securities, global capital markets, open capital markets, index options, hedging, securities markets, international capital flows, corporate bonds, capital market financing, corporate bond market, hoarding, subsidiaries, border capital flows, net capital, real effective exchange rate
    Date: 2014–01–24
  2. By: Eugenio Cerutti; Stijn Claessens; Lev Ratnovski
    Abstract: This paper provides a definition of global liquidity consistent with its meaning as the “ease of financing†in international financial markets. Using a longer time series and broader sample of countries than in previous studies, it identifies global factors driving cross-border bank flows, alongside country-specific factors. It confirms the explanatory power of US financial conditions, with flows decreasing in market volatility (VIX) and term premia, and increasing in bank leverage, growth in domestic credit and M2. A new finding is that similar variables for other systemic countries – the UK and the Euro Area – are also important, sometimes even more so, consistent with the dominant role of European banks in cross-border banking. Furthermore, recipient country characteristics are found to affect not only the level of country-specific flows, but also the cyclical impact of global liquidity, with sensitivities of flows to banks decreasing with stronger macroeconomic frameworks and better bank regulation, but less so for flows to non-financial firms.
    Keywords: International banking;Banks;Liquidity;Capital flows;Bank regulations;Bank supervision;Cross country analysis;Global Liquidity, International Banking, Capital Flows.
    Date: 2014–04–29
  3. By: Gustavo Adler; Marie-Louise Djigbenou; Sebastian Sosa
    Abstract: We study the dynamic response of gross capital flows in emerging market economies to different global financial shocks, using a panel vector-autoregressive (PVAR) setting. Our focus lies primarily on the potentially stabilizing role played by domestic investors in offsetting the response of foreign investors to global shocks. We find evidence of such role, but its existence and magnitude depend on the nature of the shock. Local investors play a meaningful stabilizing role in the face of global uncertainty shocks, as well as shocks to long-term U.S. interest rates. However, while in the former case, sizeable asset repatriation largely offsets the retrenchment of non-residents, in the latter case the extent of the offsetting is much more limited. Meanwhile, residents and non-resident behave alike in response to short-term U.S. interest rate shocks, pulling capital away from emerging markets, although magnitudes are not economically significant. The results shed light on the potential impact of the Fed’s QE tapering on emerging market economies.
    Keywords: International capital markets;External shocks;Emerging markets;Foreign investment;Capital flows;Economic integration;Economic models;capital flows, gross capital flows, foreign assets, global financial shocks
    Date: 2014–04–16
  4. By: Christian Saborowski; Sarah Sanya; Hans Weisfeld; Juan Yepez
    Abstract: This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.
    Keywords: Capital outflows;Emerging markets;Capital controls;Economic models;Time series;Capital flows, Emerging economies, net capital, capital inflows, capital flow restrictions, net capital outflows, net capital flows, capital transactions, volatile capital flows, capital account restrictions, capital market, international capital, access to funds, inflation rate, stock market capitalization, speculative attacks, movement of capital, investor confidence, current account balance, stabilization policies
    Date: 2014–01–21
  5. By: Nicolas E. Magud; Esteban Vesperoni
    Abstract: We document the behavior of macro and credit variables during episodes of capital inflows reversals in economies with different degrees of exchange rate flexibility. We find that exchange rate flexibility is associated with milder credit growth during the boom but, even though smaller than in more rigid regimes, it cannot shield the economy from a credit reversal. Furthermore, we observe what we dub as a recovery puzzle: credit growth in economies with more flexible exchange rate regimes remains tepid well after the capital flow reversal takes place. This results stress the complementarity of macro-prudential policies with the exchange rate regime. More flexible regimes could help smoothing the credit cycle through capital surchages and dynamic provisioning that build buffers to counteract the credit recovery puzzle. In contrast, more rigid exchange rate regimes would benefit the most from measures to contain excessive credit growth during booms, such as reserve requirements, loan-to-income ratios, and debt-to-income and debt-service-to-income limits.
    Keywords: Flexible exchange rates;Bank credit;Capital inflows;Capital flows;Economic models;capital inflows, reversals, credit, macro-prudential
    Date: 2014–04–16

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