nep-ifn New Economics Papers
on International Finance
Issue of 2014‒09‒05
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages By Cristian Badarinza; John Y. Campbell; Tarun Ramadorai
  2. An empirical analysis on the parallel foreign exchange market: The case of Vietnam By Duy Hung Bui

  1. By: Cristian Badarinza; John Y. Campbell; Tarun Ramadorai
    Abstract: The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs) varies considerably both across countries and over time. We ask how movements in current and expected future interest rates affect the share of ARMs in total mortgage issuance. Using a nine-country panel and instrumental variables methods, we present evidence that near-term (one-year) rational expectations of future movements in ARM rates do affect mortgage choice, particularly in more recent data since 2001. However longer-term (three-year) rational forecasts of ARM rates have a weaker effect, and the current spread between FRM and ARM rates also matters, suggesting that households are concerned with current interest costs as well as with lifetime cost minimization. These conclusions are robust to alternative (adaptive and survey-based) models of household expectations.
    JEL: D14 E43 G21
    Date: 2014–08
  2. By: Duy Hung Bui
    Abstract: Vietnam is a developing country with a fixed exchange rate regime and the use of foreign currency is under control of the monetary authorities. Hence, like other developing countries, Vietnam also has the parallel exchange market that exists together with the official exchange market though, it is illegal. The existence of the parallel exchange market creates several complications to the State Bank of Vietnam in their attempts to manage the foreign exchange market and the exchange rate. Fluctuations in the parallel market rates affect both the level of international reserves, the position of the economy and portfolio decisions of the public. Therefore, a strong understanding of the parallel foreign exchange market will help the State bank of Vietnam have sound policies in the foreign exchange market. The monetary approach to the parallel foreign exchange market initially developed by Blejer (1978) and then further developed by Agénor (1991) is used. This approach focuses on the disequilibrium in the money market in explaining movements in output, price, the parallel market exchange rate, and change in net foreign assets An increase of money supply by 1% causes the exchange rate in the parallel market depreciated by 0.015%. A 1 per cent devaluation of the official exchange rate would bring about 1.33 per cent devaluation of the parallel market rate. These results bespeak the State Bank of Vietnam’s efforts to reduce the market premium seem to be not success and stimulating economic growth by money supply would lead to deprecation in both markets
    Keywords: Vietnam, Macroeconometric modeling, Monetary issues
    Date: 2014–07–03

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