nep-ifn New Economics Papers
on All new papers
Issue of 2014‒09‒08
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International Capital Flows, External Assets and Output Volatility By Matthias Hoffmann; Michael Krause; Peter Tillmann
  2. Capital Flows: Issues and Policies By Peter Montiel
  3. Cross-Market Spillovers with Volatility Surprise By Sofiane Aboura; Julien Chevallier

  1. By: Matthias Hoffmann (Deutsche Bundesbank); Michael Krause (Deutsche Bundesbank); Peter Tillmann (University of Gießen)
    Abstract: This paper proposes a new perspective on international capital flows and countries' long-run external asset position. Cross-sectional evidence for 84 developing countries shows that over the last three decades countries that have had on average higher volatility of output growth (1) accumulated higher external assets in the long-run and (2) experienced more procyclical capital outflows over the business cycle than those countries with a same growth rate but a more stable output path. To explain this finding we provide a theoretical mechanism within a stochastic real business cycle growth model in which higher uncertainty of the income stream increases the precautionary savings motive of households. They have a desire to save more when the variance of their expected income stream is higher. We show that in the model the combination of income risk and a precautionary savings motive will lead to procyclical capital outflows at business cycle frequency and a higher long-run external asset position.
    Keywords: Capital flows, net foreign assets, productivity growth, uncertainty, precautionary savings
    JEL: F32 F36 F43 F44
    Date: 2014
  2. By: Peter Montiel
    Abstract: This paper presents an analytical overview of recent contributions to the literature on the policy implications of capital flows in emerging and developing countries, focusing specifically on capital inflows as well as on the links between inflows and subsequent capital-flow reversals. The objective is to clarify the policy challenges that such inflows pose and to evaluate the policy alternatives available to the recipient countries to cope with those challenges. A large menu of possible policy responses to large capital inflows is considered, and experience with the use of such policies is reviewed. A policy `decision tree`-i. e. , an algorithm for determining how to deploy policies in response to an exogenous inflow episode- is developed, and strategies to achieve resilience to both inflows and outflows in a world where exogenous events may frequently drive capital flows in both directions are discussed.
    JEL: F32 F34 F36
    Date: 2013–05
  3. By: Sofiane Aboura; Julien Chevallier
    Abstract: This article adopts the asymmetric DCC with one exogenous variable (ADCCX) model developed by Vargas (2008), by updating the concept of ‘volatility surprise’ to capture cross-market relationships. Current methods for measuring spillovers do not focus on volatility interactions, and neglect cross-effects between the conditional variances. This paper aims to fill this gap. The dataset includes four aggregate indices representing equities, bonds, foreign exchange rates and commodities from 1983 to 2013. The results provide strong evidence of spillover effects coming from the ‘volatility surprise’ component across markets. Against the background of the recent financial crisis, the aim is to contribute to the literature on the interdependencies of financial markets, both in conditional means and (co)variances. In addition, asset management implications are derived.
    Keywords: Cross-market relationships, Volatility surprise, Volatility spillover, ADCCX, Asset management.
    JEL: C32 C4 G15
    Date: 2014–08–29

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