nep-ifn New Economics Papers
on International Finance
Issue of 2014‒10‒03
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. What is the Major Determinant of Credit Flows through Cross-Border Banking? By Toyoichiro Shirota
  2. The international monetary and financial system: a capital account historical perspective By Claudio Borio; Harold James; Hyun Song Shin
  3. The “Inflow-Effect” – Trader Inflow and Bubble Formation in Asset Markets By Michael Kirchler; Caroline Bonn; Jürgen Huber; Michael Razen

  1. By: Toyoichiro Shirota (Bank of Japan)
    Abstract: This paper examines the major determinant of the cross-border credit flows from global banks toward 70 vis-a-vis countries in seven regions of the world. Employing a Bayesian dynamic latent factor model, we decompose the volatilities of banking flows into the contribution of the global-common factor, the regional-common factor, and the national-specific factor. The results indicate that the global-common factor explains 36.4 percent of volatilities in overall cross-border banking flow, suggesting that the international propagations of shocks through global banks are quantitatively important. Especially, the contribution of the global-common factor is increasing in the 2000s. At the same time, main determinants are largely heterogeneous across countries. This heterogeneity implies that the desirable policy response to credit inflows could be different for each host country.
    Keywords: International Capital Flows; Dynamic Latent Factor; Bayesian Estimation
    JEL: C11 F3
    Date: 2013–03–19
  2. By: Claudio Borio; Harold James; Hyun Song Shin
    Abstract: In analysing the performance of the international monetary and financial system (IMFS), too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century. Zeroing on the capital account shifts the focus from the goods markets to asset markets and balance sheets. Seen through this lens, the IMFS looks quite different. Its main weakness is its propensity to amplify financial surges and collapses that generate costly financial crises – its "excess financial elasticity". And assessing the vulnerabilities it hides requires going beyond the residence/non-resident distinction that underpins the balance of payments to look at the consolidated balance sheets of the decision units that straddle national borders, be these banks or non-financial companies. We illustrate these points by revisiting two defining historical phases in which financial meltdowns figured prominently, the interwar years and the more recent Great Financial Crisis.
    Keywords: excess financial elasticity, banking glut, current account, capital account, financial cycle, financial crises
    Date: 2014–08
  3. By: Michael Kirchler; Caroline Bonn; Jürgen Huber; Michael Razen
    Abstract: We investigate the impact of trader and cash inflow on bubble formation in asset markets with a novel design featuring heterogeneous information and a constant fundamental value. Implementing seven treatments we find that (i) only the joint inflow of traders and cash triggers bubbles (“inflow-effect”). (ii) In treatments with trader and cash inflow only in the first half of the market, prices converge to fundamentals towards maturity of the asset. This inflow-effect is very robust as we observe bubbles in almost all of the 24 markets with trader inflow. The analysis of traders’ beliefs reveals that (iii) despite fundamentals staying constant, beliefs about fundamentals co-move with upwardly trending prices. Finally, we report a speculative motive only among the optimists in treatments where we observe bubbles.
    Keywords: Experimental finance, inflow-effect, trader inflow, asset market, bubble, market efficiency
    JEL: C92 D84 G10
    Date: 2014–09

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