nep-ifn New Economics Papers
on International Finance
Issue of 2014‒12‒29
seven papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International Financial Integration and Crisis Contagion By Devereux, Michael B; Yu, Changhua
  2. International capital flows, external assets and output volatility By Hoffmann, Mathias; Krause, Michael; Tillmann, Peter
  3. Correlations across Asia-Pacific bond markets and the impact of capital flow measures By Pornpinun Chantapacdepong; Ilhyock Shim
  4. The Effect of the Federal Reserve’s Tapering Announcements on Emerging Markets By Vikram Rai1; Lena Suchanek
  5. The Real Effects of Capital Controls: Financial Constraints, Exporters, and Firm Investment By Laura Alfaro; Anusha Chari; Fabio Kanczuk
  6. The Transmission of Liquidity Shocks: Evidence from Credit Rating Downgrades By Karam, Philippe; Merrouche, Ouarda; Souissi, Moez; Turk, Rima
  7. What makes a currency procyclical ? an empirical investigation By Cordella, Tito; Gupta, Poonam

  1. By: Devereux, Michael B; Yu, Changhua
    Abstract: International financial integration helps to diversify risk but also may increase the transmission of crises across countries. We provide a quantitative analysis of this trade-off in a two-country general equilibrium model with endogenous portfolio choice and collateral constraints. Collateral constraints bind occasionally, depending upon the state of the economy and levels of inherited debt. The analysis allows for different degrees of financial integration, moving from financial autarky to bond market integration and equity market integration. Financial integration leads to a significant increase in global leverage, doubles the probability of balance sheet crises for any one country, and dramatically increases the degree of `contagion' across countries. Outside of crises, the impact of financial integration on macro aggregates is relatively small. But the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky. Thus, a trade-off emerges between the probability of crises and the severity of crises. Financial integration can raise or lower welfare, depending on the scale of macroeconomic risk. In particular, in a low risk environment, the increased leverage resulting from financial integration can reduce welfare of investors.
    Keywords: financial contagion; international financial integration; leverage; occasionally binding contracts
    JEL: D52 F36 F44 G11 G15
    Date: 2014–10
  2. By: Hoffmann, Mathias; Krause, Michael; Tillmann, Peter
    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
  3. By: Pornpinun Chantapacdepong; Ilhyock Shim
    Abstract: Using a novel database on capital flow measures in Asia over 2004-2013, we investigate the impact of bond inflow measures on the cross-market correlations of weekly bond fund flows and of daily bond returns in 12 Asia-Pacific economies, after controlling for global, regional and local factors. We find that a bond inflow measure taken by a country tends to increase the correlation of bond flows into the country with those into other countries in the region. In particular, a country's policy actions to loosen (ie increase) bond inflows significantly increase bond flow correlations, but policy actions to tighten (ie decrease) bond inflows have no significant impact. We also find that bond inflow measures increase bond return correlations in the long run. These results can be explained by the signalling hypothesis, under which global investors expect that when a country takes a bond inflow measure other countries to take similar actions, so that they increase or decrease their investment in the region at the same time.
    Keywords: Bond flow, bond return, cross-market correlation, capital flow measure
    Date: 2014–12
  4. By: Vikram Rai1; Lena Suchanek
    Abstract: The Federal Reserve’s quantitative easing (QE) program has been accompanied by a flow of funds into emerging-market economies (EMEs) in search of higher returns. When Federal Reserve officials first mentioned an eventual slowdown and end of purchases under the central bank’s QE program in May and June 2013, foreign investors started to withdraw some of these funds, leading to capital outflows, a drop in EME currencies and stock markets, and a rise in bond yields. Using an event-study approach, this paper estimates the impact of “Fed tapering” on EME financial markets and capital flows for 19 EMEs. Results suggest that EMEs with strong fundamentals (e.g., stronger growth and current account position, lower debt, and higher growth in business confidence and productivity), saw more favourable responses to Fed communications on tapering. Capital account openness initially played a role as well, but diminished in importance in subsequent tapering announcements.
    Keywords: International financial markets; Transmission of monetary policy; International topics
    JEL: C33 E58 F32 G14
    Date: 2014
  5. By: Laura Alfaro; Anusha Chari; Fabio Kanczuk
    Abstract: In aftermath of the global financial crisis of 2008–2009, emerging-market governments have increasingly restricted foreign capital inflows. The data show a statistically significant drop in cumulative abnormal returns for Brazilian firms following capital control announcements. Large firms and the largest exporting firms appear less negatively affected compared to external finance-dependent firms, and capital controls on equity have a more negative announcement effect than those on debt. Real investment falls following the controls. Overall, the results suggest that capital controls segment international financial markets, increase the cost of capital, reduce the availability of external finance, and lower firm-level investment.
    JEL: F3 F4 G11 G15 L2
    Date: 2014–12
  6. By: Karam, Philippe; Merrouche, Ouarda; Souissi, Moez; Turk, Rima
    Abstract: We analyze the transmission of bank-specific liquidity shocks triggered by a credit rating downgrade through the lending channel. Using bank-level data for US Bank Holding Companies, we find that a credit rating downgrade is associated with an immediate and persistent decline in access to non-core deposits and wholesale funding, especially during the global financial crisis. This translates into a reduction in lending to households and non-financial corporates at home and abroad. The effect on domestic lending, however, is mitigated when banks (i) hold a larger buffer of liquid assets, (ii) diversify away from rating-sensitive sources of funding, and (iii) activate internal liquidity support measures. Foreign lending is significantly reduced during a crisis at home only for subsidiaries with weak funding self-sufficiency.
    Keywords: credit ratings; credit supply; internal capital markets; liquidity management; multinational banks
    JEL: E51 F23 F34 F36 G21
    Date: 2014–11
  7. By: Cordella, Tito; Gupta, Poonam
    Abstract: This paper looks at the correlation between the cyclical components of gross domestic product and the exchange rate and classifies countries'currencies as procyclical if they appreciate in good times, countercyclical if they appreciate in bad times, and acyclical otherwise. With this classification, the paper shows that: (i) the countries that are commodity exporters and experience procyclical capital flows tend to have procyclical currencies; (ii) countries with procyclical currencies tend to restrict their capital accounts, perhaps as an attempt to reduce the degree of procyclicality; (iii) countries with procyclical currencies pursue procyclical monetary policy; (iv) however, in the last decade, there is a disconnect between the cyclicality of currency and monetary policy; and (v) the disconnect may reflect a decline in the fear of floating, which can be partially attributed to an improvement in countries'net foreign asset positions.
    Keywords: Currencies and Exchange Rates,Emerging Markets,Debt Markets,Economic Stabilization,Macroeconomic Management
    Date: 2014–11–01

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