nep-ifn New Economics Papers
on International Finance
Issue of 2015‒02‒11
seven papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Capital Controls and the Cost of Debt By Eugenia Andreasen; Martin Schindler; Patricio Valenzuela
  2. Motivations for Capital Controls and Their Effectiveness By Radhika Pandey; Gurnain Pasricha; Ila Patnaik; Ajay Shah
  3. International Credit Flows and Pecuniary Externalities By Brunnermeier, Markus K; Sannikov, Yuliy
  4. Global liquidity, house prices and the macroeconomy: evidence from advanced and emerging economies By Cesa-Bianchi, Ambrogio; Cespedes, Luis; Rebucci, Alessandro
  5. Credit Booms and Macroeconomic Dynamics: Stylized Facts and Lessons for Low-Income Countries By Marco Arena; Serpil Bouza; Era Dabla-Norris; Kerstin Gerling; Lamin Njie
  6. Facing Volatile Capital Flows: The Role of Exchange Rate Flexibility and Foreign Assets By Rodrigo Cifuentes; Alejandro Jara
  7. Financial Integration, Volatility of Financial Flows and Macroeconomic Volatility By Mirdala, Rajmund; Svrčeková, Aneta

  1. By: Eugenia Andreasen; Martin Schindler; Patricio Valenzuela
    Abstract: Using a novel panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we find that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads. By contrast, we find no robust significant effect of restrictions on outflows. The effect of capital account restrictions on inflows is particularly strong for bonds maturing in the short-term, issued by small firms and in countries with underdeveloped financial markets. Additionally, the paper shows that capital account restrictions on inflows have a greater effect during periods of financial distress than during periods of financial stability. These results are suggestive of a causal interpretation of the estimated effects and establish a novel channel through which capital controls affect economic outcomes.JEL CODE: F3, F4, G1, G3. Key words: KEY WORDS: Credit spreads; Capital account restrictions; Financial instability; Financial openness.
    Date: 2015
  2. By: Radhika Pandey; Gurnain Pasricha; Ila Patnaik; Ajay Shah
    Abstract: We assess the motivations for changing capital controls and their effectiveness in India, a country with extensive and long-standing controls. We focus on the controls on foreign borrowing that can, in principle, be motivated by macroprudential concerns. We construct a fine-grained data set on capital control actions on foreign borrowing in India. Using event study methodology, we assess the factors that influence these capital control actions, the main factor being the exchange rate. Capital controls are tightened after appreciation, and eased after depreciation, of the exchange rate. Macroprudential concerns, measured by variables that capture systemic risk buildups, do not seem to be a factor shaping the use of capital controls. To assess the impact of controls, we use both event study and propensity score matching methodologies. Event study methodology suggests no impact of capital controls on most variables evaluated, but reveals limited evidence that capital controls relieve currency pressures in the short term. However, even this limited evidence disappears once selection bias is controlled for.
    Keywords: International topics; Financial stability; Exchange rate regimes; Financial system regulation and policies
    JEL: F32 G15 G18
    Date: 2015
  3. By: Brunnermeier, Markus K; Sannikov, Yuliy
    Abstract: This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too much since each firm does not internalize that an increase in production capacity undermines their output price, worsening their terms of trade. From an ex-ante perspective each firm undermines the natural “terms of trade hedge.” Second, sudden stops and fire sales lead to sharp price drops of illiquid capital. Capital controls or domestic macro-prudential measures that limit short-term borrowing can improve welfare.
    Keywords: hot money; international capital flows; international credit flows; pecuniary externalities; sudden stops; terms of trade hedge
    JEL: F33 F34 F36 F41 G15
    Date: 2015–01
  4. By: Cesa-Bianchi, Ambrogio (Bank of England); Cespedes, Luis (Universidad Adolfo Ibanez); Rebucci, Alessandro (Johns Hopkins University Carey Business School)
    Abstract: In this paper we first compare house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990-2012. We find that house prices in emerging economies grow faster, are more volatile, less persistent and less synchronised across countries than in advanced economies. We also find that they correlate with capital flows more closely than in advanced economies. We then condition the analysis on an exogenous change to a particular component of capital flows: global liquidity, broadly understood as a proxy for the international supply of credit. We identify this shock by aggregating bank-to-bank cross-border credit flows and by using the external instrumental variable approach introduced by Stock and Watson and Mertens and Ravn. We find that in emerging markets a global liquidity shock has a much stronger impact on house prices and consumption than in advanced economies. We finally show that holding house prices constant in response to this shock tends to dampen its effects on consumption in both advanced and emerging economies, but possibly through different channels: in advanced economies by boosting the value of housing collateral and hence supporting domestic borrowing; in emerging markets, by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy.
    Keywords: Capital flows; emerging markets; global liquidity; house prices; external instrumental variables
    JEL: C32 E44 F44
    Date: 2015–01–23
  5. By: Marco Arena; Serpil Bouza; Era Dabla-Norris; Kerstin Gerling; Lamin Njie
    Abstract: Using a comprehensive database on bank credit, covering 135 developing countries over the period 1960–2011, we identify, document, and compare the macro-economic dynamics of credit booms across low- and middle-income countries. The results suggest that while the duration and magnitude of credit booms is similar across country groups, macro-economic dynamics differ somewhat in low-income countries. We further find that surges in capital inflows are associated with credit booms. Moreover, credit booms associated with banking crises exhibit distinct macroeconomic dynamics, while also reflecting a potentially large deviation of credit from country fundamentals. These results suggest that low-income countries should remain mindful of the inter-linkages between financial liberalization, increased cross-border banking activities, and rapid credit growth.
    Keywords: Credit booms;Low-income developing countries;Banking crisis;Bank supervision;Credit booms, macroeocnomic dynamics, low-income countries, emerging market economies.
    Date: 2015–01–22
  6. By: Rodrigo Cifuentes; Alejandro Jara
    Abstract: In this paper we study the role played by capital controls (CC), the flexibility of the exchange rate regime (FERR) and the stock of assets held abroad (AA) in reducing the volatility of capital flows. First, following Forbes and Warnok (2012), we study the impact of CC, FERR and AA on the probability of stops and surges of gross capital inflows. We find that FERR reduces the probability of a stop, but CC and AA have no impact. Second, we look at their role in facilitating an offsetting event on outflows (a retrenchment or a flight) to an event on inflows (a stop or a surge, respectively). We find that both FEER and AA increase significantly the probability of a retrenchment occurring when a stop has taken place; while lower CC increases the probability of a flight in the event of a surge. Finally, we look at the extent at which funds lost (gained) in a stop (surge) are compensated by funds gained (lost) in a retrenchment (flight). We find that FERR remain the most significant policy tool behind the compensation of stops, as well as CC is for the compensation of surges.
    Date: 2014–12
  7. By: Mirdala, Rajmund; Svrčeková, Aneta
    Abstract: Macroeconomic instability is usually associated with increased short-term volatility in key fundamental variables. The recent literature that empirically examines implications of the macroeconomic volatility provides strong evidence of its negative growth effects. Stable macroeconomic environment represents a substantial fundamental pillar of a long-term economic growth. International financial integration as one of the phenomenon of last few decades still differentiate economists examining its direct and side effects on macroeconomic performance and volatility. In the paper we examine the relationship between international financial integration, volatility of financial flows and macroeconomic volatility. Examination of the international financial integration and its effects on macroeconomic volatility or stability is particularly important due to existence of generally expected positive relationship between macroeconomic volatility and economic growth, common trends of decreased macroeconomic instability worldwide and occurrence of negative sides of financial integration - financial crises. Following our results we suggest that relationship between financial integration, volatility of financial flows and macroeconomic volatility is positive, however not significant. Moreover the relationship is stronger in case of developing countries.
    Keywords: international financial integration, volatility of international financial flows, macroeconomic volatility
    JEL: F36 F41 F43
    Date: 2014–04

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