nep-ifn New Economics Papers
on International Finance
Issue of 2015‒02‒22
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. International Capital Flows, External Assets, and Output Volatility By Krause, Michael; Hoffmann, Mathias; Tillmann, Peter
  2. International Asset Allocations and Capital Flows: The Benchmark Effect By Claudio Raddatz; Sergio L. Schmukler; Tomas Williams
  3. Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies By Ambrogio Cesa-Bianchi; Luis Felipe Cespedes; Alessandro Rebucci

  1. By: Krause, Michael; Hoffmann, Mathias; 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. We explain this finding with a stochastic real business cycle growth model in which higher uncertainty of expected income increases households' precautionary savings. In the model, the combination of income risk and the precautionary savings motive leads to procyclical capital outflows at business cycle frequency and a higher long-run external asset position.
    JEL: F32 D83 F44
    Date: 2014
  2. By: Claudio Raddatz (Central Bank of Chile); Sergio L. Schmukler (World Bank and Hong Kong Institute for Monetary Research); Tomas Williams (Universitat Pompeu Fabra)
    Abstract: We study different channels through which well-known benchmark indexes impact asset allocations, capital flows, and asset prices across countries, using unique monthly micro-level data of benchmark compositions and mutual fund investments during 1996-2014. Benchmarks are useful for identification and have important effects on equity and bond mutual fund portfolios, including both passive and active funds. Benchmark effects are important after controlling for industry, macroeconomic, and country-specific time-varying effects. Reverse causality and common shocks do not drive the results. Exogenous, pre-announced changes in benchmarks result in movements in asset allocations and capital flows mostly when these changes are implemented. Moreover, assets in the benchmarks experience abnormal returns when benchmark changes become effective, suggesting that the reallocations implied by those changes are not immediately arbitraged away. By impacting country allocations, benchmarks explain apparently counterintuitive movements in capital flows and asset prices, for example, generating outflows and depressing prices in countries being upgraded.
    Keywords: Benchmark Indexes, Contagion, Coordination Mechanism, ETFs, International Asset Prices, International Portfolio Flows, Mutual Funds
    JEL: F32 F36 G11 G15 G23
    Date: 2015–02
  3. By: Ambrogio Cesa-Bianchi; Luis Felipe Cespedes; Alessandro Rebucci
    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 synchronized 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. We find that a global liquidity shock, identified by aggregating bank-to-bank cross border flows and by using the external instrumental variable approach of Stock and Watson (2012) and Mertens and Ravn (2013), has a much stronger impact on house prices and consumption in emerging markets than in advanced economies. In our empirical model, holding house prices or the exchange rate constant in response to this shock tends to dampen its effects on consumption in emerging economies.
    Keywords: Housing prices;Business cycles;Capital flows;International liquidity;Emerging markets;Developed countries;Capital flows, emerging markets, global liquidity, house prices, external instrumental variables
    Date: 2015–01–29

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