nep-ifn New Economics Papers
on International Finance
Issue of 2015‒03‒05
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Capital Control Measures: A New Dataset By Andrés Fernández; Michael W. Klein; Alessandro Rebucci; Martin Schindler; Martín Uribe
  2. Capital controls and the real exchange rate: Do controls promote disequilibria? By Montecino, Juan Antonio
  3. On a tight leash: does bank organisational structure matter for macroprudential spillovers? By Danisewicz, Piotr; Reinhardt, Dennis; Sowerbutts, Rhiannon
  4. Aggregate Investment and Investor Sentiment By Arif, Salman; Lee, Charles M. C.
  5. Pick Your Poison: The Choices and Consequences of Policy Responses to Crises By Kristin J. Forbes; Michael W. Klein

  1. By: Andrés Fernández; Michael W. Klein; Alessandro Rebucci; Martin Schindler; Martín Uribe
    Abstract: We present and describe a new dataset of capital control restrictions on both inflows and outflows of ten categories of assets for 100 countries over the period 1995 to 2013. Building on the data first presented in Martin Schindler (2009), and other datasets based on the analysis of the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions, this dataset includes additional asset categories, more countries, and a longer time period. We discuss the manner in which we translate the information in the AREAER into a usable data set. We also characterize the data with respect to the prevalence of controls across asset categories, the correlation of controls across asset categories and between controls on inflows and controls on outflows, the aggregation of the separate categories into broader indicators, and the comparison of our dataset with other indicators of capital controls.
    JEL: F3
    Date: 2015–02
  2. By: Montecino, Juan Antonio (The University of Massachusetts at Amherst)
    Abstract: The consensus view is that capital controls can effectively lengthen the maturity composition of capital inflows and increase the independence of monetary policy but are not generally effective at reducing net inflows and influencing the real exchange rate. This paper presents empirical evidence that although capital controls may not directly affect the long-run equilibrium level of the real exchange rate, they may enable disequilibria to persist for an extended period of time relative to the absence of controls. Allowing the speed of adjustment to vary according to the intensity of restrictions on capital flows, it is shown that the real exchange rate converges to its long-run level at significantly slower rates in countries with capital controls. This result holds whether permanent or episodic controls are considered. The benchmark estimated half-lives for the speed of adjustment are around 3.5 years for countries with strict capital controls but as low as 2 years in countries with no restrictions on international capital flows. The paper also presents a stylized two-sector dynamic investment model with constraints on externally-funded investment to illustrate potential theoretical channels.
    Keywords: Capital Controls, Real Exchange Rates, Undervaluation.
    JEL: F2 F31 F36 F41
    Date: 2015
  3. By: Danisewicz, Piotr (Lancaster University); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England)
    Abstract: This paper examines whether cross-border spillovers of macroprudential regulation depend on the organisational structure of banks’ foreign affiliates. Our analysis compares the response of foreign banks’ branches versus subsidiaries in the United Kingdom to changes in macroprudential regulations in foreign banks’ home countries. By focusing on branches and subsidiaries of the same banking group, we are able to control for all the factors affecting parent banks’ decisions regarding the lending of their foreign affiliates. We document that there are important differences between the type of regulation and the type of lending. Following a tightening of capital regulation, branches of multinational banks reduce interbank lending growth by 6 percentage points more relative to subsidiaries of the same banking group. Lending to non-banks does not exhibit such differences. A tightening in lending standards or reserve requirements at home does not have differential effects on both interbank and non-bank lending in the United Kingdom.
    Keywords: Macro prudential regulation; cross-border lending; credit supply; foreign banks organisational structure
    JEL: E51 E58 G21 G28
    Date: 2015–02–20
  4. By: Arif, Salman (IN University); Lee, Charles M. C. (Stanford University)
    Abstract: Using bottom-up information gleaned from corporate financial statements, we examine the relation between aggregate investment, future equity returns, and investor sentiment. Consistent with the business cycle literature, corporate investments peak during periods of positive sentiment (measured multiple ways), yet these periods are followed by lower equity returns (particularly for "growth" stocks). This pattern exists in most developed countries, and survives controls for discount rates, equity flows, valuation multiples, operating accruals, and other investor sentiment measures. Higher aggregate investments also precede greater earnings disappointments, lower short-window earnings announcement returns, and lower macroeconomic growth. We conclude aggregate corporate investment is an alternative, and possibly sharper, measure of market-wide investor sentiment.
    Date: 2014–05
  5. By: Kristin J. Forbes; Michael W. Klein
    Abstract: Countries choose different strategies when responding to crises. An important challenge in assessing the impact of these policies is selection bias with respect to relatively time-invariant country characteristics, as well as time-varying values of outcome variables and other policy choices. This paper addresses this challenge by using propensity-score matching to estimate how major reserve sales, large currency depreciations, substantial changes in policy interest rates, and increased controls on capital outflows affect real GDP growth, unemployment, and inflation during two periods marked by crises, 1997 to 2001 and 2007 to 2011. We find that none of these policies yield significant improvements in growth, unemployment, and inflation. Instead, a large increase in interest rates and new capital controls are estimated to cause a significant decline in GDP growth. Sharp currency depreciations may raise GDP growth over time, but only with a lagged effect and after an initial contraction.
    JEL: F41
    Date: 2015–02

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