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on International Finance |
| By: | Lucio Sarno (Faculty of Finance, Cass Business School, UK; The Rimini Centre for Economic Analysis, Italy); Ilias Tsiakas (University of Guelph, Canada; The Rimini Centre for Economic Analysis, Italy); Barbara Ulloa (Central Bank of Chile) |
| Abstract: | Understanding what drives international portfolio flows has important policy implications for countries wishing to exert some control on the size, direction and volatility of the flows. This paper empirically assesses the relative contribution of common (push) and country-specific (pull) factors to the variation of bond and equity flows from the US to 55 other countries. Using a Bayesian dynamic latent factor model, we find that more than 80% of the variation in bond and equity flows is due to push factors from the US to other countries. Hence global economic forces seem to prevail over domestic economic forces in explaining movements in international portfolio flows. The dynamics of push and pull factors can be partially explained by US and foreign economic fundamentals. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:15-16&r=ifn |
| By: | Brunnermeier, Markus K; Schnabel, Isabel |
| Abstract: | This paper reviews some of the most prominent asset price bubbles from the past 400 years and documents how central banks (or other institutions) reacted to those bubbles. The historical evidence suggests that the emergence of bubbles is often preceded or accompanied by an expansionary monetary policy, lending booms, capital inflows, and financial innovation or deregulation. We find that the severity of the economic crisis following the bursting of a bubble is less linked to the type of asset than to the financing of the bubble—crises are most severe when accompanied by a lending boom and high leverage of market players, and when financial institutions themselves are participating in the buying frenzy. Past experience also suggests that a purely passive “cleaning up the mess” stance toward the buildup of bubbles is, in many cases, costly. Monetary policy and macroprudential measures that lean against inflating bubbles can and sometimes have helped deflate bubbles and mitigate the associated economic crises. However, the correct implementation of such proactive policy approaches remains fraught with difficulties. |
| Keywords: | bubbles; capital flows; credit; macroprudential policy; monetary policy |
| JEL: | E44 E52 F34 G01 N10 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10528&r=ifn |