nep-ifn New Economics Papers
on International Finance
Issue of 2015‒04‒25
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Cheap but Flighty: How Global Imbalances create Financial Fragility By Enrico Perotti; Toni Ahnert
  2. Capital flows and asset prices: empirical evidence from emerging and developing economies By Taguchi, Hiroyuki; Sahoo, Pravakar; Nataraj, Geethanjali

  1. By: Enrico Perotti (University of Amsterdam, the Netherlands); Toni Ahnert (Bank of Canada, Canada)
    Abstract: Can a wealth shift to emerging countries explain instability in developed countries? Investors exposed to political risk seek safety in countries with better property right protection. This induces private intermediaries to offer safety via inexpensive demandable debt, and increase lending into marginal projects. Because safety conscious foreigners escape any risk by running in some good states, cheap foreign funding leads to larger and more frequent runs. Beyond some scale, foreign runs also induce domestic runs in order to avoid dilution. When excess liquidation causes social losses, a domestic planner may limit the scale of foreign inflows or credit volume.
    Keywords: capital flows, unstable funding, safe haven, absolute safety
    JEL: F3 G2
    Date: 2015–03–19
  2. By: Taguchi, Hiroyuki; Sahoo, Pravakar; Nataraj, Geethanjali
    Abstract: This paper aims at providing empirical evidence on the effect of capital flows on asset prices including its channel under different currency regimes, focusing on ten emerging and developing economies in the world with data availability and stationarity for the 2000s, by a generalized impulse response analysis under a vector auto-regression model. The main findings are as  follows. Portfolio capital inflows have a significantly positive effect on stock prices in all sample economies except two transition economies, which implies that the direct channel from capital inflows into stock markets is at least working in sample economies regardless of their currency regimes; The indirect channel –the channel in which capital inflows raise share prices through an increase in domestic monetary base– works differently under different currency regimes: it works in the economies with peg regime through their intervention to foreign exchange markets, whereas the indirect channel seems to be shut down in those with floating regime probably by sterilizing the intervention.
    Keywords: capital flows, asset prices, emerging and developing Economies
    JEL: E51 E52 F32
    Date: 2015

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