nep-ifn New Economics Papers
on International Finance
Issue of 2015‒06‒20
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The geographic distribution of international currencies and RMB internationalization By He, Qing; Korhonen, Iikka; Guo, Junjie; Liu , Fangge
  2. Comparative assessment of macroprudential policies By Valentina Bruno; Ilhyock Shim; Hyun Song Shin
  3. The impossible trinity: Where does India stand? By Rajeswari Sengupta
  4. International Transmission of Credit Shocks in an Equilibrium Model with Production Heterogeneity By Yuko Imura; Julia Thomas
  5. Limits to arbitrage: The case of single stock futures and spot prices By Nidhi Aggarwal

  1. By: He, Qing (BOFIT); Korhonen, Iikka (BOFIT); Guo, Junjie (BOFIT); Liu , Fangge (BOFIT)
    Abstract: The paper investigates the determinants of geographical distribution of international currencies in global financial market transactions. We implement a gravity model, in which international currency distribution depends on the characteristics of the source and destination countries. We find that the source country’s currency is more likely to be used in the financial market transactions of the destination country if the bilateral trade and capital flows are large or the destination country’s economy is the larger of the two. We also find that the level of development of the destination country’s financial market and whether the two countries use a common language are important determinants of the currency distribution. In addition, our model suggests that, to be a true international currency, the renminbi should be used more extensively in the financial markets of the US and UK.
    Keywords: currency internationalization; distribution of currencies; gravity model
    JEL: F33 F36 G15
    Date: 2015–06–03
  2. By: Valentina Bruno; Ilhyock Shim; Hyun Song Shin
    Abstract: This paper provides a comparative assessment of the effectiveness of macroprudential policies in 12 Asia-Pacific economies, using comprehensive databases of domestic macroprudential policies and capital flow management (CFM) policies. We find that banking sector CFM polices and bond market CFM policies are effective in slowing down banking inflows and bond inflows, respectively. We also find some evidence of spillover effects of these policies. Finally, regarding the interaction of monetary policy and macroprudential policies, our empirical findings suggest that macroprudential policies are more successful when they complement monetary policy by reinforcing monetary tightening, than when they act in opposite directions.
    Keywords: macroprudential policy, capital flow management policy, interest rate policy, complementarity, Asia-Pacific
    Date: 2015–06
  3. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: The Global Financial Crisis of 2008 and the heightened macroeconomic and financial volatility that followed the crisis raised important questions about the current international financial architecture as well as about individual countries' external macroeconomic policies. Policy makers dealing with the global crisis have been confronted with the 'impossible trinity' or the 'Trilemma', a potent paradigm of open economy macroeconomics asserting that a country may not target the exchange rate, conduct an independent monetary policy and have full financial integration, all at the same time. This issue is highly pertinent for India. A number of challenges have emanated from India's greater integration with the global financial markets during the last two decades, one of which includes managing the policy tradeoffs under the Trilemma. In this chapter, I present a comprehensive overview of a few empirical studies that have explored the issue of Trilemma in the Indian context. Based on these studies I attempt to analyze how have Indian policy makers dealt with the various trade-offs while managing the Trilemma over the last two decades.
    Keywords: Impossible Trinity, Financial Integration, Currency Stabilization, International Reserves, Sterilized Intervention
    JEL: F3 F4
    Date: 2015–03
  4. By: Yuko Imura; Julia Thomas
    Abstract: Many policy-makers and researchers view the recent financial and real economic crises across North America, Europe and beyond as a global phenomenon. Some have argued that this global recession has a common source: the U.S. financial crisis. This paper investigates the extent to which a credit shock in one country is transmitted to its trade partners. To this end, we develop a quantitative two-country dynamic stochastic general equilibrium model wherein intermediate-good producers face persistent idiosyncratic productivity shocks and occasionally binding collateralized borrowing constraints for investment loans. We find that a negative credit shock to one country induces a sharp contraction in that country’s economy, whereas the resulting recession in the economy of its trading partner is quantitatively minor. Transmission through goods trade is limited by the calibrated average trade share, which we find insufficient to deliver a sizable recession abroad. The degree of credit-shock transmission depends on the home bias in international trade and the type of goods countries trade with each other. We show that lower home bias dampens the domestic recession following a credit shock, but it amplifies international transmission. Similarly, when traded goods are less substitutable, the domestic recession is less severe, while real consequences abroad are greater. Our model also predicts that credit shocks cause larger declines in international trade than do productivity shocks. These results shed light on the great trade collapse over 2008-09, suggesting that tightened financial constraints may have been a contributing factor.
    Keywords: Business fluctuations and cycles, Economic models, Financial markets, Financial stability, International topics
    JEL: E E2 E22 E3 E32 E4 E44 F F4 F41 F44
    Date: 2015
  5. By: Nidhi Aggarwal (Indira Gandhi Institute of Development Research)
    Abstract: Market frictions limit arbitrage, but these frictions affect different stocks differently. Using intraday data on a liquid single stock futures and spot market, we examine the arbitrage efficiency of these two markets. We find evidence of significant cross- sectional variation in the size and asymmetricity of no-arbitrage bands. To the extent that market frictions affect all stocks similarly, commonality in the size of the bands is expected. 17 of variation in the size of the bands is explained by the first principal component. Changes in funding liquidity is a key factor that determines variation in the common component.
    Keywords: Limits to arbitrage, mispricing, no-arbitrage bands, short-selling constraints, transactions costs, funding constraints
    JEL: G13 G14
    Date: 2015–05

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