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on International Finance |
| By: | Julian Caballero (Research Department, Inter-American Development Bank, 1300 New York Ave NW, Washington DC); Ugo Panizza (Department of International Economics, The Graduate Institute of International and Development Studies, Maison de la Paix, Case Postale 136, CH1211 Genève 21); Andrew Powell (Research Department, Inter-American Development Bank, 1300 New York Ave NW, Washington DC) |
| Abstract: | Recent work suggests that non-financial firms have acted like financial intermediaries particularly in emerging economies. We corroborate these findings but then ask why? Our results indicate evidence for carry-trade activities but focused in countries with higher levels of capital controls, particular controls on infl‡ows. We find little evidence for such activities given other potential motives. We posit that this phenomenon is due more to the reaction to low global interest rates and strong capital infl‡ows than to incomplete markets or the retreat of global banks due to impaired balance-sheets or tighter regulations. |
| Keywords: | Corporate finance, bond issuance, currency mismatches, carry-trade, capital controls |
| JEL: | E51 F30 F33 |
| Date: | 2015–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp21-2015&r=ifn |
| By: | Joshua Aizenman; Mahir Binici |
| Abstract: | We study the ways domestic and external global factors (such as risk appetite, global liquidity, U.S. monetary policy, and commodity prices) affected the exchange market pressure before and after the global financial crisis as well as the role of these factors during the Federal Reserve’s tapering episode. Utilizing a comprehensive database on capital controls, we investigate whether control measures have a significant impact on mitigating exchange market pressure associated with capital flows [net and gross]. Using quarterly data over the 2000–2014 period and a dynamic panel model estimation, we find that external factors played a significant role in driving exchange market pressure for both OECD countries and emerging market countries, with a larger impact on the latter. While the effect of net capital flows on exchange market pressure is muted, short-term gross portfolio inflows and outflows comprise important factors that account for exchange market pressure. Short-term portfolio flows and long-term foreign direct investment flows have a significant impact on exchange market pressure for emerging market economies and no significant effect for OECD countries. Capital controls seem to significantly reduce the exchange market pressure although the economic size of this impact is highly dependent on the institutional quality. |
| JEL: | F3 F31 F33 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21662&r=ifn |
| By: | Albuquerque, Rui; Brandão-Marques, Luis; Ferreira, Miguel; Matos, Pedro Pinto |
| Abstract: | We test the hypothesis that foreign direct investment promotes corporate governance spillovers in the host country non-target firms. Using firm-level data from 22 countries, we find that cross-border M&A activity is associated with subsequent improvements in the governance of target firms’ rivals. The spillover is more pronounced when the acquirer’s country has stronger investor protection than the target’s country, and when the target operates in a competitive industry. Cross-border M&As also lead to increases in valuation and reductions in overinvestment of non-target firms. Our results suggest that the international market for corporate control promotes functional convergence in corporate governance. |
| Keywords: | Corporate governance; Cross-border mergers and acquisitions; Foreign direct investment; Spillovers |
| JEL: | G32 G34 G38 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10917&r=ifn |
| By: | G. Andrew Karolyi; David T. Ng; Eswar S. Prasad |
| Abstract: | We examine how emerging market (EM) investors allocate their stock portfolios internationally. Using both country-level and institution-level data, we find that the coming wave of EM investors systematically over- and under-weight their holdings in some target countries. These abnormal foreign allocation biases of EM investors offer robust support of the information endowment hypothesis of van Nieuwerburgh and Veldkamp (2009). Specifically, past capital and trade flows from a foreign country to the home country create an information endowment (or advantage) that lead home country investments to be overweight that foreign country. At the institutional level, information advantage proxies based on relationships between EM institutional investors and the headquarters of their parent companies have strong explanatory power for international portfolio allocations. The results remain robust after controlling for other factors like geographic and other measures of economic proximity, economic and capital market development, market integration, market returns and correlation, and corporate governance. The information advantage effect is stronger for EM investors for which external portfolios exhibit a higher degree of concentration. |
| JEL: | F21 G11 G15 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21661&r=ifn |
| By: | Olivier Blanchard; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon |
| Abstract: | The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers however believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically, and find support for the key predictions in the data. |
| JEL: | F21 F23 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21619&r=ifn |
| By: | Gita Gopinath |
| Abstract: | I define and provide empirical evidence for an "International Price System" in global trade, employing data for thirty-five developed and developing countries. This price system is characterized by two features. First, the overwhelming share of world trade is invoiced in very few currencies, with the dollar the dominant currency. Second, international prices, in their currency of invoicing, are not very sensitive to exchange rates at horizons of up to two years. In this system, a good proxy for a country's inflation sensitivity to exchange rate fluctuations is the fraction of its imports invoiced in a foreign currency. U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it. Exchange rate depreciations (appreciations) make U.S. exports cheaper (expensive), while for other countries they mainly raise (lower) mark-ups and hence profits. U.S. monetary policy has spillover effects on inflation in other countries, while spillovers from other countries monetary policies on to U.S. inflation are more muted. |
| JEL: | E31 F0 F41 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21646&r=ifn |
| By: | Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas |
| Abstract: | This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets, and nominal rigidities. In this context, we establish five main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap—a phenomenon we dub the “reserve currency paradox;” (iii) Beggar-thy-neighbor exchange rate devaluations stimulate the domestic economy at the expense of other economies; (iv) While more price and wage flexibility exacerbates the risk of a deflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (v) (Safe) Public debt issuances and increases in government spending anywhere are expansionary everywhere, and more so when there is some degree of price or wage flexibility. We use our model to shed light on the evolution of global imbalances, interest rates, and exchange rates since the beginning of the global financial crisis. |
| JEL: | E0 F3 F4 G01 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21670&r=ifn |
| By: | Lubos Pastor; Pietro Veronesi |
| Abstract: | We develop a simple general equilibrium model with heterogeneous agents, incomplete financial markets, and redistributive taxation. Agents differ in both skill and risk aversion. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the expected stock market return. Both income inequality and the level of stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence largely supports the model's predictions. |
| JEL: | E24 G1 H2 J24 J31 J38 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21668&r=ifn |