nep-ifn New Economics Papers
on International Finance
Issue of 2016‒02‒12
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Cost of Capital of the Financial Sector By Adrian, Tobias; Friedman, Evan; Muir, Tyler
  2. International Channels of Transmission of Monetary Policy and the Mundellian Trilemma By Rey, Hélène
  3. International Transmissions of Monetary Shocks By Han, Xuehui; Wei, Shang-Jin

  1. By: Adrian, Tobias; Friedman, Evan; Muir, Tyler
    Abstract: Standard factor pricing models do not capture the common time series or cross sectional variation in average returns of financial stocks well. We propose a five factor asset pricing model that complements the standard Fama-French (1993) three factor model with a financial sector ROE factor (FROE) and the spread between the financial sector and the market return (SPREAD). This five factor model helps to alleviate the pricing anomalies for financial sector stocks and also performs well for nonfinancial sector stocks when compared to the Fama-French (2014) five factor or the Hou, Xue, Zhang (2014) four factor models. We find the aggregate expected return to financial sector equities to correlate negatively with aggregate financial sector ROE, which is puzzling, as ROE is commonly used as a measure of the cost of capital in the financial sector.
    Keywords: asset pricing; cost of capital; financial intermediation
    JEL: G12 G21 G24 G31
    Date: 2015–12
  2. By: Rey, Hélène
    Abstract: This lecture argues that the Global Financial Cycle is a challenge for the validity of the Mundellian trilemma. I present evidence that US monetary policy shocks are transmitted internationally and affect financial conditions even in inflation targeting economies with large financial markets. Hence flexible exchange rates are not enough to guarantee monetary autonomy in a world of large capital flows.
    Keywords: Global Financial Cycle; Monetary Policy; Trilemma
    JEL: F33 F41 F42
    Date: 2015–12
  3. By: Han, Xuehui; Wei, Shang-Jin
    Abstract: This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. It combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country’s interest rate if it focuses only on growth and inflation goals. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. We find that a flexible exchange rate regime per se does not deliver monetary policy autonomy (in contrast to the conclusions of Obstfeld (2015) and several others). Instead, some form of capital control appears necessary. Interestingly, a combination of capital controls and a flexible exchange rate may provide the most buffer for developing countries against foreign monetary policy shocks.
    Keywords: capital control; exchange rate regime; monetary policy independence; Taylor Rule; trilemma
    JEL: E42 E43 E52
    Date: 2016–01

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