nep-ifn New Economics Papers
on International Finance
Issue of 2016‒03‒17
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Currency Premia and Global Imbalances By Della Corte, Pasquale; Riddiough, Steven; Sarno, Lucio
  2. What’s In a Name? That Which We Call Capital Controls By Atish R. Ghosh; Mahvash Qureshi
  3. Capital flows and central banking : the Indian experience By Gupta,Poonam - DECOS
  4. Stitching together the global financial safety net By Denbee, Edd; Jung, Carsten; Paternò, Francesco
  5. Agreeing on disagreement: heterogeneity or uncertainty? By Saskia ter Ellen; Willem F.C. Verschoor; Remco C.J. Zwinkels
  6. Asset Bubbles & Global Imbalances By Daisuke Ikeda; Toan Phan

  1. By: Della Corte, Pasquale; Riddiough, Steven; Sarno, Lucio
    Abstract: We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross sections of other major asset markets.
    Keywords: carry trade; currency risk premium; foreign exchange excess returns; global imbalances
    JEL: F31 F37 G12 G15
    Date: 2016–02
  2. By: Atish R. Ghosh; Mahvash Qureshi
    Abstract: This paper investigates why controls on capital inflows have a bad name, and evoke such visceral opposition, by tracing how capital controls have been used and perceived, since the late nineteenth century. While advanced countries often employed capital controls to tame speculative inflows during the last century, we conjecture that several factors undermined their subsequent use as prudential tools. First, it appears that inflow controls became inextricably linked with outflow controls. The latter have typically been more pervasive, more stringent, and more linked to autocratic regimes, failed macroeconomic policies, and financial crisis—inflow controls are thus damned by this “guilt by association.†Second, capital account restrictions often tend to be associated with current account restrictions. As countries aspired to achieve greater trade integration, capital controls came to be viewed as incompatible with free trade. Third, as policy activism of the 1970s gave way to the free market ideology of the 1980s and 1990s, the use of capital controls, even on inflows and for prudential purposes, fell into disrepute.
    Keywords: Capital controls;Capital inflows;International financial system;Globalization;Financial crises;Capital flows;capital controls, capital flows, gold standard, interwar period, Bretton Woods
    Date: 2016–02–12
  3. By: Gupta,Poonam - DECOS
    Abstract: Because of the steady liberalization of the capital account since the early 1990s and increased financial integration of the Indian economy, capital flows to India have moved in tandem with broad global trends. This paper looks at the extent to which India?s monetary policy has been affected by the ebbs and flows of the capital it receives. For ease of narration, the paper divides the post-liberalization period since the early 1990s into three phases--early 1990s to early 2000s, a period of increasing but still modest capital flows; early 2000s to 2007-08, a period of capital flow surge when inflows increased rapidly; and a period of sudden stops and volatility, starting in 2008-09, when capital flows reversed in the post-Lehman Brothers collapse, and again during the tapering tantrum of 2013. The paper shows that although ordinarily domestic policy imperatives, such as price stability and growth, have taken precedence over issues related to exchange rate or capital flows in policy rate setting, some accommodation in money supply is evident during the surge and stop episodes. The broad policy mix to handle large increases or reversals of capital flows has included reserve management, liquidity management, and capital flow measures.
    Keywords: Currencies and Exchange Rates,Debt Markets,Economic Theory&Research,Access to Finance,Emerging Markets
    Date: 2016–02–17
  4. By: Denbee, Edd (Bank of England); Jung, Carsten (Bank of England); Paternò, Francesco (Banca d’Italia)
    Abstract: Financial globalisation and the expansion in global capital flows bring a number of benefits — more efficient allocation of resources, improved risk sharing and more rapid technology transfer. But they can also increase the risk of financial crisis. In recent years, to reduce these risks to stability, countries have reformed financial regulation, enhanced frameworks for central bank liquidity provision and developed new elements, and increased the resources, of the global financial safety net (GFSN). A comprehensive and effective GFSN can help prevent liquidity crises from escalating into solvency crises and local balance of payments crises from turning into systemic sudden stop crises. The traditional GFSN consisted of countries’ own foreign exchange reserves with the IMF acting as a backstop. But since the global financial crisis there have been a number of new arrangements added to the GFSN, in particular the expansion of swap lines between central banks and regional financing arrangements. The new look GFSN is more fragmented than in the past, with multiple types of liquidity insurance and individual countries and regions having access to different size and types of financial safety nets. These new facilities provide many benefits, such as increasing the resources available to some countries and providing additional sources of economic surveillance. However, many facilities have yet to be drawn upon and variable coverage risks leaving some countries with inadequate access. This paper consider the features, costs and benefits of each of the components of the GFSN and whether the overall size and distribution across countries and regions is likely to be sufficient for a plausible set of shocks. We find that the components of the GFSN are not fully substitutable: different elements exhibit different levels of versatility, have been shown to be more or less effective depending upon the circumstances, have different cost profiles and have different implications for the functioning of the international monetary and financial system as a whole. We argue that while swap lines and RFAs can play an important role in the global financial safety net they are not a substitute for having a strong, well resourced, IMF at the centre of it. By running a series of stress scenarios we find that for all but the most severe crisis scenarios, the current resources of the GFSN are likely to be sufficient. However, this finding relies upon the IMF’s overall level of resources (including both permanent and temporary) being maintained at their current level. Our analysis also highlights that the aggregation of global resources can mask vulnerabilities at the country, and even regional, level. In other words, while the current safety net might be big enough in aggregate, there is a risk that, for large enough shocks, gaps in coverage could be revealed. Steps should be taken to ensure the different components of the safety net function effectively together to reduce the risk of gaps appearing. Policymakers should consider measures which (i) reduce vulnerabilities in external balance sheets which leave countries exposed to volatility in cross-border capital flows and increase potential demands on the safety net; (ii) secure the availability of appropriate GFSN resources, including the IMF’s resource base; and (iii) make more efficient use of the current GFSN resources by ensuring the elements of the GFSN more effectively complement one another.
    Keywords: Capital flows; GFSN; cross-border; Financial globalisation
    Date: 2016–02–12
  5. By: Saskia ter Ellen (Norges Bank (Central Bank of Norway)); Willem F.C. Verschoor (zVU University Amsterdam and Tinbergen Institute); Remco C.J. Zwinkels (zVU University Amsterdam and Tinbergen Institute)
    Abstract: Disagreement is used as a measure of both investor heterogeneity and uncertainty. We study whether disagreement captures heterogeneity or uncertainty for the foreign exchange market. We do so by relating disagreement to alternative measures of uncertainty, as well as by taking advantage of the different asset pricing implications of the two concepts. We find that whereas disagreement measures uncertainty conditionally, unconditionally this is only true during the peak of the global financial crisis.
    Keywords: foreign exchange markets, disagreement, heterogeneous expectations, uncertainty
    JEL: G12 G15
    Date: 2016–02–16
  6. By: Daisuke Ikeda; Toan Phan
    Date: 2016–02–18

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