nep-ifn New Economics Papers
on International Finance
Issue of 2016‒03‒23
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The impact of international swap lines on stock returns of banks in emerging markets By Alin Marius Andries; Andreas M. Fischer; Pinar Yesin
  2. The geographic distribution of international currencies and RMB internationalization By He, Qing; Korhonen, Iikka; Guo, Junjie; Liu, Fangge
  3. International Channels of Transmission of Monetary Policy and the Mundellian Trilemma By Hélène Rey
  4. International Coordination By Jeffrey A. Frankel
  5. A Market-based Indicator of Currency Risk: Evidence from American Depositary Receipts By Stefan Eichler; I. Roevekamp

  1. By: Alin Marius Andries (Alexandru Ioan Cuza University of Iasi); Andreas M. Fischer (Swiss National Bank); Pinar Yesin (Swiss National Bank)
    Abstract: This paper investigates the impact of international swap lines on stock returns using data from banks in emerging markets. The analysis shows that swap lines by the Swiss National Bank (SNB) had a positive impact on bank stocks in Central and Eastern Europe. It then highlights the importance of individual bank characteristics in identifying the impact of swap lines on bank stocks. Bank-level evidence suggests that stock prices of local and less-well capitalized banks as well as banks with high foreign currency exposures and high reliance on short-term funding responded more strongly to SNB swap lines. This new evidence is consistent with the view that swap lines not only enhanced market liquidity but also reduced risks associated with micro-prudential issues.
    Date: 2015–10
  2. By: He, Qing; Korhonen, Iikka; Guo, Junjie; Liu, Fangge
    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
  3. By: Hélène Rey
    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.
    JEL: F3 F33 F41
    Date: 2016–01
  4. By: Jeffrey A. Frankel
    Abstract: After a 30-year absence, calls for international coordination of macroeconomic policy are back. This time the issues go by names like currency wars, taper tantrums, and fiscal compacts. In traditional game theory terms, the existence of spillovers implies that countries are potentially better off if they coordinate policies than under the Nash non-cooperative equilibrium. But what is the nature of the spillover and the coordination? The paper interprets recent macroeconomic history in terms of four possible frameworks for proposals to coordinate fiscal policy or monetary policy: the locomotive game, the discipline game, the competitive depreciation game and the competitive appreciation game. (The paper also considers claims that monetary coordination has been made necessary by the zero lower bound among advanced countries or financial imperfections among emerging markets.) Perceptions of the sign of spillovers and the direction of proposed coordination vary widely. The existence of different models and different domestic interests may be as important as the difference between cooperative and non-cooperative equilibria. In some cases complaints about foreigners’ actions and calls for cooperation may obscure the need to settle domestic disagreements.
    JEL: F42
    Date: 2016–01
  5. By: Stefan Eichler; I. Roevekamp
    Abstract: We introduce a novel currency risk measure based on American Depositary Receipts(ADRs). Using a multifactor pricing model, we exploit ADR investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 831 ADRs located in 23 emerging markets over the 1994-2014 period, we find that a deterioration in the fiscal and current account balance, as well as higher inflation, increases currency risk. Interaction models reveal that these macroeconomic fundamentals drive currency risk, particularly in countries with managed exchange rates, low levels of foreign exchange reserves and a poor sovereign credit rating.
    Keywords: currency risk; currency crises; American depositary receipts; emerging markets
    JEL: F31 F37 G12 G15
    Date: 2016–03

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