nep-ifn New Economics Papers
on International Finance
Issue of 2016‒04‒30
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Exchange rates and monetary policy uncertainty By Philippe Mueller; Alireza Tahbaz-Salehi; Andrea Vedolin
  2. Managing sudden stops By Eichengreen,Barry J.; Gupta,Poonam - DECOS
  3. Spillover effects of global liquidity’s expansion on emerging countries: evidences from a Panel VAR approach By Nady Rapelanoro
  4. What to Expect When China Liberalizes Its Capital Account By Mark Kruger; Gurnain Pasricha
  5. The Dilemma or Trilemma Debate: Empirical Evidence By Pablo Anaya. Michael Hachula

  1. By: Philippe Mueller; Alireza Tahbaz-Salehi; Andrea Vedolin
    Abstract: We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.
    Keywords: Monetary policy; foreign exchange; uncertainty
    JEL: J1 F3 G3
    Date: 2016–01–15
  2. By: Eichengreen,Barry J.; Gupta,Poonam - DECOS
    Abstract: The recent reversal of capital flows to emerging markets has pointed up the continuing relevance of the sudden stop problem. This paper analyzes the sudden stops in capital flows to emerging markets since 1991. It shows that the frequency and duration of sudden stops have remained largely unchanged, but that the relative importance of different factors in their incidence has changed. In particular, global factors appear to have become more important relative to country-specific characteristics and policies. Sudden stops now tend to affect different parts of the world simultaneously rather than bunching regionally. Stronger macroeconomic and financial frameworks have allowed policy makers to respond more flexibly, but these more flexible responses have not guaranteed insulation or mitigated the impact of the phenomenon. These findings suggest that the challenge of understanding and coping with capital-flow volatility is far from fully met.
    Keywords: Currencies and Exchange Rates,Macroeconomic Management,Debt Markets,Economic Theory&Research,Emerging Markets
    Date: 2016–04–13
  3. By: Nady Rapelanoro
    Abstract: The attention for the global liquidity concept has grown over the recent years insofar as its dramatic increase is considered among regulators and economists as one of the possible determinants of the last global financial crisis. Although global liquidity remains without a generally accepted definition in the literature, the destabilizing effects of its expansion are widely studied, especially for the advanced economies. However, empirical studies regarding the consequences in the emerging countries are scarcer and this paper is related to this topic. We rely on a Panel VAR approach to investigate those effects on emerging economies and we find that the consequences are in line with the results of the literature on advanced countries. Nevertheless, contrary to previous empirical studies, we find that the choice of the exchange rate regimes is not important, as the exchange rate regime does not fully isolate the countries from a surge of global liquidity in the issuing countries.
    Keywords: Global liquidity, emerging countries, international spillovers, Panel VAR model.
    JEL: C33 E5
    Date: 2016
  4. By: Mark Kruger; Gurnain Pasricha
    Abstract: When China joined the World Trade Organization in December 2001, it marked a watershed for the world economy. Ten years from now, the opening of China’s capital account and the financial integration that will unfold will be viewed as a milestone of similar importance. This paper discusses the benefits, to China and the rest of the world, of deepening China’s capital account liberalization. We assess China’s current level of de jure and de facto integration, in relation to other G20 economies. We update the Pasricha et al. (2015) data on capital control actions to 2015 for China, to assess China’s international financial integration. We also look at its relative international investment position to gauge its de facto integration. We then estimate the size and composition of capital flows likely to ensue assuming that China’s further capital account liberalization results in its gross international investment position converging to that of the G20 average. In addition, we discuss the risks involved with the further opening of China’s capital account and how they can best be managed. We also emphasize the potentially stabilizing effects of residents’ flows and the importance of liberalizing inflows and outflows in a balanced way and at the same time.
    Keywords: Balance of payments and components, Exchange rate regimes, International topics
    JEL: F31 F32 G18
    Date: 2016
  5. By: Pablo Anaya. Michael Hachula
    Abstract: One of the central results in international economics is that an economy cannot have at the same time independent monetary policy, free capital flows, and a fixed exchange rate. Over the last few years, however, this so-called Mundell-Flemming ‘trilemma’ has increasingly been challenged. It is argued that given the rising importance and synchronization of capital and credit flows across countries and their underlying common driving forces, the ‘trilemma’ has morphed into a ‘dilemma’: an economy cannot have at the same time independent monetary policy and an open capital account, independent of the exchange rate regime. This Roundup provides a brief overview of the debate, reviews recent empirical findings on the topic, and outlines possible directions for future research.
    Date: 2016

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