nep-ifn New Economics Papers
on International Finance
Issue of 2016‒07‒23
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Currency Wars, Coordination, and Capital Controls By Olivier Blanchard
  2. Exchange Rates and Monetary Policy Uncertainty By Andrea Vedolin; Alireza Tahbaz-Salehi; Philippe Mueller
  3. Exchange Risk and Market Integration By Ines CHAIEB; Vihang ERRUNZA
  4. Can Countries Rely on Foreign Saving for Investment and Economic Development? By Eduardo Cavallo; Barry Eichengreen; Ugo Panizza
  5. Central Bank Transparency and Cross-border Banking By Eichler, Stefan; Littke, Helge; Tonzer, Lena

  1. By: Olivier Blanchard (Peterson Institute for International Economics)
    Abstract: The strong monetary policy actions undertaken by advanced economies' central banks have led to complaints of "currency wars" by some emerging-market economies and to widespread demands for more macroeconomic policy coordination. This paper reviews cross-border effects of advanced economies' monetary policies on emerging economies, through goods markets, foreign exchange markets, and financial markets, and examines the scope for coordination. Blanchard concludes that, while advanced economies' monetary policies indeed have had substantial spillover effects on emerging-market economies, there was and still is little room for coordination. He argues that, given the limits on fiscal policy, restrictions on capital flows (i.e., capital controls) were and still are the appropriate macroeconomic instrument to advance the objectives of both macro and financial stability.
    Keywords: Exchange Rates, Capital Controls, Capital Flows, Monetary Policy, Macroeconomic Policy Coordination
    JEL: F3 F36 F42
    Date: 2016–07
  2. By: Andrea Vedolin (London School of Economics); Alireza Tahbaz-Salehi (Columbia Business School); Philippe Mueller (London School of Economics)
    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-a`-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.
    Date: 2016
  3. By: Ines CHAIEB (University of Geneva and Swiss Finance Institute); Vihang ERRUNZA (McGill University)
    Abstract: We investigate the impact of currency factor on market integration. We compare integration indices estimated from international asset pricing models with and without real exchange risk. The theoretical expectation implies the integration measures should be similar when global currency premium and the sum of global and local currency premiums are small. Our empirical results support this proposition. We also examine the sensitivity of the Pukhthuatong and Roll (2009) R square to omitted currency factors. In general, currency risk does not affect the level and the dynamics of the integration measure except under crisis conditions.
    Keywords: Real exchange rate risk premium, market integration, international asset pricing, emerging markets
    JEL: G15 F30 G30
  4. By: Eduardo Cavallo (Inter-American Development Bank); Barry Eichengreen (University of California, Berkeley); Ugo Panizza (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: A surprisingly large number of countries have been able to finance a significant fraction of domestic investment using foreign finance for extended periods. While many of these episodes are in low-income countries where official finance is more important than private finance, we also identify a number of episodes where a substantial fraction of domestic investment was financed via private capital inflows. That said, we find that foreign savings are not a good substitute for domestic savings. More often than not, episodes of large and persistent current account deficits do not end happily. Rather, they end abruptly with compression of the current account, real exchange rate depreciation, and a sharp slowdown in investment. We conclude that financing growth and investment out of foreign savings, while not impossible, is risky.
    Keywords: Current account, Growth, Volatility, Savings
    JEL: F32 O16
    Date: 2016–07–15
  5. By: Eichler, Stefan; Littke, Helge; Tonzer, Lena
    Abstract: We analyze the effect of central bank transparency on cross-border bank activities. Based on a panel gravity model for cross-border bank claims for 21 home and 47 destination countries from 1998 to 2010, we find strong empirical evidence that a rise in central bank transparency in the destination country, on average, increases cross-border claims. Using interaction models, we find that the positive effect of central bank transparency on cross-border claims is only significant if the central bank is politically independent. Central bank transparency and credibility are thus considered complements by banks investing abroad.
    Keywords: central bank transparency,cross-border banking,gravity model
    JEL: E58 F30 G15
    Date: 2016

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