nep-ifn New Economics Papers
on International Finance
Issue of 2016‒09‒11
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global Financial Conditions and Monetary Policy Autonomy By Carlos Caceres; Yan Carriere-Swallow; Bertrand Gruss
  2. Macro uncertainty and currency premia By Aleksejs Krecetovs; Pasquale Della Corte
  3. Changes in Prudential Policy Instruments — A New Cross-Country Database By Eugenio M Cerutti; Ricardo Correa; Elisabetta Fiorentino; Esther Segalla

  1. By: Carlos Caceres; Yan Carriere-Swallow; Bertrand Gruss
    Abstract: Is the Mundell-Fleming trilemma alive and well? International co-movement of asset prices takes place alongside synchronized business cycles, complicating the identification of financial spillovers and assessments of monetary policy autonomy. A benchmark for interest rate comovement is to impose the null hypothesis that central banks respond only to the outlook for domestic inflation and output. We show that common approaches used to estimate interest rate spillovers tend to understate the degree of monetary autonomy enjoyed by small open economies with flexible exchange rates. We propose an empirical strategy that partials out those spillovers that are associated with impaired monetary autonomy. Using this approach, we revisit the predictions of the trilemma and find more compelling evidence that flexible exchange rates deliver monetary autonomy than prior work has suggested.
    Keywords: Economic conditions;Small open economies;Monetary policy;Central bank autonomy;Central banking and monetary issues;Spillovers;Vector autoregression;Econometric models;Monetary policy; monetary conditions; autonomy; global financial cycle.
    Date: 2016–06–08
  2. By: Aleksejs Krecetovs (Imperial College London); Pasquale Della Corte (Imperial College London)
    Abstract: This paper studies empirically the relation between macro uncertainty shocks and the cross-section of currency excess returns. We measure uncertainty over macro variables such as current account, inflation rate, short-term interest rate, real economic growth and foreign exchange rate using the cross-sectional dispersion of market participants’ expectations from two international surveys of macro forecasts. We ï¬ nd evidence that investment currencies deliver low returns whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. In contrast, uncertainty over other macro indicators displays no signiï¬ cant relation with the cross-section of currency excess returns. Our results are consistent with a recent theory of exchange rate determination based on capital flows in imperfect ï¬ nancial markets.
    Date: 2016
  3. By: Eugenio M Cerutti; Ricardo Correa; Elisabetta Fiorentino; Esther Segalla
    Abstract: This paper documents the features of a new database that focuses on changes in the intensity in the usage of several widely used prudential tools, taking into account both macro-prudential and micro-prudential objectives. The database coverage is broad, spanning 64 countries, and with quarterly data for the period 2000Q1 through 2014Q4. The five types of prudential instruments in the database are: capital buffers, interbank exposure limits, concentration limits, loan to value (LTV) ratio limits, and reserve requirements. A total of nine prudential tools are constructed since some useful further decompositions are presented, with capital buffers divided into four subindices: general capital requirements, real state credit specific capital buffers, consumer credit specific capital buffers, and other specific capital buffers; and with reserve requirements divided into two sub-indices: domestic currency capital requirements and foreign currency capital requirements. While general capital requirements have the most changes from the cross-country perspective, LTV ratio limits and reserve requirements have the largest number of tightening and loosening episodes. We also analyze the instruments’ usage in relation to the evolution of key variables such as credit, policy rates, and house prices, finding substantial differences in the patterns of loosening or tightening of instruments in relation to business and financial cycles.
    Keywords: Policy instruments;Macroprudential Policy;Financial institutions;Business cycles;Developed countries;Emerging markets;Data collection;Cross country analysis;Macroprudential policies, Microprudential Policies, Financial cycles
    Date: 2016–06–08

This nep-ifn issue is ©2016 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.