nep-ifn New Economics Papers
on International Finance
Issue of 2016‒09‒18
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Capital Inflow Surges and Consequences By Ghosh, Atish R.; Qureshi, Mahvash S.
  2. Spillovers of the ECB's non-standard monetary policy into CESEE economies By Alessio Ciarlone; Andrea Colabella
  3. Bad Bad Contagion By Londono, Juan M.
  4. Managing Capital Outflows: The Role of Foreign Exchange Intervention By Pablo Winant; Jonathan Ostry; Atish Ghosh; Suman Basu

  1. By: Ghosh, Atish R. (Asian Development Bank Institute); Qureshi, Mahvash S. (Asian Development Bank Institute)
    Abstract: While capital flows to emerging markets bring numerous benefits, they are also known to create macroeconomic imbalances (economic overheating, currency overvaluation) and increase financial vulnerabilities (domestic credit growth, bank leverage, foreign currency-denominated lending). But are all inflows the same? In this paper, we examine whether the source of the inflow—residents repatriating foreign assets or nonresidents investing in the country—or the type of inflow (foreign direct investment, portfolio, other investment) makes any difference to the consequences of the capital flow. Our results, based on a sample of 53 emerging markets over 1980–2013, show that when it comes to the source of the inflow, the macroeconomic and financial-stability consequences of flows driven by residents (asset flows) and nonresidents (liability flows) are broadly similar in economic terms. Formal statistical tests, however, suggest that liability flows are more prone to causing economic overheating and domestic credit expansion than asset flows. On the types of inflows, we find that compared to direct investment, portfolio debt and other investment flows are associated with larger macroeconomic imbalances and financial vulnerabilities. We conclude that policy should try to mitigate the untoward consequences of inflows, and shift their composition from risky to safer forms of liabilities.
    Keywords: capital flow; emerging markets; macroeconomics; economic overheating; credit expansion; currency; overvaluation; domestic credit; bank leverage; foreign currency; lending; FDI; foreign direct investment; investment; financial stability; asset flow; liability flow; portfolio debt
    JEL: F21 F32 F38 F41 F42 F62
    Date: 2016–09–15
  2. By: Alessio Ciarlone (Banca d'Italia); Andrea Colabella (Banca d'Italia)
    Abstract: In this paper we provide evidence that the effects of the ECB’s asset purchase programmes spill over into CESEE countries, contributing to easing their financial conditions both in the short and in the long term through different transmission channels. In the short term, a number of variables in CESEE financial markets appear to respond to news related to the ECB’s non-standard policies by moving in the expected direction. Over a longer-term horizon, we found that cross-border portfolio and banking capital flows towards CESEE economies have been ffected by both the announcement and the actual implementation of the ECB’s asset purchase programmes, pointing to the existence of a portfolio rebalancing and a banking liquidity channel.
    Keywords: unconventional monetary policy, ECB, Central and Eastern Europe, international spillovers, event study
    JEL: C32 C33 E52 E58 F32 F36
    Date: 2016–09
  3. By: Londono, Juan M.
    Abstract: Bad contagion, the downside component of contagion in international stock markets, has negative implications for financial stability. I propose a measure for the occurrence and severity of global contagion that combines the factor-model approach in Bekaert et al. (2005) with the model-free or co-exceedance approach in Bae et al. (2003). Contagion is measured as the proportion of international stock markets that simultaneously experience unexpected returns beyond a certain threshold. I decompose contagion into its downside or bad component (the co-exceedance of low returns) and its upside or good component (the co-exceedance of high returns). I find that episodes of bad contagion are followed by a significant drop in country-level stock index prices and by a deterioration of financial stability indicators, especially for more open economies.
    Keywords: International stock markets ; Bad contagion ; Downside contagion ; Inter-connectedness ; International integration ; Financial stability ; SRISK
    JEL: G15 F36 F65
    Date: 2016–09
  4. By: Pablo Winant (Bank of England); Jonathan Ostry (International Monetary Fund); Atish Ghosh (International Monetary Fund); Suman Basu (International Monetary Fund)
    Abstract: We analyze the optimal intervention policy for an emerging market central bank which wishes to stabilize the exchange rate in response to a capital outflow shock, but possesses limited reserves. Using a stylized framework which nests various forms of limited capital mobility, we derive a time inconsistency problem, and we compare outcomes under full, zero and partial commitment. A central bank with full commitment achieves a gentle exchange rate depreciation to the pure float level by promising a path of sustained intervention, including a commitment to exhaust reserves after particularly adverse shocks. A central bank without commitment intervenes less, wishing instead to preserve at least some reserves forever, and suffers a larger exchange rate depreciation. For more persistent shocks, the time inconsistency problem is larger, and simple intervention rules can achieve welfare gains relative to discretion.
    Date: 2016

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