nep-ifn New Economics Papers
on International Finance
Issue of 2017‒04‒09
six papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Cross-country exposures to the Swiss franc By Agustín S. Bénétrix; Philip R. Lane
  2. Do monetary policy announcements affect foreign exchange returns and volatility? Some evidence from high-frequency intra-day South African data. By Cyril May; Greg Farrell; Jannie Rossouw
  3. Capital controls and foreign currency denomination By Fernando Garcia-Barragan; Guangling Liu
  4. Macro-Prudential Response to Increased Global Market Volatility By Kang, Tae Soo; Lim, Tae Hoon; Suh, Hyunduk; Kang, Eunjung
  5. Equilibrium in FX Swap Markets: Funding Pressures and the Cross-Currency Basis By Jean-Marc Bottazzi; Jaime Luque; Mario Pascoa
  6. Measures of Participation in Global Value Chains and Global Business Cycles By Zhi Wang; Shang-Jin Wei; Xinding Yu; Kunfu Zhu

  1. By: Agustín S. Bénétrix; Philip R. Lane
    Abstract: "This paper first documents the foreign currency exposures of Switzerland in the 2002-2012 period. We find that the large scale of the Swiss international balance sheet means that movements in the Swiss Franc generate large cross-border valuation effects. Second, we examine the Swiss Franc holdings of the rest of the world and highlight differences in exposures between advanced and emerging economies." JEL Classification: F31, O24
    Keywords: cross-border valuation, foreign currency exposures, swiss frank, emerging economies
    Date: 2016–03
  2. By: Cyril May; Greg Farrell; Jannie Rossouw
    Abstract: This paper examines the temporal effect of domestic monetary policy surprises on both the levels and volatility of the South African rand/United States dollar exchange rate. The analysis in this ‘event study’ proceeds using intra-day minute-by-minute exchange rate data, repo rate data from the South African Reserve Bank’s scheduled monetary policy announcements, and Bloomberg market consensus repo rate forecasts. We find statistically and economically significant responses in intra-day high-frequency exchange rate returns and volatility to domestic interest rate surprises, but anticipated changes have no bearing on the rand. Our results suggest that monetary policy news is an important determinant of the exchange rate for approximately 5 to 40 minutes after the estimated time of the pronouncement – suggesting a relatively high degree of market ‘efficiency’ in its mechanical sense (and not ‘efficient’ market in the deeper economic-informational sense) in processing this information.
    Keywords: Exchange rate, expectations, monetary policy surprises, repo rate, returns, volatility
    JEL: C22 E52 E58 F31 F41 G14 G15
    Date: 2017–03
  3. By: Fernando Garcia-Barragan; Guangling Liu
    Abstract: This paper studies the effectiveness of capital controls with foreign currency denomination and its welfare implications. To do this, we develop a general equilibrium model with financial frictions and banking, in which assets and liabilities are denominated in both domestic and foreign currencies. We propose a non-pecuniary capital-control policy that limits the gap between foreign-currency denominated loans and deposits to the amount of foreign funds that bankers can borrow from the international credit market. We show that capital controls have a critical impact on the dynamics of assets and liabilities that are denominated in foreign currency. This critical impact works through the capital control constraint on quantitative nancial variables directly, not through the spreads. The non-pecuniary capital controls help to stabilize the nancial sector and, hence, reduces the negative spillovers to the real economy. A more restrictive capital-control policy signicantly attenuates the welfare effect of the foreign monetary policy and exchange rate shocks.
    Keywords: Capital control, Foreign currency denomination, Open economy macroeconomics, Financial friction, Welfare analysis, DSGE
    JEL: E32 E44 E58 F38 F41
    Date: 2017–02
  4. By: Kang, Tae Soo (Korea Institute for International Economic Policy); Lim, Tae Hoon (Korea Institute for International Economic Policy); Suh, Hyunduk (INHA University); Kang, Eunjung (Korea Institute for International Economic Policy)
    Abstract: Volatilities of price indicators have remained extremely stabilized during the period of low interest rates since the Global Financial Crisis (GFC) of September 2009. Low volatility pushes down risk premium. That could lead global investors' risk appetite to increase. There has been a big change in global liquidity flows since 2009. Emerging market economies (EMEs), with relatively high credit risk, received a huge capital inflows backed up by the increased risk appetite of global investors. US Federal Reserve is now trying to normalize its monetary policy by increasing the policy rate tied at zero low bound for about seven years. This will bring asset price volatility and risk premium to normalize too. We remain concerned about the downside risk to the capital outflows from EMEs, including Korea. And it may well potentially cause a decrease in asset price and a growth contraction in EMEs. Accordingly, we overview volatility of financial market and new trends in capital flows, and identify the determinants of capital flows to/from EMEs. We also review the use of capital flow management policies in EMEs including Korea, and examine the effectiveness of Asset? Based Reserve Requirements (ABRR) as an alternative macro-prudential policy measure to manage capital flows.
    Keywords: Macroprudential; Volatility; Emerging Market; Global Liquidity
    Date: 2016–03–14
  5. By: Jean-Marc Bottazzi (Capula and Paris School of Economics); Jaime Luque (University of Wisconsin - Madison); Mario Pascoa (University of Surrey)
    Abstract: To understand this normality requires turning the CIP logic on its head. We look at the Foreign Exchange (FX) swap market as the very market where scarce funding capacities are exchanged; the basis becomes an equilibrium outcome that compensates one of the parties for the temporary loss in the possession of one of the currencies. Ultimately, the counterparty’s funding pressure in that currency determines the willingness to pay for such endogenous possession value. In our model, banks compete for funding in two currencies. Unsecured, secured and FX positions are bounded by leverage ratio constraints tying banks’ equity. Currency-specific funding pressures are apparent in banks’ secured funding constraints, governing how securities denominated in different currencies can be pledged (and short-sold). The latter, not the former, is what drives the basis; this explains why bases also arise with no crisis in sight. A basis occurs when secured funding becomes more binding in one currency than in the other; leverage constraints can only have an accessory effect through this channel. Equivalently, the basis depends on how different across currencies are the spreads between actual (bank specific) unsecured borrowing rates and the secured rates. To illustrate, we look at central banks’ actions targeting international funding pressures, in particular FX swaps lines and collateral policies.
    JEL: D5 E5 G15 G18
    Date: 2017–03
  6. By: Zhi Wang; Shang-Jin Wei; Xinding Yu; Kunfu Zhu
    Abstract: This paper makes two methodological contributions. First, it proposes a framework to decompose total production activities at the country, sector, or country-sector level, to different types, depending on whether they are for pure domestic demand, traditional international trade, simple GVC activities, and complex GVC activities. Second, it proposes a pair of GVC participation indices that improves upon the measures in the existing literature. We apply this decomposition framework to a Global Input-Output Database (WIOD) that cover 44 countries and 56 industries from 2000 to2014 to uncover evolving compositions of different production activities. We also show that complex GVC activities co-move with global GDP growth more strongly than other types of production activities.
    JEL: F10
    Date: 2017–03

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