nep-ifn New Economics Papers
on International Finance
Issue of 2017‒05‒28
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Managing the Tide; How Do Emerging Markets Respond to Capital Flows? By Atish R. Ghosh; Jonathan David Ostry; Mahvash S Qureshi
  2. Supply- and demand-side factors in global banking By Mary Amiti; Patrick McGuire; David E Weinstein
  3. Coherent financial cycles for G-7 countries: Why extending credit can be an asset By Yves S. Schüler; Paul P. Hiebert; Tuomas A. Peltonen
  4. Thick vs. Thin-Skinned; Technology, News, and Financial Market Reaction By Barry J. Eichengreen; Romain Lafarguette; Arnaud Mehl

  1. By: Atish R. Ghosh; Jonathan David Ostry; Mahvash S Qureshi
    Abstract: This paper examines whether—and how—emerging market economies (EMEs) respond to capital flows to mitigate their untoward consequences. Based on a sample of about 50 EMEs over 2005Q1–2013Q4, we find that EME policy makers respond proactively to capital inflows by using a combination of policy tools: central banks raise the policy interest rate to address economic overheating concerns; intervene in the foreign exchange market to resist currency appreciation pressures; tighten macroprudential measures to dampen credit growth; and deploy capital inflow controls in the face of competitiveness and financial-stability concerns. Contrary to conventional policy advice to EMEs, we find no evidence of counter-cyclical fiscal policy in the face of capital inflows. Overall, policies are more likely to respond, and used in combination, during inflow surges than in more normal times.
    Keywords: Central banks and their policies;capital flows; policy toolkit; capital controls; emerging market economies, capital flows, policy toolkit, capital controls, emerging market economies
    Date: 2017–03–27
  2. By: Mary Amiti; Patrick McGuire; David E Weinstein
    Abstract: What is the role for supply and demand forces in determining movements in international banking flows? Answering this question is crucial for understanding the international transmission of financial shocks and formulating policy. This paper addresses the question by using the method developed in Amiti and Weinstein (forthcoming) to exactly decompose the growth in international bank credit into common shocks, idiosyncratic supply shocks and idiosyncratic demand shocks for the period 2000-2016. A striking feature of the global banking flows data can be characterized by what we term the "Anna Karenina Principle": all healthy credit relationships are alike, each unhealthy credit relationship is unhealthy in its own way. During non-crisis years, bank flows are well-explained by a common global factor and a local demand factor. But during times of crisis flows are affected by idiosyncratic supply shocks to a borrower country's creditor banks. This has important implications for why standard models break down during crises.
    Keywords: international banking, global financial crisis, supply vs demand shocks, BIS consolidated banking statistics
    JEL: F34 G01 G21
    Date: 2017–05
  3. By: Yves S. Schüler; Paul P. Hiebert; Tuomas A. Peltonen
    Abstract: Failing to account for joint dynamics of credit and asset prices can be hazardous for countercyclical macroprudential policy. We show that composite financial cycles, emphasising expansions and contractions common to credit and asset prices, powerfully predict systemic banking crises. Further, the joint consideration yields a more robust view on financial cycle characteristics, reconciling an empirical puzzle concerning cycle properties when using two popular alternative methodologies: frequency decompositions and standard turning point analysis. Using a novel spectral approach, we establish the following facts for G-7 countries (1970Q1-2013Q4): Relative to business cycles, financial cycles differ in amplitude and persistence – albeit with heterogeneity across countries. Average financial cycle length is around 15 years, compared with 9 years (6.7 excluding Japan) for business cycles. Still, country-level business and financial cycles relate occasionally. Across countries, financial cycle synchronisation is strong for most countries; but not for all. In contrast, business cycles relate homogeneously. JEL Classification: C54, E32, E44, E58, G01
    Keywords: Financial cycle, Spectral analysis, Macroprudential policy
    Date: 2017–05
  4. By: Barry J. Eichengreen; Romain Lafarguette; Arnaud Mehl
    Abstract: We study the impact of technology on the reaction of financial markets to information, focusing on the foreign exchange market. We contrast the “thin-skinned†view that technological improvements cause markets to react more to new information with the “thick-skinned†view that they react less. We pinpoint exogenous technological changes using the timing of the connection of countries via the submarine fiber-optic cables used for electronic trading. Cable connections dampen the response of exchange rates to macroeconomic news, consistent with the “thick-skinned†hypothesis. This is in line with the view that technology eases access to information and reduces trend-following behavior. According to our estimates, cable connections reduce the reaction of exchange rates to U.S. monetary policy news by 50 to 80 percent.
    Keywords: Western Hemisphere;United States;Technology, Submarine Fiber-Optic Cables, Foreign Exchange Market, Macro Announcements, General
    Date: 2017–04–07

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