nep-ifn New Economics Papers
on International Finance
Issue of 2017‒06‒25
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Can Countries Rely on Foreign Saving for Investment and Economic Development? By Eduardo A. Cavallo; Barry Eichengreen; Ugo Panizza
  2. Capital Controls and the Cost of Debt By Eugenia Andreasen; Martin Schindler; Patricio A Valenzuela
  3. Supply- and demand-side factors in global banking By Amiti, Mary; McGuire, Patrick M.; Weinstein, David E.
  4. A Tie That Binds; Revisiting the Trilemma in Emerging Market Economies By Maurice Obstfeld; Jonathan David Ostry; Mahvash S Qureshi

  1. By: Eduardo A. Cavallo; Barry Eichengreen; Ugo Panizza
    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, this paper also identifies a number of episodes where a substantial fraction of domestic investment was financed via private capital inflows. That said, foreign savings are not a good substitute for domestic savings, since 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. Summing over the deficit episode and its aftermath, growth is slower than when countries rely on domestic savings. The paper concludes that financing growth and investment out of foreign savings, while not impossible, is risky.
    Keywords: Foreign Saving, Saving Rate, Investment, Emerging countries, Capital inflow, GDP Growth, Exports, Exchange rates, Human Capital, Capital Markets, Domestic Investment, Foreign Saving
    JEL: O16 F32
    Date: 2016–08
  2. By: Eugenia Andreasen; Martin Schindler; Patricio A Valenzuela
    Abstract: Using a panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we show that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads. A number of heterogeneities suggest that the effect of capital controls on inflows is particularly strong for more financially constrained firms, establishing a novel channel through which capital controls affect economic outcomes. By contrast, we do not find a robust significant effect of restrictions on outflows.
    Date: 2017–06–09
  3. By: Amiti, Mary (Federal Reserve Bank of New York); McGuire, Patrick M. (Bank for International Settlements); Weinstein, David E. (Columbia University)
    Abstract: What is the role of 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 2000-16 period. 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, but 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 shocks versus demand shocks; BIS consolidated banking statistics
    JEL: F34 G01 G21
    Date: 2017–06–01
  4. By: Maurice Obstfeld; Jonathan David Ostry; Mahvash S Qureshi
    Abstract: This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on a sample of about 40 emerging market countries over 1986–2013. Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities—faster domestic credit and house price growth, and increases in bank leverage—than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.
    Date: 2017–06–08

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