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on International Finance |
| By: | Gurnain Kaur Pasricha |
| Abstract: | This paper attempts to borrow the tradition of estimating policy reaction functions in monetary policy literature and apply it to capital controls policy literature. Using a novel weekly dataset on capital controls policy actions in 21 emerging economies over the period 1 January 2001 to 31 December 2015, I examine the competitiveness and macroprudential motivations for capital control policies. I introduce a new proxy for competitiveness motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. The analysis shows that past emerging-market policy systematically responds to both competitiveness and macroprudential motivations. The choice of instruments is also systematic: policy-makers respond to competitiveness concerns by using both instruments - inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. I also find evidence that that policy is acyclical to foreign debt but is countercyclical to domestic bank credit to the private non-financial sector. The adoption of explicit financial stability mandates by central banks or the creation of inter-agency financial stability councils increased the weight of macroprudential factors in the use of capital controls policies. Countries with higher exchange rate pass-through to export prices are more responsive to competitiveness concerns. |
| Keywords: | capital controls, macroprudential policy, competitiveness motivations, capital flows, emerging markets, policy rules |
| JEL: | F3 F4 F5 G0 G1 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:670&r=ifn |
| By: | Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller |
| Abstract: | We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1% U.S. dollar appreciation against all other currencies in the world predicts a 0.6--0.8% decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country's share of imports invoiced in dollars explains 15% of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms. |
| JEL: | E5 F1 F3 F4 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23988&r=ifn |
| By: | Graciela L. Kaminsky |
| Abstract: | A common belief in both academic and policy circles is that capital flows to the emerging periphery are excessive and ending in crises. One of the most frequently mentioned culprits is the cycles of monetary easing and tightening in the financial centers. Also, many focus on the role of crises in the financial center, pointing to excess international borrowing predating crises in the financial center and global retrenchment in capital flows in its aftermath. I re-examine these views using a newly-constructed database on capital flows spanning 200 hundred years. Extending the study of capital flows to the first episode of financial globalization has two major advantages: During this episode, monetary policy in the financial center is constrained by the adherence to the Gold Standard, thus providing a benchmark for capital flow cycles in the absence of an active role of central banks in the financial centers. Second, panics in the financial center are rare disasters that need to be examined in a longer historical episode. I find that boom-bust capital flow cycles in the periphery are milder in the second episode of financial globalization when the financial center follows a cyclical monetary policy. Also, cyclical monetary policy in the financial center is far more pronounced in times of crises in the financial center, cutting short capital flow bonanzas in the periphery and injecting liquidity in the aftermath of the crisis. |
| JEL: | F30 F34 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23975&r=ifn |
| By: | Eugenio M Cerutti; Stijn Claessens; Andrew K. Rose |
| Abstract: | This study quantifies the importance of a Global Financial Cycle (GFCy) for capital flows. We use capital flow data dis-aggregated by direction and type between 1990Q1 and 2015Q5 for 85 countries, and conventional techniques, models and metrics. Since the GFCy is an unobservable concept, we use two methods to represent it: directly observable variables in center economies often linked to it, such as the VIX; and indirect manifestations, proxied by common dynamic factors extracted from actual capital flows. Our evidence seems mostly inconsistent with a significant and conspicuous GFCy; both methods combined rarely explain more than a quarter of the variation in capital flows. Succinctly, most variation in capital flows does not seem to be the result of common shocks nor stem from observables in a central country like the United States. |
| Date: | 2017–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/193&r=ifn |
| By: | Accominotti, Olivier; Eichengreen, Barry |
| Abstract: | New data documenting European bond issues in major financial centres from 1919 to 1932 show that conditions in international capital markets and not just in borrowing countries are important for explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centres at the end of the 1920s figured importantly in the decline in foreign lending. This article draws parallels with Europe after 2008 |
| JEL: | N0 F3 G3 |
| Date: | 2016–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:84308&r=ifn |
| By: | Faia, Ester; Ottaviano, Gianmarco I. P. |
| Abstract: | Direct involvement of global banks in local retail activities can reduce risk-taking by promoting local competition. We develop this argument through a model in which multinational banks operate simultaneously in different countries with direct involvement in imperfectly competitive local deposit and loan markets. The model generates predictions that are consistent with the foregoing argument as long as the expansionary impact of competition on multinational banks’ aggregate profits through larger scale is strong enough to offset its parallel contractionary impact through lower loan-deposit return margin (a result valid with both perfectly and imperfectly correlated loans’ risk). When this is the case, banking globalization also moderates the credit crunch following a deterioration in the investment climate. Compared with multinational banking, the beneficial effect of cross-border lending on risk-taking is weaker. |
| Keywords: | global bank; oligopoly; oligopsony; endogenous risk taking; expectation of rents; extraction; appetite for leverage |
| JEL: | G32 F3 G3 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:83601&r=ifn |
| By: | Zineddine Alla; Raphael A Espinoza; Atish R. Ghosh |
| Abstract: | We develop an open economy New Keynesian Model with foreign exchange intervention in the presence of a financial accelerator mechanism. We obtain closed-form solutions for the optimal interest rate policy and FX intervention under discretionary policy, in the face of shocks to risk appetite in international capital markets. The solution shows that FX intervention can help reduce the volatility of the economy and mitigate the welfare losses associated with such shocks. We also show that, when the financial accelerator is strong, the risk of multiple equilibria (self-fulfilling currency and inflation movements) is high. We determine the conditions under which indeterminacy can occur and highlight how the use of FX intervention reinforces the central bank’s credibility and limits the risk of multiple equilibria. |
| Keywords: | Foreign exchange;Central banks and their policies;Central bank reserves; Speculative attack; Portfolio balance model; Equilibrium determinacy; Capital flows; Capital controls; Open Economy New Keynesian Model, Central bank reserves, Speculative attack, Portfolio balance model, Equilibrium determinacy, Capital flows, Capital controls, Open Economy New Keynesian Model, Monetary Policy (Targets, Instruments, and Effects) |
| Date: | 2017–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/207&r=ifn |