nep-ifn New Economics Papers
on International Finance
Issue of 2018‒03‒19
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global Portfolio Rebalancing and Exchange Rates By Nelson Camanho; Harald Hau; Hélène Rey
  2. International Capital Flow Pressures By Linda S. Goldberg; Signe Krogstrup
  3. Portfolio Inflows Eclipsing Banking Inflows: Alternative Facts? By Eugenio M Cerutti; Gee Hee Hong
  4. Managing Financial Globalization: Insights from the Recent Literature By Shang-Jin Wei

  1. By: Nelson Camanho; Harald Hau; Hélène Rey
    Abstract: We examine international equity allocations at the fund level and show how different returns on the foreign and domestic proportion of portfolios determine rebalancing behavior and trigger capital flows. We document the heterogeneity of rebalancing across fund types, its greater intensity under higher exchange rate volatility, and the exchange rate effect of such rebalancing. The observed dynamics of equity returns, exchange rates, and fund-level capital flows are compatible with a model of incomplete FX risk trading in which exchange rate risk partially segments international equity markets.
    JEL: F3 F31 F32 G15
    Date: 2018–02
  2. By: Linda S. Goldberg; Signe Krogstrup
    Abstract: This paper presents a new measure of capital flow pressures in the form of a recast Exchange Market Pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes the Global Risk Response Index, which reflects the country-specific sensitivity of capital flow pressures to measures of global risk aversion. For a large sample of countries over time, we demonstrate time variation in the effects of global risk on exchange market pressures, the evolving importance of the global factor across types of countries, and the changing risk-on or risk-off status of currencies.
    Date: 2018–02–16
  3. By: Eugenio M Cerutti; Gee Hee Hong
    Abstract: Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows (both by types of instrument and borrower) shows interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities not only in the case of corporate and sovereign borrowers in advanced countries, but also sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging markets, the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries associated with the global financial cycle, but rather by country-specific factors.
    Date: 2018–02–16
  4. By: Shang-Jin Wei
    Abstract: This paper seeks to draw lessons for developing countries based on a survey of the recent literature on financial globalization. First, while capital account openness holds promises (by potentially lowering cost of capital, promoting risk sharing, and providing disciplines on policies), it does not always work out that way in the data. Distortions in the domestic financial market, international capital market, domestic labor market, and domestic public governance can all make financial globalization less beneficial for developing countries. Second, developing countries may seek to avoid the effects of foreign monetary policy shocks. The empirical pattern appears to be somewhere between a trilemma and a dilemma. While nominal exchange rate flexibility provides some policy autonomy but not consistently, capital flow management can confer additional insulation against foreign monetary shocks.
    JEL: F2 G15
    Date: 2018–02

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