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on International Finance |
| By: | Hui Tong; Shang-Jin Wei |
| Abstract: | A country may adopt policy measures such as raising its foreign exchange reserves to better prepare for foreign interest rate shocks or sudden reversal of international capital flows, which in principle should reduce financial vulnerability for its firms and the entire economy, but the beneficial effect of such policies may be partially offset by endogenous firms’ decisions to take on more risks. We present a robust but previously undocumented relationship between corporate leverage and country-level foreign exchange reserve holdings. For 6610 non-financial firms in 23 emerging markets from 2000 to 2006, we show that more foreign reserve accumulation leads to higher corporate leverage. While the reserve accumulation can reduce macroeconomic uncertainty, the increase in corporate leverage is also significantly greater in sectors that are intrinsically more sensitive to policy uncertainty. We go from correlation to causality via a two-prong instrumental variable strategy: simultaneously (1) instrumenting FX reserves by global commodity price movement, and (2) examining leverage of firms outside the commodity-sensitive sectors. |
| JEL: | F3 G3 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26545&r=all |
| By: | Jacob M. Meyer |
| Abstract: | Political institutions can influence the likelihood of banking crises through both direct and indirect causal pathways. They may influence domestic economic conditions, thereby indirectly impacting the likelihood of a banking crisis, or they may directly affect the likelihood of banking crises through confidence and expectations-related mechanisms. I apply econometric moderated multiple-mediation to estimate this combination of effects for veto player theory - a common framework for analysing political institutional constraints - using a dynamic panel approach and a dataset of 111 developing economies and emerging markets from 1990-2012. I find more veto players indirectly reduce the likelihood of banking crises by reducing inflation and increasing GDP growth in the pre-crisis period. However, they also increase the likelihood of banking crises by increasing credit growth. When global risk is high, more veto players impede policy responses to changing conditions. This directly increases the likelihood of crises. When global risk is low, more veto players reduce policy volatility. This directly reduces the likelihood of crises. Rising global volatility has larger effect on the likelihood of crises in relatively constrained political systems. |
| Keywords: | Banking Crises, Political Institutions, Econometric Moderated Mediation, Veto Player Theory, Empirical International Finance. |
| JEL: | E02 E50 E51 |
| Date: | 2019–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2019_07&r=all |