nep-ifn New Economics Papers
on International Finance
Issue of 2023‒01‒09
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Leaning against the global financial cycle By Ferrero, Andrea; Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
  2. Effectiveness of Capital Controls: Gates versus Walls By Yang Zhou; Shigeto Kitano
  3. Sentiment, Mispricing and Excess Volatility in Presence of Institutional Investors By Hervé Roche; Juan Sotes-Paladino
  4. When Will Arctic Sea Ice Disappear? Projections of Area, Extent, Thickness, and Volume By Francis X. Diebold; Glenn D. Rudebusch; Maximilian Göbel; Philippe Goulet Coulombe; Boyuan Zhang

  1. By: Ferrero, Andrea; Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
    Abstract: We study the role and the interaction of the quality of institutions and of counter-cyclical policies in leaning against the Global Financial Cycle (GFC) in Emerging Economies (EMEs). We show that heteroegeneity in institutional strength is a key determinant of the different effects of the GFC on EME domestic financial conditions. Institutional strength also shapes the response in terms of counter-cyclical policies to sudden changes in global financial conditions as well as the effectiveness of such policies. We illustrate in a simple stylised model that countries may in fact decide to undertake ex ante costly structural reforms that reduce their vulnerability to the GFC or react ex post to the financial s hock. However, we also find that the Covid-19 episode seems to deviate somewhat from the general pattern of EME reaction to shifts in the GFC. JEL Classification: F32, F38, E52, G28
    Keywords: capital controls, emerging markets, foreign-exchange intervention, Global Financial Cycle, institutions., macro-prudential policies, monetary policy
    Date: 2022–12
  2. By: Yang Zhou (Graduate School of Economics, Kobe University and Junir Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration(RIEB), Kobe University, JAPAN)
    Abstract: This study analyzes the effectiveness of capital controls on international debt flows using data of 81 economies, including both advanced and emerging economies, over the period from 1995 to 2019. The analysis using the total sample shows that, although they are in the expected directions, the impulse responses of capital controls are statistically insignificant. Making various distinctions among samples (such as advanced and emerging economies and pre- and post-crisis periods), we still find that most results are statistically insignificant. However, the canonical distinction between the "gate" and "wall" economies indicates that the effectiveness of capital controls is relevant for the "wall" emerging economies.
    Keywords: Capital flows; Capital controls; Local projection
    JEL: E69 F32 F38 F41
    Date: 2022–12
  3. By: Hervé Roche (Universidad Adolfo Ibáñez); Juan Sotes-Paladino (Sotes-Paladino)
    Abstract: e study the equilibrium implications on asset prices of institutions’ trading with sentimentdriven retail investors. In the model, both the benchmarking concerns of institutions and the (irrational) optimism of retail investors boost the aggregate demand for a stock. We show that the ensuing demand pressure has a depressing effect on the stock market price of risk but an ambiguous effect on volatility. The overall effect on volatility results from the interplay of a benchmarking and a relative-wealth channels on the transmission of fundamental news to prices. This interplay can induce a negative relation between the degree of irrationality of the sentimentdriven investors and the stock return’s excess volatility, in stark contrast with a well-known prediction of models with no institutional investors. It further creates novel countercyclical patternsin stock volatility that cannot be explained in the absence of sentiment. Our results have a number of implications for the interpretation of the empirically documented dynamics of mispricing and excess volatility of financial assets.
    Keywords: Indexing, Sentiment, Excess Volatility, Institutional Investors.
    JEL: G11 G12 G18 G41
    Date: 2022–12
  4. By: Francis X. Diebold; Glenn D. Rudebusch; Maximilian Göbel; Philippe Goulet Coulombe; Boyuan Zhang
    Abstract: Rapidly diminishing Arctic summer sea ice is a strong signal of the pace of global climate change. We provide point, interval, and density forecasts for four measures of Arctic sea ice: area, extent, thickness, and volume. Importantly, we enforce the joint constraint that these measures must simultaneously arrive at an ice-free Arctic. We apply this constrained joint forecast procedure to models relating sea ice to atmospheric carbon dioxide concentration and models relating sea ice directly to time. The resulting "carbon-trend" and "time-trend" projections are mutually consistent and predict a nearly ice-free summer Arctic Ocean by the mid-2030s with an 80% probability. Moreover, the carbon-trend projections show that global adoption of a lower carbon path would likely delay the arrival of a seasonally ice-free Arctic by only a few years.
    JEL: C51 Q54
    Date: 2022–12

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