nep-ifn New Economics Papers
on International Finance
Issue of 2023‒09‒11
five papers chosen by
Jiachen Zhan, University of California,Irvine

  1. Integrated Monetary and Financial Policies for Small Open Economies By Mr. Suman S Basu; Ms. Emine Boz; Ms. Gita Gopinath; Mr. Francisco Roch; Ms. Filiz D Unsal
  2. Regularity in forex returns during financial distress: Evidence from India By Radhika Prosad Datta
  3. Hot money inflows and bank risk-taking: Germany from the 1920s to the Great Depression By Postel-Vinay, Natacha; Collet, Stephanie
  4. The Geography of Capital Allocation in the Euro Area By Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
  5. Trading Halts and Price Informativeness By Crocker Herbert Liu; Charles Trzcinka; Ziwei Zhao

  1. By: Mr. Suman S Basu; Ms. Emine Boz; Ms. Gita Gopinath; Mr. Francisco Roch; Ms. Filiz D Unsal
    Abstract: We develop a tractable small-open-economy framework to characterize the constrained efficient use of the policy rate, foreign exchange (FX) intervention, capital controls, and domestic macroprudential measures. The model features dominant currency pricing, shallow FX markets, and occasionally-binding external and domestic borrowing constraints. We characterize the conditions for the “traditional prescription”—relying on the policy rate and exchange rate flexibility—to be sufficient, even if externalities persist. The conditions are satisfied for world interest rate shocks if FX markets are deep. By contrast, we show that to manage non-fundamental inflow surges and taper tantrums related to local currency debt, capital inflow taxes and FX intervention should be used instead of the policy rate and exchange rate flexibility. In the realistic case where countries face both shallow FX markets and external borrowing constraints, we establish that some kinds of FX mismatch regulations may reduce the external debt limit friction but worsen FX market depth. Finally, we show that capital controls and domestic macroprudential measures cease to be perfect substitutes if there is a risk that the domestic borrowing constraint binds as a result of the transmission of the global financial cycle.
    Keywords: integrated policy framework; monetary policy; capital controls; foreign exchange intervention; macroprudential policies
    Date: 2023–08–04
  2. By: Radhika Prosad Datta
    Abstract: This paper uses the concepts of entropy to study the regularity/irregularity of the returns from the Indian Foreign exchange (forex) markets. The Approximate Entropy and Sample Entropy statistics which measure the level of repeatability in the data are used to quantify the randomness in the forex returns from the time period 2006 to 2021. The main objective of the research is to see how the randomness of the foreign exchange returns evolve over the given time period particularly during periods of high financial instability or turbulence in the global financial market. With this objective we look at 2 major financial upheavals, the subprime crisis also known as the Global Financial Crisis (GFC) during 2006-2007 and the recent Covid-19 pandemic during 2020-2021. Our empirical results overwhelmingly confirm our working hypothesis that regularity in the returns of the major Indian foreign exchange rates increases during times of financial crisis. This is evidenced by a decrease in the values of the sample entropy and approximate entropy before and after/during the financial crisis period for the majority of the exchange rates. Our empirical results also show that Sample Entropy is a better measure of regularity than Approximate Entropy for the Indian forex rates which is in agreement with the theoretical predictions.
    Date: 2023–08
  3. By: Postel-Vinay, Natacha; Collet, Stephanie
    Abstract: This paper explores the origins of German banks’ risk-taking in the years preceding the 1931 crisis. The 1920s were marked by a large and prolonged increase in capital flows into Germany, chiefly from the United States and the United Kingdom. This coincided, at the individual bank level, with a rise in leverage and a fall in liquidity. We examine possible connections between the two phenomena. Our analysis is based on a combination of historiographical work and statistical modelling based on a newly hand-collected bimonthly dataset on German reporting banks from 1925 to 1935. Bank by bank we examine the effects of foreign inflows on decisions related to leverage, lending, and liquidity. The Dawes Plan of 1924 and the relative absence of a too-big-to-fail (TBTF) environment allow us to mitigate endogeneity concerns. We suggest that while capital inflows did not seem to impact banks’ liquidity decisions, their impact on leverage was non-negligeable.
    Keywords: capital flows; credit; financial crisis; financial development; financial globalization; foreign debt; international lending; money supply; Wiley deal
    JEL: E51 F34 G21 N24 N14
    Date: 2023–07–26
  4. By: Beck, Roland (European Central Bank); Coppola, Antonio (Stanford U); Lewis, Angus (Stanford U); Maggiori, Matteo (Stanford U); Schmitz, Martin (European Central Bank); Schreger, Jesse (Columbia U)
    Abstract: We reassess the pattern of Euro Area financial integration adjusting for the role of “on- shore offshore financial centers†(OOFCs) within the Euro Area. While the Euro Area records large levels of international investment both within and outside of the currency union, much of these flows are intermediated via the OOFCs of Luxembourg, Ireland, and the Netherlands. These countries have dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We look through both roles and restate the pattern of Euro Area investment positions by linking fund sector investments to the underlying holders and securities issuance to the ultimate parent firms. Our new estimates of Euro Area investment allow us to document a number of stylized facts. First, the Euro Area’s estimated gross external position is smaller than in official data. Second, the Euro Area is more biased towards euro-denominated assets and away from US dollar and other foreign currency assets than in official data. Third, the Euro Area is less financially integrated than it appears. Fourth, European financial integration occurs disproportionately through securities issued in OOFCs rather than via domestic capital markets. Fifth, there is a North-South bias in Euro Area financial integration whereby Northern European countries are relatively underweight securities issued by Southern European countries.
    JEL: F3 F4 G2 G3
    Date: 2023–05
  5. By: Crocker Herbert Liu (Cornell University); Charles Trzcinka (Indiana University); Ziwei Zhao (University of Lausanne; Swiss Finance Institute)
    Abstract: Chinese firms can initiate trading halts. While many plausible reasons exist for halts to occur after a price decline: 42% of halts come after a 7-day price rise. We argue the only reason for halts after a price rise is to increase management information. We find that our measures of private information are negatively associated with the likelihood of a halt. However, halts increase the cost of capital by 121 basis points. We show that price non-synchronicity, institutional ownership, and accounting variables predict a trading halt and explain the positive CARs after a halt.
    Keywords: trading, halts, fundamentals, noise traders, liquidity
    JEL: E44 G12 G14 N20 O16 O53
    Date: 2023–08

This nep-ifn issue is ©2023 by Jiachen Zhan. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.