Domestic Financial Assets Research Articles

ТРАНСФОРМАЦІЯ ФІНАНСОВИХ АКТИВІВ УКРАЇНИВ УМОВАХ РОЗВИТКУ МІЖНАРОДНОЇ ФІНАНСОВОЇ СИСТЕМИ

The article examines the main components of global financial assets and the dynamics of their changes in the international finance system in the context of the global transformation of financial architecture and financial interconnections that have occurred in recent decades. It was found that the volume of global assets in 2020 exceeds global GDP by more than 18 times. The assets under study have three almost equivalent components: assets of the real sector of the economy (non-financial corporations), financial sector assets (financial corporations), and financial system assets (households and governments). Each component in 2020 accounts for approximately one-third, which is about $500 trillion, equivalent to about six times the GDP. The author proves that the slow growth of each component observed in recent years is one of the obstacles to economic growth, which reduces the investment potential of territories in business development, consumption, innovation, and infrastructure development. The main components of financial assets inherent in the domestic financial system were analyzed. Differences in the volume concerning GDP and the structure of financial assets of Ukraine with global indicators were revealed. It was found that the ratio of domestic financial assets to GDP is less than one, and their structure does not correspond to global trends, which indicates a significant delay in the development of the domestic financial sector, but at the same time gives rise to optimistic expectations about the scale of future development. The reasons for the significant differences in the structure of financial assets in Ukraine and the leading countries in the world were analyzed. It was found that the growth of volumes and transformation of the structure of financial assets in Ukraine should be the result of post-war reconstruction and depends on how quickly the war in Ukraine ends, as well as on some reforms that are the key to Ukraine's movement towards the European economic and financial space.

Testing the stability of money demand function in Lesotho

This paper adopts the autoregressive distributed lag (ARDL) bounds testing and error correction model (ECM) approach to co-integration to test the stability of demand for real money balances (M2) in Lesotho from 1980 to 2015. The results provide strong evidence for the presence of a stable long run relationship among M2, real gross domestic product (GDP), consumer price index (CPI), real interest rate spread and real exchange rate. The empirical evidence shows that in the long run, real GDP and real exchange rate are positively related to demand for real broad money balances while CPI and real interest rate spread negatively affect the demand for real broad money balances in Lesotho. The short run findings also show that real GDP and the inflation (captured by CPI) positively and negatively affect the demand for real broad money balances in Lesotho, respectively. The income elasticity of real money demand is greater than unity in the long run while it is close to unity in the short run. The implication could be a heightened demand for foreign interest earning assets in the long run due to a lack of suitable alternative domestic financial assets. This necessitates government action to promote an increase in the availability of alternative domestic assets.

Growth and distribution after the 2007–2008 US financial crisis: who shouldered the burden of the crisis?

The post-1980 era witnessed an increase in the frequency and severity of financial crises around the globe, the majority of which took place in low- and middle-income countries. Studies of the impacts of these crises have identified three broad sets of consequences. First, the burden of crises falls disproportionately on labor in general and low-income segments of society in particular. In the years following financial crises, wages and labor share of income fall, the rate of unemployment increases, the power of labor and labor unions is eroded, and income inequality and rates of poverty increase. Capital as a whole, on the other hand, usually recovers quickly and most of the time gains more ground. Second, the consequences of crises are visible not only through asset and income distribution, but also in government policies. Government policies in most cases favor capital, especially financial capital, at the expense of large masses. In addition, many crises have presented opportunities for further deregulation and liberalization, not only in financial markets but in the rest of the economy as well. Third, in the aftermath of financial crises in low- and middle-income economies, capital inflows may increase as international capital seeks to take advantage of the crisis and acquire domestic financial and non-financial assets. The 2007–2008 financial crisis in the US provides an opportunity to extend this analysis to a leading high-income country and see if the patterns visible in other crises are also visible in this case. Using the questions and issues typically raised in examinations of low- and middle- income countries, we study the consequences of the 2007–2008 US financial crisis and complement the budding literature on the ‘Great Recession.’ In particular, we examine the impacts of the crisis on labor and capital, with a focus on distributional effects of the crisis such as changes in income shares of labor and capital, and the evolution of inequality and poverty. We also analyse the role of government policies through a study of government taxation and spending policies, and examine capital flow patterns.

Capital Account Policies and the Real Exchange Rate

Capital Account Policies and the Real Exchange Rate

The Narrow Money Demand Behaviour in Indonesia, 1970– 2005

This paper specifies a simple partial adjustment model of narrow money demand for Indonesia in an open economy context and estimates it with annual data for the period 1970-2005. Empirical results suggest that real income, inflation (a proxy for expected inflation), and the return on foreign financial assets are the major determinants of narrow money demand in this country. The deposit rate of interest (a proxy for the interest rate on alternative domestic financial assets) is statistically insignificant. The CUSUM and CUSUMSQ of residuals' tests suggest that the narrow money demand function remained stable during the sample period of study. Having selected an empirically parsimonious model, both the recursive and rolling regression techniques are applied to investigate the possibility of structural change in the regression coefficients possibly due to financial reforms and innovations since the early 1990s. Empirical results suggest that since the late 1990s the long-run income elasticity of the demand for narrow money has remained relatively stable around a value not different from one while the narrow money demand elasticities with respect to the rates of inflation and the return on foreign financial assets have declined markedly. The paper interprets the overall empirical results in a historical context and draws implications on the strategy of monetary policy in Indonesia.

Home bias in global bond and equity markets: The role of real exchange rate volatility

This paper focuses on the role of real exchange rate volatility as a driver of portfolio home bias, and in particular as an explanation for differences in home bias across financial assets. We present a Markowitz-type portfolio selection model in which real exchange rate volatility induces a bias towards domestic financial assets as well as a stronger home bias for assets with low local currency return volatility. We find empirical support in favour of this hypothesis for a broad set of industrialized and emerging market countries. Not only is real exchange rate volatility an important factor behind bilateral portfolio home bias, but we find that a reduction of monthly real exchange rate volatility from its sample mean to zero reduces bond home bias by up to 60 percentage points, while it reduces equity home bias by only 20 percentage points.

Home bias and international capital asset pricing model with human capital

We develop an international C.A.P.M. including human capital. We test this model and underline its contribution to the explanation of home bias observed in portfolio choice for nine countries. Human capital positively correlated with the domestic financial assets could worsen the home bias puzzle. Then, we add deadweight costs to the model. Using different levels of risk aversion, we compute the necessary costs to explain home bias. The costs obtained are too high compared to real existing costs. Human capital is an important feature in portfolio choice, but its contribution to the explanation of the home bias is very weak. Home bias is still a puzzle.

Liberalizing foreign investments by pension funds: Positive and normative aspects

The paper evaluates the economics of foreign investment regulation for pension funds, with a focus on developing countries, where fully-funded pension systems are being started de novo. The analysis proceeds in three steps. First, it is argued that the benefits of global portfolio diversification apply particularly to developing-country pension assets because the volatility of asset returns is high while the risk tolerance of pensioners is low. Second, restrictions of foreign investmetn by domestic pension funds can hardly be justified on ground of financial-development arguments: the paper presents crosscountry evidence which shows little support for the claim that the accumulation of pension assets would provide strong externalities for financial development. Moreover, the home bias generally observed in pension fund investment should translate into sufficient potential demand for domestic financial assets as to deepen markets and develop the institutional infrastructure. Third, a case for initial localization requirements, however, can be derived from the fiscal costs of moving from unfunded to fully-funded pension systems if fiscal illustion and domestic tax collection costs are important.

Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness

The link is explored between interest rates on domestic financial assets in Mexico and expectations of exchange rate changes and perceptions about default risks contained in Mexico's external debt. Interest rate differentials between peso- and U.S. dollar-denominated assets are shown to have reflected concerns about the exchange rate policy during the period considered. The evidence also suggests that the interest rate on a U.S. dollardenominated Mexican domestic asset is linked to the yield implicit in the secondary market price for external debt issued by Mexico.

Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness

This paper explores how interest rates on domestic financial assets in Mexico are linked to expectations of exchange rate changes and to perceptions about the default risks contained in Mexico’s external debt. It is shown that the interest rate differentials between peso- and U.S. dollar-denominated domestic assets reflected some concerns about the exchange rate policy during the period under study. In addition, the evidence suggests that the interest rate on a U.S. dollar-denominated Mexican domestic asset is linked (i.e., cointegrated) to the yield implicit in the secondary market price for external debt issued by Mexico.

Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness

This paper explores how interest rates on domestic financial assets in Mexico are linked to expectations of exchange rate changes and to perceptions about the default risks contained in Mexico’s external debt. It is shown that the interest rate differentials between peso- and U.S. dollar-denominated domestic assets reflected some concerns about the exchange rate policy during the period under study. In addition, the evidence suggests that the interest rate on a U.S. dollar-denominated Mexican domestic asset is linked (i.e., cointegrated) to the yield implicit in the secondary market price for external debt issued by Mexico.

Asset Substitution, Money Demand, and the Inflation Process in Brazil

Various domestic financial assets in Brazil have provided relatively liquid nonmonetary alternatives. Monthly money demand estimates, which include domestic asset opportunity costs and take account of T-bill repurchase agreements in a dynamic error-correction model, demonstrate the importance of domestic substitutes in explaining money holdings. Money demand appears responsive and stable. Moreover, T-bills and indexed bonds have acted as an alternative to central bank liabilities as a source of finance for government deficits. Evidence indicates that the initial financing of government deficits through bonds, bills, and other nonmonetary liabilities may explain why money lags price shocks rather than vice versa. Copyright 1989 by Ohio State University Press.

Exchange rate and price level dynamics under perfect substitutability of real and financial assets

This note investigates the implications of arbitrage between domestic financial and real assets for the evolution through time of the exchange rate and the price level after a monetary schock. The model yields results contrasting sharply with those of the traditional model of exchange rate dynamics based on international arbitrage [e.g. Dornbusch (1976)]. In particular, there is no overshooting of the exchange rate and the short-run deviations from purchasing power parity are the opposite of those implied by the traditional model.