Foreign Bonds Research Articles

자본유입과 물가상승률 간의 동태적 상관관계 분석: 아시아의 8개국 소규모 개방경제를 중심으로 (Dynamic Relationship between Foreign Capital Inflow and Inflation: Evidence from Eight Small Open Economies in Asia)

Korean Abstract: 자본유입에 대한 이론적ㆍ실증적 연구는 자본유입이 환율의 평가절상을 야기하여 국내 경제를 위축시킨다는 먼델-플레밍 모형을 중심으로 이루어져 왔다. 그러나 최근 들어 자본유입이 소규모 개방경제에서 총수요를 자극하여 확장적인 효과를 나타낸다는 연구가 진행되고 있으나 구체적으로 어떤 경로를 통해 성장, 물가 등에 확장적인 효과를 나타내는지에 대한 연구는 부족한 상황이다. 이에 본 연구에서는 홍콩, 인도, 한국, 필리핀, 싱가포르, 스리랑카, 대만, 태국 등 8개 아시아 소규모 개방경제 국가의 2000~2018년중 분기별 국가패널 자료를 이용하여 주식, 채권, 은행차입 등 자본유입 경로별 충격이 어떤 경로를 통하여 물가상승률에 영향을 미치는지를 패널 VAR 모형으로 분석하였다. 분석 결과, 자본유입 충격의 총수요 확장 효과가 환율효과보다 커 물가에 대체로 양(+)의 영향을 미치는 것으로 나타났다. 자본유입 경로별로 보면 주식 및 은행차입을 통한 자본유입이 물가에 양(+)의 영향을, 채권투자는 음(-)의 영향을 미치는 것으로 나타났다. 채권투자를 통한 자본유입이 물가하락 압력으로 작용하는 것은 금융시장 미성숙, 중앙은행 금리정책 등으로 금리하락이 제약됨에 따라 총수요 확장효과가 환율효과보다 작게 나타난 데 기인한 것으로 보인다. 한편, 분석대상 국가들의 제도적인 차이를 고려하여 물가안정목표제(IT) 운영 여부와 금융시장 발전 정도에 따라 자본유입 경로별 충격이 물가상승률에 미치는 영향을 분석해 본 결과, IT 국가에 비해 Non-IT 국가에서 자본유입이 물가상승률에 미치는 양(+)의 효과가 더 큰 것으로 나타났다. 이는 IT 국가의 경우 자본유입 충격에 따른 물가상승 압력에 중앙은행이 적극적으로 대응한 데 기인한 것으로 해석할 수 있다. 다음으로 주식투자 충격의 경우 금융시장 성숙 국가와 미성숙 국가 간에 뚜렷한 차이가 나타나지 않았으나, 은행차입 충격의 경우 미성숙 국가가 성숙 국가에 비해 더 큰 양(+)의 효과를 나타내었다. 이는 금융시장이 미성숙한 국가는 자본유입이 주로 은행차입을 통해 이루어지는 데 기인한 것으로 보인다. 자본유입 경로별로 물가에 차별적인 효과를 나타낸다는 본고의 분석결과는 정책당국이 자본유입 총량뿐 아니라 유입경로에 대해서도 유의해야 함을 시사한다. English Abstract: This paper investigated the effects of capital inflow by type on domestic inflation for eight small open economies in Asia using panel VAR and data from 2000 to 2018. The estimation results overall indicated that expansionary effects from aggregate demand caused by capital inflow were larger than the exchange rate effect and subsequently, the capital inflow had overall positive (+) effects on inflation. More specifically, first, the capital inflow by foreign equity investments and other investments had positive (+) effects on inflation while foreign bond investments had a limited effect on inflation. This insignificance in capital inflow by bond investment can be attributable to the fact that central banks’ monetary policy holding short-term interest rates and less developed financial markets. Second, the increasing effects of capital inflow by equity and other investments on inflation were more pronounced in non-IT (inflation targeting) countries. Lastly, the effects of capital inflow by other investments in the countries with less developed financial markets had greater positive effects on inflation than in countries with developed financial markets. Meanwhile, there was no clear difference between two country groups for capital inflow by foreign equity investments.

Motivation, Dilemma and Countermeasures of Foreign Bond Financing of Real Estate Enterprises?Based on Perspective of Financial Internationalization

Several real estate enterprises in China (hereinafter referred to as housing enterprises) rely on overseas financing to meet their financing needs, but it is fraught with challenges such as high financing costs. Premised on the internationalization of finance, combined with the background of "staying and not speculating" and establishing a long-term mechanism for real estate market, based on the investigation of the financing motives of real estate enterprises, combined with a large amount of data, the present study examines the current situation and predicament of overseas financing of housing enterprises. It proposes four feasible countermeasures to promote sustainable development of real estate enterprises overseas financing including building a special financing system to reduce the cost, expanding various financing channels, strengthening the supervision of overseas bond financing, and reducing the loss devaluation of RMB internally and externally.

Foreign Portfolio Investment And Human Capital Development In Nigeria 2005-2019

Following the saving – investment gap resulting from shortfalls of savings suffered by developing economies it has become fashionable to embrace foreign capital inflow as an essential complementing alternative supply of funds for domestic investment. This study investigates the effect of foreign portfolio investment on human capital development in Nigeria covering the period 2005-2019. Foreign portfolio investment, the explanatory variable is disaggregated intoforeign portfolio equity (FPIE) and foreign portfolio bonds (FPIB), while exchange rate is included as the control variable. The Human Capital Development – the dependent variable is represented by the Human Development Index (HDI). Econometric techniques,including Descriptive Statistics,Augmented Dickey Fuller tests for unit roots, Error Correction Model (ECM), and Ordinary Least Square (OLS) Regression analysis were used. The study showed foreign portfolio investment in equity has positive and significant effect on human capital development while foreign portfolio investment in bonds has positive but insignificant effect. The study thus concluded that foreign portfolio investment has positive effect on human capital development and has helped to improve human capacity necessary for economic development in Nigeria. The study reiterated the need for eye-catching polices that will attract greater foreign portfolio investment in both equity and bonds in the stock market which could be achieved by greater openness.

Exchange Rate Determination: The Portfolio-Balance Approach

The portfolio-balance approach to exchange rate determination is part of the Asset Market Models and is largely attributed to economists after 1973 when the exchange rate became flexible (market determined). This article first introduces the setting of the model embedded in the portfolio balance approach that encompasses two assets (money and bonds), which deviates a little from the models and approaches used for the monetary approach to the balance of payment, the overshooting model, and from the associated market equilibria. The effects of monetary policy, of current account, and of wealth under the portfolio-balance approach are examined, here, theoretically and empirically. The current econometric results show that the exchange rate is determined by the foreign bonds, the domestic interest rate, and the foreign interest rate. JEL classification numbers: F31, F47, E52, E41, C52, E21, E43. Keywords: Foreign Exchange, Forecasting and Simulation, Monetary Policy, Demand for Money, Model Evaluation and Testing, Consumption and Saving, Interest Rates.

A Theory of Foreign Exchange Interventions

We develop a theory of foreign exchange interventions in the presence of limited capital mobility. We study a real small open economy subject to global liquidity and endowment shocks. Home and foreign bond markets are segmented and intermediaries have a limited capacity to arbitrage between both bond markets. As a result, the central bank can manipulate the spread across markets by managing its portfolio. We show that the planning problem can be entirely framed in terms of the spreads. Crucially, spreads are inherently costly, over and above the standard costs from distorting households’ consumption profiles. The extra term is exactly given by the carry trade profits of foreign intermediaries, is convex in the spread - as more foreign intermediaries become active carry traders - and increasing in the openness of the capital account - as foreign intermediaries find it easier to take larger positions. Optimal interventions lean against the wind for global liquidity shocks and implement a zero spread against endowment shocks. Importantly, interventions should be small, frequent and rely on forward guidance of future interventions. The effectiveness of interventions increases if they are pre-announced and the policy is more credible. Finally, we model a world equilibrium with two types of small open economies: advanced economies, with a strong desire to save; and emerging markets, who intervene to avoid currency appreciation. In the Nash equilibrium, emerging markets engage in “reserve wars,” leading to substantial reserve over-accumulation and too depressed world interest rates. Simple coordination rules, like committing to replicating zero spreads, are shown to be strict Pareto improvements for reasonable calibrations.

Financial Liberalization, Financial Development, and Macroeconomic Risks in an Open Economy

In an open economy with endogenous risks, financial development and capital account liberalization reduce the volatilities of home equity and bond prices, and appreciate the home currency at the stochastic steady state. Financial development lowers the equilibrium real interest rate when exchange rate floats and increases it when exchange rate is fixed. Capital account liberalization increases the real rate in both exchange rate regimes. Monetary policy should be countercyclical to the volatilities of home equity and bond prices, and procyclical to the volatilities of foreign bond price and exchange rate. Proper reactions to the risks make central banks less constrained by the Mundell-Fleming trilemma.

Does social trust affect international contracting? Evidence from foreign bond covenants

Building on rational choice institutionalism theory and Williamson’s (J Econ Lit 38(3): 595–613, 2000) four-level social analysis framework, we investigate the influence of the informal institution of social trust on debt contract design in an international setting. Using a sample of non-U.S. firms that issue bonds in the U.S. debt market, we find that Yankee bond creditors impose fewer covenants on bond issuers domiciled in countries with a high degree of social trust. We further show that the inverse relationship between debt covenants and the informal institution of social trust is more pronounced for firms from countries with weak formal institutions, as well as for firms with poor corporate governance and greater information opacity. These findings are robust to endogeneity tests, within-country analysis, various empirical models and measures of trust, and alternative hypotheses. We also show that, while a lower level of informal social trust is associated with higher borrowing costs, this relationship weakens when formal covenants are added to the debt contract (i.e., a substitution effect). Our paper contributes to the international business literature by providing new insights into the role of informal institutions (social trust) in cross-border debt contracting.

Rising Wealth Inequality: Intergenerational Links, Entrepreneurship, and the Decline in Interest Rate

The share of wealth held by the top one percent of Americans has increased from about 24% in 1980 to 40% in 2010. This paper examines the potential role played by three factors in accounting for this increase - decline in the corporate tax rates, increase in the income risk, and the decline in the world interest rates. Our model consists of altruistic households who either run a business or work for others. Entrepreneurial households enjoy high returns due to high productivity while worker households' savings earn the bank deposit rate that is determined in a competitive banking sector and equals the rate of return on foreign bonds. We find that entrepreneurship and intergenerational links via altruism are important factors generating a wealth distribution that mimics the data in the 2000s. However, it is the decline in the interest rate that plays a major role in accounting for the increase in the U.S. wealth inequality since the 1980s. In our model, the decline in the interest rate increases wealth inequality as it affects the two types of households differently. Entrepreneurial households benefit from lower financing costs and increase their investments while worker households face lower returns to their savings as the interest rate declines. Other changes such as the changes in taxation and income risk play a less significant role.

ANALISIS FAKTOR-FAKTOR INTERNAL YANG MEMENGARUHI LIKUIDITAS SUKUK NEGARA DI INDONESIA

Indonesian sovereign Sukuk has lower liquidity than the foreign bond. Sukuk liquidity is measured by total return and trade volume in the secondary market from June 2015 until May 2017. This study aims to analyze the internal determinant factors of sovereign Sukuk liquidity in Indonesia. The method used in this study is Panel Data analysis. The variables used in this study are liquidity, outstanding, coupon rate, time to maturity and age. The study results show that outstanding is significantly positive as the determinant of liquidity of sovereign Sukuk in Indonesia. Variables of time to maturity and age are significantly negative as the determinant of liquidity of sovereign Sukuk in Indonesia. Meanwhile, the coupon rate variable is not significant as the determinant of liquidity of sovereign Sukuk in Indonesia. Keywords: Liquidity, Outstanding, Coupon Rate, Time to Maturity, Age, Sovereign Sukuk, Panel Data Analysis

The development of local government financial vehicles in China: A case study of Jiaxing Chengtou

Financial intermediaries have been widely used in urban development. Since the global financial crisis, it has been an urgent task to understand their operation and implications for financial risks. This paper examines emerging local government financial vehicles (LGFVs) in China. We review their history, current status and underlying financial mechanisms. Confronting the global financial crisis, China has taken a stimulus plan to invest four-trillion Yuan in urban development to stimulate the economy. The plan has been largely fulfilled by the LGFVs. This paper investigates the case of Jiaxing City Construction Investment Corporation (Jiaxing Chengtou), which plays a role of LGFVs. We find that it mainly uses bank loans and bonds to finance land and infrastructure development. To borrow from the capital market, Jiaxing Chengtou collateralizes allocated state-owned land and enhances credits by build and transfer protocols with the city government. However, the enterprise did not manage to pay back its loans, which has led to further borrowing. Due to the central government’s control, Jiaxing Chengtou has been nominally detached from the municipal government since 2012, but it maintains a financial role. It has been re-packaged with other LGFVs to access foreign bond markets. The paper reveals how LGFVs act as financial conduits to connect local governments with the financial market in China.

Central Bank Digital Currency with Adjustable Interest Rate in Small Open Economies

Open economy implications of central bank digital currencies (CBDCs) are a new and exciting area of research. In this paper, we assess the economic and welfare outcomes of monetary policies with an adjustable interest rate of a CBDC as a secondary instrument and a Taylor-type rule as a primary instrument in a small open economy. We develop a dynamic stochastic general equilibrium (DSGE) model, in which bank deposits and CBDC are competing media of exchange, and are both competing assets of domestic and foreign bonds. The model provides parity conditions between CBDC vis-a-vis its competing assets, which imply that the efficiency in transacting with CBDC plays an important role in determining both the interest rate differentials and the effectiveness of the adjustable CBDC interest rate as a monetary policy instrument. Our simulation exercises find that a counter-cyclical rule for the CBDC interest rate improves social welfare, despite the distributional effects among financially constrained and unconstrained agents. We also find that the adjustable CBDC interest rate provides a possibility for the central bank to achieve both objectives of monetary autonomy and exchange rate stability, in a way analogous to a sterilized foreign exchange intervention.

Can commodity prices forecast exchange rates?

Abstract Forecasting exchange rates is a challenging work. This paper investigates the predictive content of commodity prices for exchange rates. We draw a factor from prices of 17 popular commodities including crude oil to forecast exchange rates. Our results indicate that the average commodity returns can successfully predict the level and excess returns to exchange rates of currencies in Australia, Canada, New Zealand and South Africa from both in-sample and out-of-sample perspectives. The predictability of excess currency returns is further demonstrated to be economically significant. An agent with mean-variance preference who allocates her wealth between domestic and foreign bonds can improve the portfolio performance by using commodity forecasts of currency return instead of the benchmark of historical average forecasts.

Foreign exchange reserves as a tool for capital account management

Recent theoretical papers argue that countries can insulate themselves from volatile world capital flows by using a variable tax on foreign capital as an instrument of monetary policy. But empirical papers argue that we rarely observe these cyclical capital flow taxes used in practice. We construct a small open economy model where the central bank engages in sterilized foreign exchange intervention. When private agents freely trade foreign bonds, sterilized intervention has no effect. But we prove that when frictions prevent the free trade in foreign bonds, optimal sterilized foreign exchange intervention is equivalent to an optimal tax on foreign capital. The model is then calibrated to match the levels of capital account restrictions that we observe in the data. For levels of capital account openness that we observe in many emerging market economies, a variable tax on capital flows is a close approximation for sterilized foreign exchange intervention.

Determinants of foreign portfolio flows to Indian debt market

Purpose The volatile nature of foreign portfolio flows, especially flows into debt market, has large implications on financial and macroeconomic stability in recipient countries. It is necessary to identify the main drivers of portfolio investments in bond market of developing economies to design effective policies to enhance resilience of the economy and help in managing capital flow volatility. The determinants of foreign portfolio investment to Indian equity market have been examined in literature, but flows to bond market remain unexplored. Thus, the purpose of this paper is to identify the possible determinants of foreign portfolio flows to Indian bond market both in the short and in the long run. Design/methodology/approach This study carries out a time series analysis by deploying autoregressive distributed lag (ARDL) approach to cointegration of monthly data of the period from January 2002 to December 2016 for the Indian economy. A mix of pull and push factors has been analysed in this study. Domestic growth, domestic stock market performance, interest rate differential, exchange rate, volatility in exchange rate, stock market returns in other emerging economies, foreign output growth and dummy variables to trace the external developments such as global financial crisis and unconventional monetary policies of advanced economies have been used as explanatory variables. Findings The dominant pull factor such as interest rate differential explains the dynamics of flows in Indian bond market. The relationship between capital movements and interest rate differentials is the most accepted paradigm in international finance (Haynes, 1988). Among other domestic factors are stock market performance, volatility in exchange rates and domestic growth rates which are found to be significant drivers of foreign portfolio bond flows to India. The study also confirmed that global conditions could induce a fast outflow of capital from India. Research limitations/implications The study concludes that both domestic factors and external factors are equally important in determining the foreign portfolio investments in the Indian debt market. Practical implications The empirical analysis conducted in this study suggests that direct and indirect measures can be taken to increase and stabilise foreign investments in the Indian bond market. Direct policy measures refer to those tools which are under the ambit of policymakers. Indirect measures comprise those tools that are not under the direct control of the fiscal and monetary authorities but require coordinated efforts of the government and private sector. In this context, strengthening of not only financial and economic but also administrative institutions will be necessary. Creditworthiness and policy credibility should be improved to address erratic foreign portfolio investment in debt market of India. Originality/value This study is an original research study. This study adds to the existing literature and is expected to guide policymakers on the specific aspect of the management of capital flows as it gets affected by changes in monetary and fiscal policies.

A Theory of Foreign Exchange Interventions

Abstract We study a real small open economy with two key ingredients (1) partial segmentation of home and foreign bond markets and (2) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (1) the optimal policy leans against the wind, stabilizing the exchange rate; (2) it involves smooth spreads but allows exchange rates to jump; (3) it partly relies on “forward guidance,” with non-zero interventions even after the shock has subsided; (4) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.

Investing in the New Republic: Multinational Banks, Political Risk, and the Chinese Revolution of 1911

This article examines the strategies employed by multinational banks to mitigate political risk following the onset of revolution in their host countries during the early twentieth century. It does so by exploring the activities of multinational banks in China during the Revolution of 1911 and its aftermath. This article first describes the measures that multinational banks took to maintain China's credit on foreign bond markets after the outbreak of revolution. It then examines how these bankers curtailed political instability by first withdrawing financial support from both the Qing government and the revolutionaries and then providing financial assistance to the new Chinese Republican government.

U.S. Monetary Policy and International Bond Markets

AbstractThis paper analyzes how U.S. monetary policy affects the pricing of dollar‐denominated sovereign debt. We document that yields on dollar‐denominated sovereign bonds are highly responsive to U.S. monetary policy surprises—during both the conventional and unconventional policy regimes—and that the passthrough of unconventional policy to foreign bond yields is, on balance, comparable to that of conventional policy. In addition, a conventional U.S. monetary easing (tightening) leads to a significant narrowing (widening) of credit spreads on sovereign bonds issued by countries with a speculative‐grade credit rating but has no effect on the corresponding weighted average of bilateral exchange rates for a basket of currencies from the same set of risky countries; this indicates that an unanticipated tightening of U.S. monetary policy widens credit spreads on risky sovereign debt directly through the financial channel, as opposed to indirectly through the exchange rate channel. During the unconventional policy regime, yields on both investment‐ and speculative‐grade sovereign bonds move one‐to‐one with policy‐induced fluctuations in yields on comparable U.S. Treasuries. We also examine whether the response of sovereign credit spreads to US monetary policy differs between policy easings and tightenings and find no evidence of such asymmetry.

US Monetary Policy and International Bond Markets

This paper analyzes how US monetary policy affects the pricing of dollar-denominated sovereign debt. We document that yields on dollar-denominated sovereign bonds are highly responsive to US monetary policy surprises--during both the conventional and unconventional policy regimes--and that the passthrough of unconventional policy to foreign bond yields is, on balance, comparable to that of conventional policy. In addition, a conventional US monetary easing (tightening) leads to a significant narrowing (widening) of credit spreads on sovereign bonds issued by countries with a speculative-grade credit rating but has no effect on the corresponding weighted average of bilateral exchange rates for a basket of currencies from the same set of risky countries; this indicates that an unanticipated tightening of US monetary policy widens credit spreads on risky sovereign debt directly through the financial channel, as opposed to indirectly through the exchange rate channel. Durin g the unconventional policy regime, yields on both investment- and speculative-grade sovereign bonds move one-to-one with policy-induced fluctuations in yields on comparable US Treasuries. We also examine whether the response of sovereign credit spreads to US monetary policy differs between policy easings and tightenings and find no evidence of such asymmetry.

Foreign bond investors and market discipline

This article scrutinizes the impact of foreign bond ownership on market discipline, that is the mutual responsiveness of financial markets and sovereign borrowers. The empirical investigation covers 12 advanced economies during the Great Moderation (1981–2008). This article finds no evidence that foreign bond investors affect the sensitivity of bond spreads to fiscal policy. Reversely, results show that government responsiveness to market pressure is contingent on the make-up of its investor base. Bond spreads spur on fiscal consolidation. The larger the share of foreign bond investors, the bigger this effect.

Policy shocks, current account and the macroeconomy in a developing country

Purpose This is a theoretical paper in the field of international macroeconomics. The purpose of this paper is to focus on a dynamic interaction between current account imbalance and unemployment in response to some policy-induced shocks for a small open economy under a flexible exchange rate. Design/methodology/approach The paper uses a two-sector framework: one sector is traded and another is the non-traded sector that is subject to an effective demand constraint. The current account imbalance arises due to the discrepancy between production of traded goods, household consumption of traded goods and government purchases of importables. The authors keep the asset structure simple by considering only domestic currency and foreign bonds that are imperfect substitutes. The paper considers a standard methodology of dynamic adjustment process involving change in foreign exchange reserves and exchange rate under perfect foresight. The saddle path properties of the equilibrium are also examined. Findings The results of comparative static exercises depend on a set of structural features of a developing country, which include asset substitutability, wage price rigidity and sectoral asymmetries. The paper shows that expansionary monetary policy, balanced budget fiscal expansion and financial liberalization have an ambiguous effect on the current account balance, foreign exchange reserves, non-traded sector and the level of employment. Originality/value The existence of Keynesian unemployment with fixed prices is the key ingredient of this paper. The paper introduces the problem of effective demand to analyze the dynamics of current account balance and exchange rate, which, in turn, determine the sectoral composition of output and level of employment.