Foreign Liabilities Research Articles

Macro fundamentals and the resurgence of the Feldstein–Horioka puzzle in Europe

This paper discusses the resurgence of the Feldstein–Horioka puzzle after the global financial crisis within the European space. Revisiting the theory of intertemporal choice, this paper suggests that the deterioration of macroeconomic fundamentals that favor capital flows from richer to poorer economies can lead investment and savings to correlate across countries even without frictions to capital mobility. I test this hypothesis against a data set of 12 European economies spanning since the inception of the Maastricht treaty and ending immediately before the start of the Covid-19 pandemic. I find that the investment-savings correlation is generally low both across and within open economies, aligning with the theoretical stylized fact. However, this can be jeopardized when low-income economies accumulate large net stocks of foreign liabilities coupled with sluggish prospects for productivity growth. Ultimately, if investment and savings are not managed in line with macro fundamentals, foreign investors eventually impose a premium on new liabilities, raising the cost of financing investment with foreign funds and leading the correlation between investment and savings to rise both across and within countries.

How significant is trade, macroeconomic management, and economic integration for foreign indebtedness in West African countries?

The implications of trade, macroeconomic management, and economic integration for external debt have rarely been researched in public debt studies. Hence, the novelty of this study’s contribution to the literature hinges on identifying the significance of these factors in external debt accumulation for West African countries from 1981 to 2020. Methodologically, the study applied pooled mean group analytical approach due to its significance in identifying short-term heterogeneous effects. Empirical deductions from the study indicated that trade and economic integration would potentially trigger external debt accumulations in the short term, while the implication of macroeconomic management is neutral. However, the long-term quantified relations of trade and economic integration on external debt demonstrate a diminishing effect, while macroeconomic management has weak significance. The individual country short-term results indicated that trade enhanced the volume of external debt in almost all countries examined. Also, macroeconomic management and economic integration were revealed to have moderate and insignificant associations with external debt accumulation. Furthermore, this study affirmed that the role of financial sector uncertainty, political imbalance, insurgency, and disease outbreaks are accompanying exacerbating factors for foreign indebtedness in West African countries.

Inequality and the structure of countries’ external liabilities

In this paper, we present empirical evidence that higher income inequality is associated with a greater equity share in countries’ external liabilities, and we develop a theoretical model that can explain this observation: In a small open economy with traded and non-traded goods, entry barriers depress entrepreneurial activity in non-traded industries and raise income inequality. The small number of domestic non-traded goods firms leaves room for foreign firms to operate on the domestic market, and it reduces external borrowing. The model thus suggests that barriers to entrepreneurial activity raise both inequality and the equity share in foreign liabilities. Our empirical results lend some support to this conjecture.

Explaining the volatility of the real exchange rate in emerging markets

This paper shows that the real exchange rate (RER) is more volatile in emerging markets (EM) than in advanced economies (AE). This stylized fact is well explained by the correlation coefficient between gross capital inflows (increases in liabilities with the rest of the world) and gross capital outflows (increases in assets held by domestic agents in the rest of the world). This correlation (with increases both in foreign liabilities and assets expressed as positive magnitudes) has averaged over 0.80 since 2000 in AE but has oscillated between less than 0.10 and 0.40 in EM. With the use of an empirical model, we find a negative relationship between the correlation coefficient of gross inflows and outflows, on the one hand, and real exchange volatility, on the other. This finding is robust to various estimation procedures.

An Unintended Consequence of Uncoordinated International Monetary Policy on Central America

This research explores causes and implications of the foreign indebtedness of Central American countries in the 2010s, that is, during what has been defined the second phase of global liquidity, marked by the quantitative easing (QE) of central banks in developed economies. Looking at their balance of payments and their contemporary sources of funding, we find that the international bond market became an important source of debt for Central American economies during that decade. We also find that non-financial corporations’ foreign bond issuance has been increasing in some of the countries under study, even though less than in larger emerging economies. Classifying these countries’ international debt securities by residence and nationality of the issuer, we identify another peculiarity with important implications about financial fragility. In fact, as opposed to what occurred to larger emerging economies, the general governments issuing foreign bonds has been a more relevant source of risk than the issuance by financial and non-financial corporations.

MACROECONOMIC ANALYSIS AND FORECASTING OF FOREIGN DIRECT INVESTMENT INFLOW: EVIDENCE FROM UKRAINE

Attracting foreign investment is a viable means of ensuring the economic growth of any country. The relevance of the study is substantiated by the creation of a favorable investment climate in the country, which will allow the establishment of guarantees of protection of foreign investments and stability of the legal basis for entrepreneurship performance. The article aims to analyze and forecast the inflow of foreign direct investment (FDI) into Ukraine. In order to achieve the stated purpose, the econometric model was developed, which demonstrates the correlation between macroeconomic indicators, their characteristics and the amount of FDI. A set of general scientific and special research methods were used, in particular: induction and deduction, grouping, summarization, comparison, complex and systemic approaches. The article reveals the essence of foreign investment for the Ukrainian economy and defines the characteristics of FDI. The impact of FDI on the economy of Ukraine is analyzed in detail and the conditions for their attraction are substantiated. Using statistical methods, the structure and dynamics of FDI by types of economic activity and investor countries are investigated. The conducted research has shown that through the attraction of foreign direct investment economic growth, the well-being of the population, the reduction of foreign indebtedness and efficient state capital investments are ensured. Taking all this into account the necessary preconditions for the attraction of foreign direct investments into the Ukrainian economy were substantiated.

MMT and policy assignment in an open economy context: Simplicity is useful, oversimplification not so much

AbstractModern Monetary Theory (MMT) has recently received significant attention in academic and policy circles. Critics question the sustainability of MMT‐prescribed approaches to fiscal and monetary policy, especially over extended periods of time, in the presence of international financial markets, and for developing country governments that borrow in foreign currency. I formalize some of these arguments using a dynamic, open economy, Tobin‐Markowitz portfolio balance environment that takes into account: (1) the role of expectations in the foreign exchange market and the feedback mechanisms between these and the exchange rate and inflation, and (2) interactions between the current account, debt accumulation, and the goods market. I show that continuous monetary accommodation of fiscal policy by a consolidated authority that operates along MMT‐prescribed lines is likely to generate instability and make it hard to maintain full employment with stable inflation. Importantly, this is true even in the absence of rational forward‐looking expectations or sovereign foreign indebtedness.

Annina Gagyiova. Vom Gulasch zum Kühlschrank: Privater Konsum zwischen Eigensinn und Herrschaftssicherung im sozialistischen Ungarn (1956–1989) [From goulash to fridge: individual consumption between Eigensinn and political dominance in socialist Hungary (1956–1989)

Annina Gagyiova. <i>Vom Gulasch zum Kühlschrank: Privater Konsum zwischen Eigensinn und Herrschaftssicherung im sozialistischen Ungarn (1956–1989)</i> [From goulash to fridge: individual consumption between <i>Eigensinn</i> and political dominance in socialist Hungary (1956–1989)

Indebtedness and the pace of catching up in the CEE countries

The paper verifies the existence of the relationship between the economic growth – i.e., the main determinant of the catching up process – and the level of government, household and external debt (foreign liabilities). The comparative analysis of the correlation for CEE11 countries and EU14 countries confirms that the level of indebtedness is a strong determinant of economic growth, and thus of the catching up process. The authors confirmed the "unfair" relationship that high debts more severely constrain development in less credible developing countries, and that tolerance for public debt in developing countries has decreased in recent years. The results also show that in developing CEE countries – unlike in the case of developed countries – higher levels of foreign liabilities and their stronger growth turn out to be a hindrance to economic growth. Finally, it should be emphasized that the fact that the stronger increase in household liabilities was accompanied by higher average economic growth in the CEE countries in the analyzed period (as opposed to EU14 countries) should be treated as an important warning. Probably the relatively high (although noticeably lower than in the EU14 countries) and/or growing household debt in the CEE countries will also at some point begin to slow down their economic growth and the pace of the catching up process.

Foreign exchange rate shocks and stabilizing role of interbank markets: evidence from Turkey

ABSTRACT We study the transmission of exchange rate shocks in the Turkish interbank loan market using high-frequency bank-level data. Our results suggest that interbank market plays a stabilizing role: following large domestic currency depreciations, banks with a higher share of foreign currency liabilities borrow more in the interbank market, with a higher but insignificant effect on borrowing costs. The results are stronger the larger the exchange rate shock is and the lower the capital adequacy or liquidity ratios of borrower banks. Interbank markets play a weaker stabilizing role for banks with higher short-term rollover risks.

To default or not? The aftermath of sovereign defaults and IMF programs in economic crises

AbstractEconomic crises are costly and highly disruptive, but does a sovereign default enhance or undermine economic recovery during the crisis? In this study, we approach this question by using a large dataset regarding economic crises after the Second World War. The results indicate that in terms of the real economy, domestic defaults tend to be followed by losses, especially in developing countries facing crises. Defaulting on foreign liabilities yields an equivocal economic outcome depending mostly on the level of economic development. Surprisingly, public debt seems to play no role in outcomes of defaults. We also analyse International Monetary Fund (IMF) programmes and find that they provide a more favourable crisis outcome.

The Real Effect and Consequence of Regulation Reform in Corporate Finance and Banking

In order for a country to grow economically, it needs a stable, efficient, and well-functioning banking system. The province should examine systematically and comprehensively its regulations, and examine how to improve the quality of these regulations, reduce their administrative burden, and remove the confusion they sometimes create. Several studies have pointed to the importance of financial regulation to the performance and safety of banks. The reform of regulatory policies and practices makes businesses more competitive and decreases regulatory costs, boosting efficiency, bringing down prices, stimulating innovation, as well as making economies more adaptable and competitive. We investigated how banking regulations affected financial development in MENA (Middle East-North Africa) countries. We measured bank regulation by proxies like foreign banks, capital levels, and liquidity liabilities. We measured financial development by proxies like private credit, z-scores, and private credit. Similarly, a tool to measure bank supervision includes supervisory power, independence, private monitoring, and moral hazard in addition to the size, activity, and stability of the financial sector. In terms of financial development, regulation of banks made a positive and significant contribution. A major contribution of the study is to demonstrate that reform supervision is also an important component of bank regulation, so that banks can achieve their regulatory objectives and impact financial development as strongly as possible. For MENA countries, this benefit is particularly significant, since an analysis of the data shows that more emphasis is placed on regulation than supervision in financial sector reform.

Growth led by government expenditure and exports: Public and external debt stability in a supermultiplier model

The Sraffian supermultiplier model revealed the role of autonomous demand in economic growth. Nevertheless, the sustainability of growth requires the stability of the financial stocks behind autonomous demand. Growth led by government expenditure and exports is thus stable if both public and external debts are stable. In this paper, we assess the stability of this growth process in a supermultiplier model. The external constraint may appear as a restriction to external indebtedness, imposing an upper limit to growth. Nonetheless, the domestic autonomous expenditure can keep the economy distant from the external constraint. A fiscal policy rule is proposed to contain foreign indebtedness. Simulations support the analytical results, and compare the outcomes of the fiscal policy rule and a structural change policy. Altogether, the model provides stability conditions for growth in an open economy paying its international liabilities in foreign currency.

Foreign investment in times of COVID-19: How strong is the flight to advanced economies?

This paper investigates the flight to advanced economies by foreign investors at the onset of the COVID pandemic. Amid an overall decline of international positions, countries featuring higher GDPs per capita, and belonging to the groups of advanced, G7, or euro area countries, appear to have been significantly less severely hit by the pandemic than developing countries. Comparing the growth rates of foreign liabilities in the first quarter of 2020, the wedge between advanced and emerging countries is about 3%, and it is at least twice as large for G7 countries. This wedge is paired with evidence of momentum trading by foreign investors. Our results are robust to the inclusion, as controls, of government stringency measures, alternative indicators of the severity of the pandemic, and alternative sample specification and regression methods.

"Crime and Punishment"? How Russian Banks Anticipated and Dealt with Global Financial Sanctions

We study the impact of global financial sanctions on the Russian banks and economy. Financial sanctions were consecutively imposed between 2014 and 2019, allowing potentially-targeted (but not yet sanctioned) banks to adjust their international and domestic exposures. Compared to similar other banks, targeted banks immediately reduced their foreign assets. Yet, to deal with considerable domestic depositor withdrawals, targeted banks at first actually expanded their foreign liabilities. Once sanctioned, however, banks not only further reduced their foreign assets but also started to decrease their foreign liabilities as well. Despite the introduction of government support the sanctioned banks substantially contracted their lending to the domestic corporate sector resulting in a potential loss in domestic GDP of at least four percent. However, at the same time the sanctioned banks increased household lending by almost the same magnitude, mostly offsetting the loss in GDP. Finally, unique hand-collected board membership and location data coupled with a two-stage difference-in-differences approach that flexibly addresses potential treatment diffusion allows us to show that throughout this period state-controlled banks were not all equally recognized as potential sanction targets.

Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk

We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to the presence of a pecuniary externality individual agents borrow too much and hold too little liquid assets relative to a social planner. This ineffciency rationalizes macroprudential policy interventions in the form of reserve accumulation at the central bank coupled with a tax on foreign borrowing. Unless combined with other measures, a tax on foreign borrowing is detrimental to welfare; it reduces agents’ incentives to invest in liquid assets and thereby increases financial instability. Our model can quantitatively match the simultaneous depreciation of the exchange rate and contractions in output, gross trade flows, foreign liabilities and liquid reserves during Sudden Stop episodes.

Brazil's quasi-stagnation and East-Asia growth: A new-developmental explanation

From the 1980s, Brazil quasi-stagnated while East-Asia continued to grow. What went wrong? Classical developmentalists and post-Keynesians argue the cause was the desertion of the national developmental project based on structural change or industrialization. New-developmental economics agrees but is more specific: two historical new facts reduced investments. In the 1980s, a fiscal crisis of the state defined by negative public savings, broke up. This crisis, which was not resolved, led to the fall of public investments. As to private investments, they also have fallen as a percentage of GDP (when we compare with the 1970). They have fallen due to an action and an omission. The action was the mistaken adoption of growth with foreign indebtedness policy and the consequent excess of capital inflows. The omission was the suspension of the neutralization of the Dutch disease. Both resulted in a long-term overvaluation of the exchange rate and stopped industrialization.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.