Global Financial Conditions Research Articles

Global Financial Conditions, Country Spreads and Macroeconomic Fluctuations in Emerging Countries

This paper uses a panel structural vector autoregressive (VAR) model to investigate the extent to which global financial conditions, i.e., a global risk-free interest rate and global financial risk, and country spreads contribute to macroeconomic fluctuations in emerging countries. The main findings are: (1) Global financial risk shocks explain about 20 percent of movements both in the country spread and in the aggregate activity in emerging economies. (2) The contribution of global risk-free interest rate shocks to macroeconomic fluctuations in emerging economies is negligible. Its role, which was emphasized in the literature, is taken up by global financial risk shocks. (3) Country spread shocks explain about 15 percent of the business cycles in emerging economies. (4) Interdependence between economic activity and the country spread is a key mechanism through which global financial shocks are transmitted to emerging economies.

Macroeconomic transmission of Eurozone shocks to emerging economies

Cet article analyse la robustesse de la croissance des économies émergentes à divers chocs sur leur demande extérieure en utilisant un modèle vectoriel autorégressif bayésien incorporant des informations préalables sur l’état d’équilibre. Nous montrons que plus de 50% de la variation de la croissance du PIB réel dans les économies d’Amérique latine est expliquée par les facteurs extérieurs, contre un peu moins de 50% pour l’Asie émergente et la Chine. Les prévisions conditionnelles montrent qu’une récession profonde en zone euro créerait des baisses de croissance sévères et persistantes dans les économies émergentes et que ces répercussions sont modulées par la réaction de la croissance américaine à ce choc. Enfin, un ralentissement prononcé de la croissance chinoise aurait un impact négatif significatif sur la croissance des autres économies émergentes. Classification JEL : F43 ; F44 ; F47.

Development threshold, capital flows, and financial turbulence

We study capital flows in a panel of 130 countries, and derive the implications for the observed patterns of capital flows and capital controls before and into the crisis of 2008–11. We find that the size of capital flows is positively correlated with country's income level. In addition, capital flight has a non-linear relationship with the income level. Using the Hansen threshold estimation, we identify a three-stage threshold effect: for low-income countries (GDP per capita below US$ 3,000), capital flight increases as the income level rises; and only after the economy passes a threshold level (GDP per capita above US$ 5,000), capital flight declines with income. We conclude with a case study of Brazil and Korea, observing that the decisions to implement capital control measures tend to be pushed around by the feedbacks among economic growth, currency appreciation, and the global financial conditions.

Non linear and asymmetric linkages between real growth in the Euro area and global financial market conditions: New evidence

This paper deals with transition mechanisms through which financial market conditions affect real economic growth in the Euro area. The informational content of financial variables for predicting real economic growth is assessed, allowing for asymmetric responses to shocks. A nonlinear framework is developed based on a smooth transition model for which the effects of shocks can vary across business cycles when financial indicators modify both the endogenous and state variables. Global financial variables are shown to significantly affect real growth in the Euro area, particularly during periods of recession. Changes in stock market index and yield slope have asymmetric effects on real growth. In recessionary periods, the slope of the US yield curve does not have a significant impact on growth in the Euro area.

Determining the Current Optimal Allocation to Property: A Survey of Australian Fund Managers

This research paper examines the property asset allocation strategies for the A$1.7 trillion Australian managed funds industry and identifies the important steps and considerations that influence their optimal property allocation view and decision making process. It investigates the use and relevance of strategic and tactical asset allocation strategies for property asset allocation decisions. The results indicate that the allocation of resources to property assets is a complex system of interdependent decisions given its distinctive investment characteristics when compared to alternative asset classes. Apart from definitive/quantitative inputs in property asset allocation models, Australian fund managers are influenced by many other non-financial considerations. In addition, there are notable differences in techniques for direct property, unlisted property and securitised property asset allocation. The results also demonstrate that there has been a shift in Australian fund manager’s property asset allocation views and strategies driven mainly by the fund’s need to adapt to the continued uncertain global financial market conditions.

Modelling the Impact of Aggregate Financial Shocks External to the Chinese Economy

Ways of extracting financial condition indices (FCI) are explored and alternative FCIs external to the Chinese economy are constructed to model their predictive content. The exploration aims at highlighting the rich and varied dynamic features of financial variables underlying FCIs and the importance of synchronising dynamic information between FCIs and the real-sector variables to be forecasted. The modelling experiment aims at improving the forecasting model upon which the FCIs are assessed. Four variables are chosen as the likely macro channel of the FCIs affecting the Chinese economy. It is found that the FCI-led models enjoy forecasting advantages over a benchmark model in three out of the four variables, although the benchmark model is not dominated by the FCI-led models when judged by in-sample encompassing tests. The evidence indicates the increasing exposure of the Chinese economy to the global financial conditions.

An assessment of another decade of capital controls in Colombia: 1998–2008

We explore the effectiveness of capital controls in Colombia. We analyze the impact of administrative restrictions to capital flows on aggregate capital flows, the composition of capital flows, the real exchange rate, and economic activity using restricted versions of vector error correction models (VEC) that control for exogenous global financial conditions. The models are estimated using monthly data ranging from August of 1998 to May of 2008. In addition we estimate GARCH models to identify if capital controls have had relevant impacts on the volatility of the nominal exchange rate and of other relevant asset prices. These models are estimated using weekly data covering the same time period. Results suggest that the capital controls used since 1998 have been ineffective in reducing capital flows and the trend of the Colombian peso to appreciate. In addition there is no evidence suggesting a change in the composition of capital flows induced by capital controls. We find some evidence in favor of capital controls reducing nominal exchange rate volatility at high frequencies.

Crises, portfolio flows, and foreign direct investment: An application to Turkey

We analyze how financial and economic crises affect the relation between the components of capital flows and their determinants in an emerging economy. Our results suggest that the composition of capital flows matters, crises can explain the volatility of portfolio flows and foreign direct investment, and modeling them as endogenous breakpoints improves the results considerably. By using data from the Turkish economy, we estimate these breakpoints together with the parameters of the model and find that they correspond to international and domestic crises that hit the country. Although both components are affected by similar crises, direct investment reacts strongly to the domestic crisis, while portfolios flows are more sensitive to global financial conditions. Breaks also have an effect on the significance and sign of determinants of each type of international investment. Evidence indicates changes in all coefficients in both investment types and suggests that analyses assuming parameter constancy lead to misleading results if they ignore the influence of endogenous breaks.

Country Insurance Using Financial Instruments

The availability of financial instruments related to indices that track global financial conditions and risk appetite can potentially offer countries alternative options to insure against external shocks. This paper shows that while these instruments can explain much of the in-sample variation in borrowing spreads, this fails to materialize in hedging strategies that work well out-of-sample during tranquil times. However, positions on instruments such as those tracking the US High Yield Spread, the VIX, and especially other emerging market CDS spreads can substantially offset adverse movements in own spreads during times of systemic crises. Moreover, high risk countries seem to gain more, as their underlying weaknesses makes them more vulnerable to external shocks. Overall, the limited value in tranquil times, coupled with political economy arguments and innovation costs could justify the limited interest for this type of hedging in practice

Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter?

Sovereign investment grade status is often associated with lower spreads in international markets. Using a panel framework for 35 emerging markets between 1997 and 2008 this paper finds that investment grade status reduces spreads by 36 percent, above and beyond what is implied by macroeconomic fundamentals. This compares to a 5-10 percent reduction in spreads following upgrades within the investment grade asset class, and no impact for movements within the speculative grade asset class, ceteris paribus. While global financial conditions play a central role in determining spreads, market sentiment improves with lower external public debt to GDP levels and higher domestic growth rates.

Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter?

Sovereign investment grade status is often associated with lower spreads in international markets. Using a panel framework for 35 emerging markets between 1997 and 2008 this paper finds that investment grade status reduces spreads by 36 percent, above and beyond what is implied by macroeconomic fundamentals. This compares to a 5-10 percent reduction in spreads following upgrades within the investment grade asset class, and no impact for movements within the speculative grade asset class, ceteris paribus. While global financial conditions play a central role in determining spreads, market sentiment improves with lower external public debt to GDP levels and higher domestic growth rates.

Comment on “International and Regional Cooperation: Asia's Role and Responsibilities”

Comment on “International and Regional Cooperation: Asia's Role and Responsibilities”

The effects of ethical framing on consumer price perceptions

PurposeThe purpose of this paper is to investigate one of the potential cues that may influence the price consumers are willing to pay for products. This paper seeks to investigate the use of ethically framed marketing efforts in influencing price perceptions among consumers of health and beauty productsDesign/methodology/approachThe exploratory online experiment was completed in two parts: the first with 84 participants and the second with 61 participants.FindingsResults show that consumers expect prices to be much higher when the product is produced under ethical conditions but they are willing to pay only slightly more for ethically produced products.Research limitations/implicationsThe participants were a convenience sample and thus the results are not generalizable. While being socially responsible is an end in itself, consumers may not allow the firms to increase prices to cover the increased costs of production. It is not apparent that consumers fully expect to share in the cost of a social responsible global economy.Originality/valueThe study offers insight into the difficulty firms have in producing products in an ethical manner and passing those costs to their customers. Considering the global financial conditions in 2008/2009, it may be even more difficult for firms to maintain ethical production methods.

Emerging Market Spreads in the Recent Financial Turmoil

This work examines how much of the variation in emerging market economies' (EMEs) spreads can be ascribed to 'country-specific' factors rather than to 'common' factors, once the existence of an interaction between the state of macroeconomic fundamentals and global financial conditions is properly taken into account. By means of factor analysis we find that a single common factor is able to explain a large part of the covariation in EME spreads in the period January 1998-June 2008; in turn, the common factor can be traced back mainly to financial market volatility. Once we have controlled for a set of idiosyncratic macroeconomic fundamentals, the common factor turns out to be a significant determinant of EME spread variations in the recent period of financial turmoil. Finally, the interaction term between global financial conditions and the state of macroeconomic fundamentals plays a significant role in most of the countries, allowing us to show that, for some less virtuous economies, the negative effects of a worsening of global conditions have been magnified by weakening domestic macroeconomic fundamentals.

Global Financial Regulatory Reform: Implications for Latin America and the Caribbean (LAC)

The Latin America and Caribbean (LAC) region has weathered the global financial crisis reasonably well so far, although tighter global financial conditions began to take their toll on trade, capital flows and economic growth in late 2008. This resilience reflects the reforms put in place by many countries over the past decade to strengthen financial supervision and adopt sound macroeconomic policies. Building on this progress, the region’s financial sector reform agenda now aims at further improvements, including steps aiming to improve compliance with the Basel Core Principles of Banking Supervision and to broaden and deepen domestic financial markets.

Emerging market sovereign spreads, global financial conditions and U.S. macroeconomic news

We investigate the impact of global financial conditions, U.S. macroeconomic news and domestic fundamentals on the evolution of EMBI spreads for a panel of 18 emerging market (EM) countries using daily data. To this end, we consider not only the conventional panel cointegration procedures but also the recent common correlated effects method to tackle cross-section dependence that may stem from common global shocks such as contagion. The results suggest that the long-run evolution of EMBI spreads depends on global financial conditions, crises contagion and domestic fundamentals proxied by sovereign ratings. The results from panel equilibrium correction models suggest that EMBI spreads respond substantially also to U.S. macroeconomic news and changes in the Federal Reserve's target interest rates. The magnitude and the sign of the effect of the U.S. news, however, crucially depend on the state of the U.S. economy, such as the presence of inflation dominance.

Editorial to the Special Issue

First paragraphDuring the recent decades the financial sectors of developed and developing countries as well as global financial relations have changed remarkably. The overall importance of financial factors for real investment and growth of non-financial business has risen, as has the financial activity of non-financial corporations. Power relations between shareholders in joint stock companies, management, and labourers seem to have changed. The development of new financial instruments, together with the booms in stock market and real estate prices, has increased the potential for wealth-based and debt-financed consumption. As a result of these developments financial fragility (Minsky 1977) has increased. The current financial turbulences, generated by the sub-prime mortgage crisis in the USA and spreading over international financial markets since summer 2007, may be seen as a result of this increased fragility. Finally, global financial relations and conditions have changed with the rapid development in Asia and the associated current account surpluses, in particular in China but also in Japan.

An Assessment of Another Decade of Capital Controls in Colombia: 1998-2008

We explore the effectiveness of capital controls in Colombia. We analyze the impact of administrative restrictions to capital flows on aggregate capital flows, the composition of capital flows, the real exchange rate, and economic activity using restricted versions of vector error correction models (VEC) that control for exogenous global financial conditions. The models are estimated using monthly data ranging from August of 1998 to May of 2008. In addition we estimate GARCH models to identify if capital controls have had relevant impacts on the volatility of the nominal exchange rate and of other relevant asset prices. These models are estimated using weekly data covering the same time period. Results suggest that the capital controls used since 1998 have been ineffective in reducing capital flows and the trend of the Colombian peso to appreciate. In addition there is no evidence suggesting a change in the composition of capital flows induced by capital controls. We find some evidence in favor of capital controls reducing nominal exchange rate volatility at high frequencies.

Sound Policies or Good Fortune: What Drives Emerging Market Spreads?

Since 2002, spreads on emerging market sovereign debt have fallen to historical lows. Given the close links between sovereign spreads, capital flows to emerging markets, and economic growth, understanding the factors driving sovereign spreads is very important. This paper uses factor analysis to study the extent to which emerging market bond spreads ‐ measured by JP Morgan’s EMBI Global index ‐ are driven by global factors, such as global liquidity or commodity prices, as opposed to country-specific macroeconomic fundamentals. Our results show that a common factor explains a substantial portion of the co-movements in emerging market spreads in the last decade. This factor is closely linked to global financial conditions, as well as to energy- and non-energy commodity prices. This factor, however, is not responsible for the reduction in EMBI spreads. Instead, emerging markets have benefited considerably from better macroeconomic policies. Therefore, a reversal of the benign global economic environment need not have a substantial negative impact on financing conditions for emerging markets. Bank index: Development economics, financial stability, international topics

Emerging markets’ spreads and global financial conditions

In this article, we analyze how much of the reduction in emerging markets’ spreads can be ascribed to specific factors—linked to the improvement in a given country's fundamentals, rather than to common factors—linked to global liquidity conditions and agents’ risk aversion. By means of factor analysis, we find that a single common factor is able to explain a large part of the co-variation in emerging market economies’ (EMEs) spreads observed in the last 4 years; in turn, this common factor can be traced back mainly to financial market volatility. Due to the particularly benign global financial conditions of recent years, spreads seem to have declined to below the levels warranted by improved fundamentals. As a consequence, EMEs do remain vulnerable to sudden shifts in financial market conditions.