International Financial Integration Research Articles

Oil price shocks and the dynamics of current account balances in Nigeria

AbstractThis paper pioneers research on the relationship between oil price shocks and current account dynamics in Nigeria, a country that doubles as an oil exporter and importer. Structural vector autoregression is applied to quarterly data from 1970Q1 to 2008Q4 to identify oil price shocks and to evaluate its net effect on Nigeria's current account balances. After introducing three control variables (output gap, real exchange rate misalignment and the lagged values of current account ratio), we impose six structural restrictions on the model to help track and identify the structural shocks of oil prices on current account balances. Overall, we find that oil price shocks have a significant short‐run effect on current account balances for Nigeria. Specifically, the impulse response of the current account ratio to oil price shocks increases speedily in the first six quarters, and then, it declines afterwards until the 30th quarter. The variance decomposition analysis shows that approximately 15.77 per cent of the variations in current account dynamics are caused by oil price shocks. The insight we draw from this finding is that there is no one‐for‐one relation between oil price shocks and current account dynamics. Exchange rate misalignment provides the offsetting effect as revealed from our results. The implication for policy is that reserve‐augmenting strategies, lax monetary policy and intensified international financial integration would need to be enhanced and sustained by policy‐makers to reinforce the positive effects of oil price shocks on the Nigerian economy.

The great retrenchment: international capital flows during the global financial crisis

The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first, across time, being especially dramatic in the wake of the Lehman Brothers’ failure; secondly, across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception; and thirdly, across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature – with countries relying on bank flows being the hardest hit – as well as domestic macroeconomic conditions and their connection to world trade flows. — Gian-Maria Milesi-Ferretti and Cedric Tille

The Impact of Recent Financial Crisis on Economic Growth and Youth Employment in South Asia

This paper investigates the impact, as well as the channels of transmission, of recent financial crisis on economic growth and youth employment in three major South Asian countries: India, Pakistan and Bangladesh that together represent more than 97 percent of the population and 96 percent of the total GDP of South Asian region. The employment concerns are of particular significance in the region since they determine the contours of poverty and human development in the region and within employment, it is youth employment that deserves special attention due to the 'youth bulge' present in the current demographic structure of each South Asian country. The study constructs a comprehensive index of financial stress using data from 1972 to 2009 and conducts panel data estimation techniques to study the effect of financial and trade related stress on economic growth in the region. Using the long term relationship between growth and employment, the study estimates the precise impact of recent slowdown in economic growth - resulting precisely from trade and financial stress - on total as well as youth employment in the three countries. The results of the study indicate that as result of financial crisis, around 12 million people are estimated to have lost their employment in the region as a whole, out of which 2.35 million consist of youth between the ages of 15-24. The study also finds that most of this effect has occurred via trade channel rather than the financial channel. This makes intuitive sense as the level of international financial integration in South Asia is much lower than the trade integration.

Innovation et mondialisation financière

Résumé Cet article analyse les liens entre l’intégration financière internationale et le niveau d’innovation. Si la mondialisation financière stimule l’innovation, cela permet d’expliquer l’évidence empirique qu’une intégration financière poussée améliore sous certaines conditions le niveau de productivité et le niveau de vie à long terme. L’article conclut que, sous réserve du niveau de développement, les économies plus intégrées présentent des niveaux plus élevés d’innovation, mais l’impact diffère selon les dimensions sous forme de capitaux ou de dette de l’intégration financière internationale. Par ailleurs, les gains de l’intégration sous forme de capitaux sont identifiés pour les pays ayant des niveaux de revenu relativement faibles, tandis que les gains de l’intégration sous forme de dette sont identifiés uniquement pour les pays à revenu élevé.

Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic GMM Panel Approach

The aim of this paper is to provide some new empirical evidence on the determinants of volatility of real exchange rates in emerging countries, focusing on the role of international financial integration in particular. A reduced-form model is estimated using the GMM method for dynamic panels over the period 1979-2004 for a sample of 39 developing countries grouped into three regions (Latin America, Asia and MENA). Our findings suggest that different types of shocks (external, real and monetary) can account for volatility of real exchange rates in emerging economies, with international financial integration being a major driving force. Therefore, financial liberalisation and integration should be pursued only gradually in emerging countries.

Integração financeira, poupança externa e convergência de renda: teoria e evidência

The conventional argument favoring capital controls elimination is based on the predictions from the neoclassical model: free international capital mobility would allow capital flows from country where capital is abundant to countries where capital is scarce and the outcome in a global perspective is efficient allocation of savings and income convergence. Within this perspective, financial integration would be particularly beneficial for developing countries resulting in external savings import, temporary increase in per-capita GDP growth rate and a permanent increase in the per-capita GDP level. Using data for a sample of 105 countries from 1980 to 2004 the evidences show that capitals flows from developing to developed countries and that international financial integration and external savings do not increase the conditional convergence rate.

Growth From International Capital Flows: The Role of Volatility Regimes

Recent commentary has downplayed the growth dividend from international financial integration, highlighting the possibly negative correlation between capital inflows and long-run growth. This paper presents new evidence consistent with standard economic theory and a more benign interpretation of cross-border private capital flows. The key observation is that a country’s growth volatility changes over time. With volatility below a threshold, an inflow of foreign capital has promoted growth. However, during periods of volatile growth, more flows have been associated with slower growth. Volatility levels and changes reflect an interaction of domestic production and institutional structures with global factors.

Growth from International Capital Flows: The Role of Volatility Regimes

Recent commentary has downplayed the growth dividend from international financial integration, highlighting the possibly negative correlation between capital inflows and long-run growth. This paper presents new evidence consistent with standard economic theory and a more benign interpretation of cross-border private capital flows. The key observation is that a country’s growth volatility changes over time. With volatility below a threshold, an inflow of foreign capital has promoted growth. However, during periods of volatile growth, more flows have been associated with slower growth. Volatility levels and changes reflect an interaction of domestic production and institutional structures with global factors.

Financial Integration and International Business Cycle Co-movement: Wealth Effects vs. Balance Sheet Effects

Abstract Different types of international financial integration have different effects on cross-country business cycle co-movement. International business cycle transmission through financial integration occurs through the wealth and balance sheet effects. The balance sheet effect leads to business cycle convergence, but the wealth effect leads to divergence. Using a crosssectional regression, this paper shows that cross-border credit market integration (debt) has a positive effect on co-movement, implying that the balance sheet effect is the main conduit for international transmission through credit markets. However, cross-border capital market integration (equity) has a negative effect, implying that the wealth effect is the main channel for international transmission through capital markets. By distinguishing between wealth and balance sheet effects, this paper resolves many discrepancies between some key empirical and theoretical findings in the open economy macro literature, between different studies in the theoretical literature, and between empirical studies that use a cross-sectional regression and those employing panel data.

What Can International Finance Add to International Strategy?

This chapter focuses on the role of corporate financial strategies to improve firms’ market valuations, and thus lower their cost of capital. The identification of successful strategies is accomplished within an overall strategic framework and related to how the firm perceives the degree of international financial integration. Five strategies for how to break out of a segmented, thin domestic capital market are highlighted together with historical success cases. The chapter illustrates the linkages between business strategy, firm motivation, and various financial strategies.

The Impact of International Portfolio Composition on Consumption Risk-Sharing

Recent empirical work has shown that ongoing international financial integration facilitates cross-country consumption risk-sharing. These studies typically find that countries with high equity home bias exhibit relatively low international consumption risk sharing. We extend this line of research and demonstrate that it is not only a country’s equity home bias that prevents consumption risk sharing. In addition, the composition of a country’s foreign asset portfolio plays an important role. Using panel-data regression for a group of OECD countries over the period 1980-2007, we show that foreign investment bias has additional explanatory power for consumption risk sharing.

The Great Retrenchment: International Capital Flows During the Global Financial Crisis

The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first across time, being especially dramatic in the wake of the Lehman Brothers’ failure, second across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception, and third across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature—with countries relying on bank flows being the hardest hit—as well as domestic macroeconomic conditions and their connection to world trade flows.

Bank Competition and International Financial Integration: Evidence Using a New Index

This paper finds a strong empirical link between domestic banking sector competitiveness and de facto international integration. De-facto international integration is measured through a new index of financial integration, which measures, for deviations from covered interest parity, the size of no-arbitrage bands and the speed of arbitrage outside the no-arbitrage band.

The term structure of interest rates, the expectations hypothesis and international financial integration : Evidence from Asian economies

The validity of the expectations hypothesis of the term structure is examined for a sample of Asian countries. A panel stationarity testing procedure is employed that addresses both structural breaks and cross-sectional dependence. Asian term structures are found to be stationary and supportive of the expectations hypothesis. Further analysis suggests that international financial integration is associated with interdependencies between domestic and foreign term structures insofar as cross-term structures based on differentials between domestic (foreign) short- and foreign (domestic) long-rates are also stationary.

Governing risk: the IMF and global financial crises

Introduction: The IMF and Global Finance Governance Evolutionary Policies: Economic Ideas and Legitimacy Feedback The 1990s Consensus on International Financial Integration The Mexican Crisis: Testing the Consensus The Asian Crisis: Questioning the Consensus The Subprime Crisis: Towards a New Consensus Conclusions: Past and Future of International Financial Governance Appendix: List of Interviewees Notes Bibliography Index

Financial (Dis)Integration

This paper addresses the macroeconomic impact of international financial integration. I first provide empirical evidence that foreign banking penetration can be associated with a contraction of banking credit, especially in countries with poor credit markets. Second I present a model in which the presence or the absence of foreign lenders endogenously modifies firms credit constraints and hence the volume of credit extended in the economy. Specifically, I show on the one hand that foreign lenders consider loans from domestic lenders as firm collateral. This implies that their lending supply is positively associated with the volume of capital a firm is able to borrow from domestic lenders (collateral effect). On the other hand, the presence of foreign lenders raises competition, reduces domestic lenders profits and hence reduces domestic lenders capital supply (competition effect). Two different cases are then possible. If foreign lenders are able, in spite of the collateral effect, to extend a large volume of loans even when domestic lenders lending capacity has shrinked (due to increased competition on the capital market), then the economy benefits at the steady state both from a large capital supply and a low cost of capital. Integration then raises the economy's growth rate. On the contrary, if foreign lenders are not able, due to the collateral effect, to extend a large volume of loans when domestic lenders lending capacity has shrinked, then competition reduces domestic lenders lending capacity and the collateral effect prompts foreign lenders to reduce their capital supply. Integration then depresses the economy's growth rate, firms cost of capital and the volume of credit extended in the economy.

Thresholds in the process of international financial integration

The financial crisis has re-ignited the fierce debate about the merits of financial globalization and its implications for growth, especially for developing countries. The empirical literature has not been able to conclusively establish the presumed growth benefits of financial integration. Indeed, a new literature proposes that the indirect benefits of financial integration may be more important than the traditional financing channel emphasized in previous analyses. A major complication, however, is that there seem to be certain “threshold” levels of financial and institutional development that an economy needs to attain before it can derive the indirect benefits and reduce the risks of financial openness. In this paper, we develop a unified empirical framework for characterizing such threshold conditions. We find that there are clearly identifiable thresholds in variables such as financial depth and institutional quality—the cost-benefit trade-off from financial openness improves significantly once these threshold conditions are satisfied. We also find that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt liabilities.

Financial Integration, Investment, and Economic Growth: Evidence from Two Eras of Financial Globalization

Abstract Does international financial integration boost economic growth? The empirical literature has not yet established a robust link between openness to the international capital market and economic growth. In this paper, we turn to the economic history of the first era of financial globalization (1880–1914) for new insights. Using identical empirical models and techniques as contemporary studies, we find a significant growth effect in the historical period. A key difference between now and then is that opening up to the international market led to net capital movements and higher investment in the historical period, but it no longer does so today.

The impact of foreign stock markets on macroeconomic dynamics in open economies: A structural estimation

With the increased international financial integration in recent years, bilateral financial linkages between countries may have a growing influence on their real economies. This paper employs a structural two-country New Keynesian model, which incorporates a cross-border wealth channel, to estimate the effect that foreign stock market fluctuations may have on macroeconomic variables in open economy countries. The model is estimated using Bayesian methods on a sample of open economies that can potentially be affected by changes in a larger foreign stock market: Australia, Canada, New Zealand, Ireland, Austria, and the Netherlands. The estimation allows for deviations from rational expectations and for learning by economic agents. The empirical results indicate important cross-country wealth effects for Ireland and Austria, from fluctuations in the U.S. and U.K. and in the U.S. and German stock markets, respectively; the wealth effect is largest in Ireland. The data favor, instead, specifications with no significant wealth effect for the remaining countries. Foreign stock price fluctuations, however, still play a role by affecting domestic expectations about future output gaps in all countries in the sample.

Stock market synchronization and monetary integration

This paper focuses on the relationship between stock market comovements and monetary integration. A panel specification is used to explain bilateral stock market return correlations between fifteen developed economies over the period 1975–2006. Time fixed effects are included to capture global shocks and we also examine the role of bilateral trade linkages and international financial integration. Monetary integration leads to stronger stock market synchronization, both through the elimination of exchange rate volatility and through the common monetary policy and the convergence of inflation expectations. Trade and financial integration also contribute to higher stock market return comovements.