International Financial Shocks Research Articles

The Time-Varying Effects of Policies: Evidence from Capital Flows to Emerging Markets

We use a novel approach—instrumental variable quantile regression estimates—to analyze expected portfolio inflows to emerging economies. We consider country-specific conditions and the effectiveness of policy interventions when economies are faced with an adverse international financial shock. This approach allows differentiation between the short- and medium-term impacts. Our results suggest that macroprudential policies and foreign exchange actions may reduce the risks of large capital flow movements following an adverse international shock; however, capital flow management policies such as capital control stringency seem to be ineffective. Besides, there is little evidence that monetary policy and high quality of institutions can immediately protect emerging markets from the risks of international financial shocks. However, institutional quality may effectively dampen the impact of excessive flows in the medium term. These findings emphasize the limitations of previous studies, which focused merely on the short-term horizon.

Foreign Assets Management and Capital Expenditure: Firm-Level Evidence from 45 Emerging Market Economies

This paper investigates the effects of foreign assets management (FAM), led by policymakers in emerging market economies, on companies’ capital expenditure with international financial shocks (IFS). Using company-level data from 45 emerging market economies from 2005 to 2020, we employed a multiplicative regression setup for Tobin’s Q ratio capital expenditure framework. First, our findings show that FAM positively affects capital expenditure; this impact is reinforced with stronger detrimental IFS. Second, the capacity to access foreign funding supports FAM policy, and more financially constrained companies are less responsive to FAM. Third, capital controls and macroprudential policies support FAM – they create a protective policy mix in the IFS context. The statistical significance of FAM’s impact on companies’ capital expenditure has an economic implication and is pertinent to the global economy. This study recommends coordinating macro-management policies to isolate companies’ capital expenditure from IFS effectively.

Policies Supporting Firms in the Face of Global Financial Shocks

This paper studies the empirical impact of Foreign Assets Management (FAM) on companies’ capital expenditure in emerging market economies with International Financial Shocks (IFS). The empirical analysis uses annual data of 2,931 publicly listed companies in 45 emerging market economies from 2000 to 2019. We analyzed a multiplicative regression of a canonical capital expenditure Q model. The findings show that FAM positively affects companies’ capital expenditure. Moreover, financially restricted companies are more sensitive to the favorable impact of FAM compared to restricted companies. Our results highlight the relevance of considering companies’ heterogeneity when examining the effect of macro-management policies. In addition, FAM has a more favorable impact on companies’ capital expenditure in economies that concurrently use capital controls and macroprudential policy. Finally, our findings suggest that successful macro-management policies insulate capital expenditure from adverse IFS. This result highlights the role of more coordinated approaches to repel adverse international shocks.

Macro‐management policies: A supporting role to company' capital expenditure

AbstractThis article studies the empirical impact of Foreign Assets Management (FAM) on companies' capital expenditure in emerging market economies with International Financial Shocks (IFS). The empirical analysis uses annual data of 2931 publicly listed companies in 45 emerging market economies from 2000 to 2019. We analyzed a multiplicative regression of a canonical capital expenditure Q model. The findings show that FAM positively affects companies' capital expenditure. Moreover, financially restricted companies are more sensitive to the favourable impact of FAM compared to restricted companies. Our results highlight the relevance of considering companies' heterogeneity when examining the effect of macro‐management policies. In addition, FAM has a more favourable impact on companies' capital expenditure in economies that concurrently use capital controls and macroprudential policy. Finally, our findings suggest that successful macro‐management policies insulate capital expenditure from adverse IFS. This result highlights the role of more coordinated approaches to repel adverse international shocks.

Investigation on transition of RMB forward exchange rate pricing mechanism based on error correction model with structural mutation

The offshore RMB market has been showing a momentum of rapid development. However, the impact of this market on the RMB exchange rate has been less studied. This paper constructs an error correction model with structural mutations and focuses on the turning point for RMB Forward Rate, during the time before and after September 2011. The model is constructed considering the micro-institutional differences between domestic and offshore RMB forward exchange rates, the impact of spreads, the impact of spot exchange rates and international financial market shocks such as the VIX index of the US dollar index. We also apply the error correction model with abrupt changes method to select the model which is innovative. According to the results of the model, the domestic RMB foreign exchange derivatives market and the offshore RMB foreign exchange derivatives market jointly played a leading role in price discovery in the determination of both short-term and long-term RMB forward exchange rates, and we also found September 2011 was an important structural change point for the RMB forward curves both domestic and abroad. Before that period, interest rate parity did not play a positive role and the NDF exchange rate occupied the dominant role in price discovery; the domestic RMB forward exchange rate and the overseas NDF exchange rate were both driven by speculative factors.

Financial cycles and domestic policy choices

The global financial cycle has raised concerns about the ability of emerging markets to insulate their economy from international spillovers. Using dynamic Local Projections we show that capital controls are as potent as floating exchange rates in dampening the response of international financial shocks on domestic financial variables and the real economy. We relate this finding to muted boom–bust cycles in short-term non-resident capital flows. However, the benefits of floats or capital controls are reaped in isolation, that is, either tool is enough. We attribute this pattern to nominal frictions in domestic labor markets.

How Voters Respond to Currency Crises: Evidence From Turkey

A burgeoning literature shows that international trade and migration shocks influence individuals’ political attitudes, but relatively little is known about how international financial shocks impact public opinion. This study examines how one prevalent type of international financial shock—currency crises—shapes mass political attitudes. I argue that currency crises reduce average citizens’ support for incumbent governments. I also expect voters’ concerns about their own pocketbooks to influence their response to currency crises. Original survey data from Turkey support these arguments. Exploiting exogenous variation in the currency’s value during the survey window, I show that currency depreciations strongly reduce support for the government. This effect is stronger among individuals that are more negatively affected by depreciation, and it is moderated by individuals’ perceptions of their personal economic situation. This evidence suggests that international financial shocks can strongly influence the opinions of average voters, and it provides further support for pocketbook theories.

South Africa's access to the global financial safety net

ABSTRACT The rapid globalisation of the world economy has heightened the exposure of many economies to global economic developments. Small open economies have become particularly vulnerable to global shocks, a situation which has increased their need for emergency funding during times of crisis. The global financial safety net (GFSN) is a financial backstop at the international level which provides support to countries during periods of financial stress. However, access to the GFSN is ‘unequal’ and ‘uneven’, with emerging and developing economies being particularly disadvantaged. This paper provides an overview of the GFSN and analyses South Africa's access to the GFSN in a comparative setting. The analysis reveals South Africa's unequal access to the GFSN, relative to upper-middle income and high-income countries. Finally, the paper highlights some measures to strengthen the country's financial backstop at the international level to enhance South Africa's resilience against international financial shocks.

Attenuating international financial shocks: the role of capital controls

PurposeBy reinforcing monetary policy independence, reducing international financing pressures and avoiding high-risk takings, capital controls strengthen the stability of the financial system and then reduce the volatility of capital inflows. The objective of this study was to conduct an empirical examination of this hypothesis. This topic has received strong support in the theoretical literature; however, empirical work has been quite limited, with few empirical studies that provide direct empirical support to this hypothesis.Design/methodology/approachThis study analyzed quarterly data of 32 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital control actions. Using panel analysis, Autoregressive Distributed Lag and local projections approaches.FindingsThis study found that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond counter-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. We also found that capital controls on inflows are more effective for reducing the volatility of capital inflows compared to capital controls on outflows.Originality/valueThis study contributes to the question of the effectiveness of capital controls in attenuating the effects of international shocks and reducing the volatility of capital flows. Previous studies have mostly focused on the role of macroprudential regulation; however, there is a lack of systematic effects of capital controls on monetary and exchange rate policies. To our knowledge, this is the first preliminary study to suggest that capital controls may buffer monetary and exchange rate shocks and reduce the volatility of capital inflows. This study investigates the novel notion that capital controls allow for a notable counter-cyclical response of monetary and exchange rate policies to international financial shocks.

Restrictive Policy to Curb Capital Flows Volatility

We examine the role of the restrictive policy, through capital controls, in reducing the capital flows volatility. The study highlights the effects of these controls to dampen international financial shocks. Using quarterly data of 28 emerging economies over the period between 1999 and 2019, three empirical approaches are applied, dynamic panel data, ARDL, and local projections models. Four indexes of capital controls have contributed to the finding that a tighter level of capital controls reduces the sensitivity of capital flows to monetary and exchange rate shocks. These findings on the benefits of capital controls are particularly asymmetric according to the differences between controls on inflows and outflows, and the differences between floating and pegged exchange rate regimes.

Transmission of International Financial Shocks: A Cross Country Analysis

This study measures the extent of cross-country financial shock spillover by utilizing Diebold and Yilmaz (2009); Diebold and Yilmaz (2012) method and using the impulse response function of the VAR model, it explores the important channel through which financial shocks transmit among the US, Japan, Germany, China, India, and Russia. The result shows that total financial shock spillover is 43.60%, indicating that slightly more than two-fifths of the total variance of the forecast errors for six countries under consideration is explained by their shock spillover across countries. The finding is observed to be robust. Using the impulse response of the VAR model, we examined the relative importance of channels viz. financial, exchange rate, and trade. We observed that 46% of external financial shocks transmit to US through the financial channel, while it is predominantly the trade channel through which shocks transmit to Japan (43%), Germany (43%), and China (76%). India receives major shocks (74%) through exchange rate. Finally, trade and financial channels are important for Russia through which 76% of shocks come from external financial markets. The spillover is observed to be high which could be because of the increasing deregulation of financial markets including capital mobility in 21st century.

Spillovers de Volatilidades Cambiais e de Mercados Financeiros Internacionais no Mercado Acionário Brasileiro

Apresentamos nesse estudo os resultados de transbordamento de volatilidades no mercado acionário brasileiro, medido por meio de correlações condicionais. Utilizando modelos GARCH multivariados foram estimadas as correlações condicionais em 3 diferentes modelos combinando o índice Ibovespa com um dos três tipos de choques cambiais e um choque de mercados financeiros internacionais. A existência e direção dos transbordamentos de volatilidade de choques cambias, choques de mercados financeiros internacionais e o índice Ibovespa foram testadas por meio de testes de causalidade de Granger de segunda ordem. Os resultados comprovam a existência de transbordamentos de choques cambiais e de mercados financeiros para o índice Ibovespa, sendo que essas correlações apresentam dinâmica temporal, com transbordamentos sempre na direção dos choques para o índice Ibovespa.

La crisis de 2008 y las decisiones en política económica colombiana

El siguiente artículo es el resultado del proyecto de investigación «Impacto de las principales crisis financieras internacionales en la Política Económica Colombiana (1929–2010)» y tiene como objetivo central analizar los efectos de la crisis financiera internacional de 2008 frente a las medidas de política económica colombiana. La metodología utilizada para la realización de artículo fue de tipo documental y descriptivo. Como resultado se puedo determinar que la crisis financiera internacional del siglo XXI ha generado algunos desbalances macroeconómicos en la economía colombiana, siendo menos profundos que en crisis anteriores y están financiados en mayor proporción por flujos externos más estables. Su deuda pública es menos frágil a las devaluaciones abruptas y su perfil más largo.El periodo de estudio 2007–2010 ha sido un proceso para la economía colombiana, en cuanto a cambios en el sistema financiero, monetario y en materia fiscal, que han permitido mejores condiciones frente a los choques financieros internacionales.

The role of financial conditions in transmitting external shocks to South Africa

This paper analyses the spillover effects of external financial conditions to South Africa using quarterly domestic and international data from 1996Q1 to 2014Q4. First, principal component analysis and vector autoregressive model are utilized to build financial conditions indices for South Africa and its main trading partners, namely, China, Germany, the United States, Japan, the United King, Netherlands, Italy, France and Belgium. Consistently across both methodologies, the financial conditions indices obtained track each other fairly well and capture the 2008/09 global financial crisis. Second, a Global Vector Autoregressive model comprised of financial indices and other macroeconomic variables is implemented to assess how international financial shocks spillover into South Africa. Our findings show that a sudden tightening of the US financial conditions has a significant but short lived effect on the South Africa's real GDP growth while the spillover effects from other trading partners appear to be of negligible impact throughout the sample period.

Examining volatility spillover between Asian countries’ stock markets

This study examined the volatility spillover effects between the stock markets of Asian countries, i.e., Pakistan, India, Sri Lanka, China, Japan, and Hong Kong. The daily data was considered from the period 4 January 1999 to 1 January 2014, consisting five trading days from Monday to Friday. The volatility spillover between stock markets was captured by using the generalized autoregressive conditional heteroskedasticity (GARCH) model. The empirical analyses show evidence of significant bidirectional spillover of return and volatility between China and Japan. The results also show significant bidirectional volatility transmission between the equity markets of the following countries: Hong Kong and Sri Lanka, China and Sri Lanka. The significant unidirectional transmissions of stock market volatility are found to be flowing from India to China, Sri Lanka to Japan, Pakistan to Sri Lanka, and Hong Kong to India and Japan. These results are important for economic policy makers in order to safeguard the financial sector from international financial shocks. The investors can use this information for making efficient portfolio which will reduce their risk and enhance their returns.

The Resilience of Future Monetary Union in Emerging Countries to International Financial Shocks: A New Set of Banking and Financial Regional Criteria

This survey presents an analysis that incorporates the lessons of the positive literature on the third generation of crises into the traditional optimum currency area theory to propose a new set of criteria that ensure better resilience of a monetary union to financial contagion. The study stresses the fact that new banking and financial criteria must be considered to protect integrated economies against common international financial shocks. The 2007 US liquidity crisis that spread into the Eurozone and generated a considerable economic slowdown validates these propositions. It underlines the insufficiency of the Maastricht criteria, which do not incorporate these measures and do not make it possible to anticipate or resorb the spread of international financial crisis. These considerations could be integrated into the future monetary union projects in emerging countries organised today in common markets and allow for the circumvention of the disastrous economic and social effects generated by the spread of financial crisis in the real sector of these economies.

International financial shocks in emerging markets

The present paper investigates how an emerging market economy is affected when it suddenly faces a higher risk premium on international capital markets. We study this question empirically for five Latin American economies over the period 1994–2007 within a structural panel vector autoregression and analyze theoretically the transmission mechanism using a dynamic stochastic general equilibrium model (DSGE) of a small open economy. The financial shock is modeled by an unexpected increase in the risk premium of firms' foreign-currency debt. In response, the adverse shock is amplified by a feedback mechanism between currency depreciation, adverse balance sheet and risk premium effects. The theoretical model is used to study different monetary policy responses. We find that an exchange rate targeting rule that strikes a balance between exchange rate and inflation targeting allows the monetary authority to stabilize inflation and output more effectively than under a pure inflation targeting rule.

International Financial Shocks in Emerging Markets

The present paper investigates how an emerging market economy is affected when it suddenly faces a higher risk premium on international capital markets. We study this question empirically for five Latin American economies over the period 1994-2007 within a structural panel vector autoregression and analyze theoretically the transmission mechanism using a dynamic stochastic general equilibrium model (DSGE) of a small open economy. The financial shock is modeled by an unexpected increase in the risk premium of firms' foreign-currency debt. In response, the adverse shock is amplified by a feedback mechanism between currency depreciation, adverse balance sheet and risk premium effects. The theoretical model is used to study different monetary policy responses. We find that an exchange rate targeting rule that strikes a balance between exchange rate and inflation targeting allows the monetary authority to stabilize inflation and output more effectively than under a pure inflation targeting rule.

The Financial Crisis and Systemic Risks in Asia Pacific Banks: An Evaluation of Policy Responses

This paper examines the effects of the 2008 financial crisis on the Asia Pacific banking system and the policies that the local government authorities implemented in response to the crisis. We use descriptive statistics to examine capital adequacy and loan quality in the Asia Pacific banks. We show that the extent of spillover effects of the crisis on the Asia Pacific banking industry is associated with the trade-off between financial liberalization and financial stability; there is a linear relationship between foreign bank participation and cross-border loans in the Asia Pacific economies. We also conduct an event study to examine the systemic risks in the Asia Pacific banks. Particularly, we find that the CDS spread started to converge in 2009 after the implementation of stimulus packages and assertive policies in the Asia Pacific countries, implying that the policies adopted by the regional governments had at least some immediate effectiveness in helping banks decentralize the international financial shocks.

Macroeconomic policy responses to financial crises in emerging European economies

This paper contributes to the literature on monetary policy responses in emerging economies to international financial crises. Such an issue is especially relevant for these countries insofar as they tend to be more unstable than developed countries. In addition, they suffer from larger cumulative output losses that have long-lasting negative effects on growth. If the earlier literature has suggested that emerging countries conduct pro-cyclical policies that exacerbate the impact of shocks, recent findings drawn from the experience of the global financial crisis show that they tend to more frequently adopt counter-cyclical monetary policies. However, even in the last crisis, all countries did not conduct expansionary monetary policies. Among the factors explaining such a behavior, the literature identifies the currency mismatch. This paper is related to this literature. It analyzes monetary policy responses to common financial shocks over the period 1995–2010 for a sample of ten emerging European countries. Emerging Europe has especially suffered from the global financial crisis. Three monetary instruments are analyzed: the nominal short-term interest rate, the real exchange rate, and the foreign exchange reserves. Our empirical methodology used structural Bayesian vector autoregressive (SBVAR) models over two crises periods (1995Q1–2001Q4 and 2002Q1–2010Q4). Our main findings are the following. First, common international financial shocks lead to different monetary policy responses. Second, countries with high currency mismatch ratios suffer from both fear of floating and fear of losing international reserves.