Most recent papers:

• Central bank transparency under the cost channel.
  Meixing Dai, Qiao Zhang.
  International Finance. August 29, 2017
  This paper studies the implications of information disclosure about the central bank's preferences regarding inflation and output‐gap stabilization in the presence of the cost channel of monetary transmission. Through this channel, higher interest rates translate into higher marginal costs of production and, finally, into higher inflation. Conventional wisdom has it that whether the central bank is transparent alters the effects of cost‐push or supply shocks, but does not change the fact that demand shocks are fully offset by optimal monetary policy. We show that this view is incorrect in the presence of a cost channel, since the latter not only affects how transparency interacts with cost‐push shocks, but also makes it interact with demand shocks. Moreover, the desirability of full transparency when shocks are persistent is significantly reduced by the presence of the cost channel.

  August 29, 2017   doi: 10.1111/infi.12107   open full text
• Monetary policy and inequality: Financial channels.
  Rory O'Farrell, Lukasz Rawdanowicz.
  International Finance. August 29, 2017
  This paper analyses the effects of monetary policy on inequality over the business cycle via its impacts on returns on assets, the cost of debt servicing, and asset prices in selected advanced economies. Monetary policy easing has a priori ambiguous effects on income and net wealth inequality via financial channels. Effects depend in a complex way on the relative size and distributions of assets, liabilities, and income. In practice, these effects are estimated to be small. A house price increase generally reduces net wealth inequality, while the opposite is true for increases in stock and bond prices. As monetary policy has the potential to affect inequality, monetary authorities face communication challenges. The available research on interactions between monetary policy and inequality does not justify targeting inequality by central banks.

  August 29, 2017   doi: 10.1111/infi.12108   open full text
• Macroeconomic effectiveness of non‐standard monetary policy and early exit. A model‐based evaluation.
  Lorenzo Burlon, Andrea Gerali, Alessandro Notarpietro, Massimiliano Pisani.
  International Finance. August 29, 2017
  This paper evaluates the macroeconomic effects of the Eurosystem's expanded asset purchase programme (APP) under alternative assumptions about (i) unwinding the asset positions accumulated under the APP and (ii) current and future paths of the policy rate (forward guidance). To this purpose, we simulate a New Keynesian model of the euro area (EA). Our results are as follows. First, if the monetary authority brings forward the unwinding of its long‐term sovereign bond holdings, the stimulus from the APP on inflation and economic activity is correspondingly reduced. Second, if the monetary authority communicates that the policy rate will be held constant for 1 year instead of 2, the APP would be less effective and the increase in inflation would be halved. Third, an early exit from bond holding subdues the impact of the APP, delaying the normalization of monetary policy conditions after a negative EA‐wide demand shock.

  August 29, 2017   doi: 10.1111/infi.12112   open full text
• The open economy trilemma in Latin America: A three‐decade analysis.
  Helder Ferreira de Mendonça, Igor da Silva Veiga.
  International Finance. August 29, 2017
  This study concerns the open economy trilemma in emerging economies, and uses a panel data framework to investigate cross‐dependence among the countries and respective parameters of the 23 countries in Latin America from 1980 to 2010. We examine the impact that trilemma choices impose on economic performance (output volatility and inflation), as well as whether the adoption of inflation targeting influences the results. The findings indicate that promoting exchange rate stability and financial openness are efficient strategies for improving the economic performance of Latin America economies. Furthermore, the adoption of inflation targeting enhances the effects of financial openness on output volatility.

  August 29, 2017   doi: 10.1111/infi.12109   open full text
• The monetary policy origins of the eurozone crisis.
  David Beckworth.
  International Finance. August 29, 2017
  The eurozone crisis represents one of the greatest economic tragedies of the past century. It has caused immense human suffering, which continues to this day. The standard view attributes the economic crisis to an earlier buildup of public and private debt that was augmented by the imposition of austerity during the crisis. Although evidence exists of a relationship between the debt buildup, austerity measures, and economic growth during the crisis, that same evidence, on closer examination, points to eurozone countries’ common monetary policy as the real culprit behind the area's sharp decline in economic activity. In particular, it seems that the European Central Bank's tightening of monetary policy in 2008 and again in 2010–2011 not only caused two recessions but also sparked the sovereign debt crisis and gave teeth to the austerity programs. Such findings point to the need for a new monetary policy regime in the eurozone. The case is made for the new regime to be a targeted growth path for total money spending.

  August 29, 2017   doi: 10.1111/infi.12110   open full text
• Vulnerabilities to housing bubbles: Evidence from linkages between housing prices and income fundamentals.
  MeiChi Huang.
  International Finance. May 19, 2017
  This paper investigates US state‐level housing markets by examining three signs of vulnerabilities to housing bubbles: negative or insignificant co‐movements between housing prices and income fundamentals, high housing‐price persistence, and boom–bust regime‐switching phenomena. The study effectively mitigates potential estimation bias by estimating income growth using three explanatory variables for housing markets: the stock price, the federal funds, rate and non‐farm‐employment growth. The moving‐average thresholds track housing boom–bust regime shifts from a forward‐looking perspective. Although only California displays high housing‐bubble vulnerability in all dimensions analysed, all selected states show signs of housing‐bubble vulnerabilities because income fundamentals lack explanatory power for housing price dynamics. The results suggest that the US government had difficulties in stabilizing the housing market during the period 1976–2010.

  May 19, 2017   doi: 10.1111/infi.12103   open full text
• The influence of monetary policy on bank profitability.
  Claudio Borio, Leonardo Gambacorta, Boris Hofmann.
  International Finance. May 19, 2017
  This paper investigates how monetary policy affects bank profitability. We use data for 109 large international banks headquartered in 14 major advanced economies for the period 1995–2012. Overall, we find a positive relationship between the level of short‐term rates and the slope of the yield curve (the ‘interest rate structure’, for short), on the one hand, and bank profitability – return on assets – on the other. This suggests that the positive impact of the interest rate structure on net interest income dominates the negative one on loan loss provisions and on non‐interest income. We also find that the effect is stronger when the interest rate level is lower and the slope less steep, that is, when non‐linearities are present. All this suggests that, over time, unusually low interest rates and an unusually flat term structure erode bank profitability.

  May 19, 2017   doi: 10.1111/infi.12104   open full text
• A century and three‐quarters of Bank Rate and long‐term interest rates in the United Kingdom.
  Hakan Berument, Ezequiel Cabezon, Richard Froyen.
  International Finance. May 19, 2017
  Over the years from 1844 to 2013, the United Kingdom had several distinct monetary policy regimes. This paper examines the relationship between the Bank of England policy rate and UK long‐term rates in each regime. Our starting point is R. G. Hawtrey's A century of Bank Rate, which focused mainly on the classical Gold Standard. We also examine the Interwar years, post‐Second World War years of policy by discretion and the recent regime of inflation targeting. We find that policy regimes that firmly anchor inflationary expectations result in long‐run interest rates becoming less responsive to changes in monetary policy rates. This suggests a conflict between a regime that anchors inflationary expectations and one that allows a central bank to have significant effects on long‐term rates via a short‐term policy rate.

  May 19, 2017   doi: 10.1111/infi.12101   open full text
• The fiscal costs of systemic banking crises.
  David Amaglobeli, Nicolas End, Mariusz Jarmuzek, Geremia Palomba.
  International Finance. May 19, 2017
  This paper examines fiscal costs of systemic banking crises. It uses a dataset of 65 crisis episodes since 1980 and considers both the direct budgetary cost of government intervention and the overall fiscal impact as proxied by changes in the public debt‐to‐GDP ratio. We find that both direct and overall fiscal impacts of banking crises are high when countries enter the crisis with large banking sectors, rely on excessive external funding, have highly leveraged non‐financial private sectors, and resort to using government guarantees on bank liabilities during the crisis. Better quality of banking supervision and higher coverage of deposit insurance help, however, alleviate the direct fiscal costs. We also identify a policy trade‐off: costly short‐term interventions are not necessarily associated with larger increases in public debt, supporting the thesis that immediate intervention may actually be a more cost‐effective solution over the long term.

  May 19, 2017   doi: 10.1111/infi.12100   open full text
• External and Macroeconomic Adjustment in the Larger Euro‐Area Countries .
  Elena Angelini, Michele Ca’ Zorzi, Katrin Forster van Aerssen.
  International Finance. December 14, 2016
  A balanced current account in the euro area has disguised sizable imbalances at the country level, exposing the common currency area to severe pressures during the financial crisis. The key contribution of this paper is to evaluate the adjustment process using the New Multi Country Model (NMCM) at the country and sectoral levels. The model suggests that a recovery in wage competitiveness reduces external deficits but has only mildly expansionary effects at the cost of higher net borrowing by households. It also suggests that the impact of an aggregate demand shock in Germany is not enough to lead to a rebound in economic activity and address external imbalances in the rest of the euro area. Finally, the presence of supportive external conditions, while facilitating the implementation of vital reforms, would not necessarily unravel intra‐euro‐area imbalances.

  December 14, 2016   doi: 10.1111/infi.12098   open full text
• Sovereign Credit Risk Co‐Movements in the Eurozone: Simple Interdependence or Contagion? .
  Manuel Buchholz, Lena Tonzer.
  International Finance. December 14, 2016
  We investigate credit risk co‐movements and contagion in the sovereign debt markets of 17 industrialized countries during the period 2008–2012. We use dynamic conditional correlations of sovereign credit default swap spreads to detect contagion. This approach allows us to separate contagion channels from the determinants of simple interdependence. The results show that, first, sovereign credit risk co‐moves considerably, particularly among eurozone countries and during the sovereign debt crisis. Second, contagion varies across time and countries. Third, similarities in economic fundamentals, cross‐country linkages in banking and common market sentiment constitute the main channels of contagion.

  December 14, 2016   doi: 10.1111/infi.12099   open full text
• Is There a Too‐Big‐to‐Fail Discount in Excess Returns on German Banks’ Stocks?
  Thomas Nitschka.
  International Finance. November 04, 2016
  Since the global financial crisis, German and other European banks’ stocks have underperformed compared with the overall euro‐area stock market. Does this observation reflect the explicit state guarantee for too‐big‐to‐fail (TBTF) banks? In that case, investors have an incentive to hold stocks of systemically important banks because they provide insurance against disaster risk through the state guarantee. Indeed, recent studies reveal a TBTF discount in large US banks’ stock returns. Does this finding pertain to German (representing continental European) banks too? The main results of this paper suggest that it does. Risk‐adjusted returns on a German bank stock index were negative in the period from 1973 to 2014. The key driver of this finding is an unanticipated, adverse shock to the German banking sector at the beginning of the global financial crisis. This shock increased the probability of a bank default and thus the insurance value of government support.

  November 04, 2016   doi: 10.1111/infi.12097   open full text
• The Conceptual Foundations of Macroprudential Policy: A Roadmap .
  Augusto de la Torre, Alain Ize.
  International Finance. October 24, 2016
  The global financial crisis unleashed a flurry of academic literature and regulations addressing macroprudential issues. However, reflecting weak links between research and policy as well as varying risk environments (across countries and over time), policy remains exposed to pitfalls, including overreacting, underreacting and applying the wrong or untimely medicine. To help policy makers navigate through the maze, this paper proposes a broad typology of financial frictions that classifies the root causes of socially pernicious financial dynamics under four ‘paradigms’, with distinct grounds, implications and aims for macroprudential policy: (i) offsetting the moral hazard implications of bailouts; (ii) protecting unsophisticated market participants from abusive practices; (iii) inducing market players to internalize the systemic consequences of their individual actions; and (iv) tempering destructive mood swings. As policies to curb one source of systemic risk can exacerbate others, the macroprudential policy challenge is to strike a sensible balance among complicated trade‐offs.

  October 24, 2016   doi: 10.1111/infi.12096   open full text
• The Interplay Between Public and Private External Debt Stocks.
  Michał Brzozowski, Joanna Siwińska‐Gorzelak.
  International Finance. October 24, 2016
  Using a sample of 48 emerging and developing countries in the 1970–2012 period, we investigated the interactions between the stock of sovereign debt and the quantity of corporate external borrowing. We found that public external debt hinders private‐sector access to external loan and bond markets. By contrast, the stock of private debt in international financial markets exerts a positive influence on public external debt from all sources except other private creditors. We also found the incidence of bank crises, capital account openness and the rate of economic growth to be among the macroeconomic variables that have a significant impact on both public and private external debts.

  October 24, 2016   doi: 10.1111/infi.12095   open full text
• That Squeezing Feeling: The Interest Burden and Public Debt Stabilization .
  Xavier Debrun, Tidiane Kinda.
  International Finance. July 05, 2016
  The paper explores the extent to which the pressure of debt service on other spending items may magnify governments’ concern for debt dynamics, independently of the public debt level itself. Our empirical analysis identifies thresholds of interest bill indicators beyond which governments appear to intensify efforts to curb the debt trajectory. Hence, in the current context of historically high public debts, a country experiencing high and rising borrowing costs and interest payments would be more likely to enact a more aggressive fiscal consolidation than one benefitting from persistently low interest rates – even though both consolidation paths would be consistent with solvency. This could be an important consideration when setting the appropriate pace of normalization of monetary policy.

  July 05, 2016   doi: 10.1111/infi.12090   open full text
• On the Stability of Synthetic CDO Credit Ratings.
  Javier Zapata, Arturo Cifuentes.
  International Finance. June 08, 2016
  Synthetic collateralized debt obligations (CDOs) performed very badly during the subprime crisis: they suffered massive rating downgrades (even at the most senior levels of the capital structure) and inflicted significant losses on investors. Using numerical simulations, this study shows that such structures are highly unstable; minor errors in the basic assumptions could manifest dramatically in the accuracy of CDO rating calculations. Regardless of the quality of the underlying assets, it is impossible to make reliable statements regarding the future performance of a synthetic CDO tranche. Moreover, this study demonstrates that single‐point credit risk estimators (in which no attempt at specifying a confidence interval is made) could be especially misleading. Finally, the study suggests that a regulatory framework based on credit ratings as they are presently defined is unlikely to be effective.

  June 08, 2016   doi: 10.1111/infi.12086   open full text
• A Secular Increase in the Equity Risk Premium .
  Kevin Daly.
  International Finance. June 07, 2016
  There is an increasing consensus that global ‘excess saving’ has contributed to a reduction in equilibrium real interest rates. While economists dispute the extent of the decline, few now question that a decline has taken place or that excess saving has played a causal role. A key implication of this narrative is a decline in yields of all assets, including but not restricted to government bond yields. Yet, since the turn of the century, yields on global equity have risen. A complementary explanation is that there has been an increase in the global equity risk premium (ERP), which has simultaneously pushed risk‐free yield curves lower and equity yields higher. Applying a sign restrictions approach, I find that excess savings shocks were the predominant force affecting global real bond yields between the mid‐1980s and 2000 but that ‘risk premium’ shocks have accounted for more of the decline in real bond yields since 2000.

  June 07, 2016   doi: 10.1111/infi.12085   open full text
• The Elusive Predictive Ability of Global Inflation .
  Carlos A. Medel, Michael Pedersen, Pablo M. Pincheira.
  International Finance. June 07, 2016
  In this paper we analyse the utility of international measures of inflation in predicting local ones. To that end, we consider a set of 31 OECD economies for which monthly inflation data are available. Three main conclusions emerge. First, there is an important share of countries for which relatively robust evidence of predictability is found for both core and headline inflation. Second, the share of countries for which there is evidence of robust predictability is about the same for core and headline inflation, although gains in root‐mean‐squared prediction error are higher for headline inflation. Third, while the evidence indicates that an international inflation factor may be a useful predictor for several countries, it also indicates that, for many countries as well, predictability is either questionable, undetectable, non‐robust or simply non‐existent.

  June 07, 2016   doi: 10.1111/infi.12087   open full text
• Banking Efficiency in the Enlarged European Union: Financial Crisis and Convergence .
  José L. Gallizo, Jordi Moreno, Manuel Salvador.
  International Finance. April 25, 2016
  The aim of this study is to analyse whether the great shock occasioned by the financial crisis and the reaction from national governments have compromised the process of financial integration in the EU. This question is important because banking union is a cornerstone of the European integration process. We estimated the evolution of cost and profit efficiency in the enlarged EU during the period from 2000 to 2013 using Bayesian frontier stochastic models (SFA), and analysed the convergence among countries using the beta and sigma convergence tests. Our results show that the outbreak of the financial crisis interrupted the convergence and gave rise to a new divergence process. These results suggest that major reforms in European banking should be adopted by EU regulators in order to strengthen financial integration.

  April 25, 2016   doi: 10.1111/infi.12083   open full text
• Macroeconomic Effects of Simultaneous Implementation of Reforms .
  Andrea Gerali, Alessandro Notarpietro, Massimiliano Pisani.
  International Finance. April 25, 2016
  This paper evaluates the macroeconomic effects of simultaneously implementing growth‐friendly fiscal consolidation and competition‐friendly reforms in one European country by simulating a dynamic general equilibrium model. Our results are as follows. First, in the case of joint implementation, the increase in gross domestic product (GDP) is larger than the sum of GDP increases obtained from implementing reforms separately. Growth‐friendly public debt consolidation uses lower interest payments in the long run to permanently reduce tax rates, and competition‐friendly reform expands the tax base, allowing for further rate reductions. Second, the medium‐term output loss associated with the temporary increase in taxes during the fiscal consolidation is mitigated by its implementation alongside the competition‐friendly reform, whose expansionary effects limit the tax rate increase. Third, in the short run (the first two years), all measures imply a macroeconomic cost in terms of output loss, which is smaller than the permanent output gain in the long run.

  April 25, 2016   doi: 10.1111/infi.12082   open full text
• Monetary Policy and Asset Price Booms: A Step Towards a Synthesis .
  Hiroshi Fujiki, Sohei Kaihatsu, Takaaki Kurebayashi, Takushi Kurozumi.
  International Finance. April 25, 2016
  Should a monetary policy maker following a Taylor‐type rule set a higher policy rate than the level suggested by the rule because of a possibility of an asset price bust in the near future? Our answer to this question for monetary policy makers who have two scenarios of ‘boom–bust cycle’ and ‘stable growth’ is yes if the following two conditions are satisfied. First, early warning indicators based on credit and residential investment data show a high probability of a boom–bust cycle occurring. Second, the policy rate path that minimizes the boom–bust probability‐based expected value of a social loss associated with inflation and the output gap over the two scenarios is higher than the rate path by the Taylor‐type rule. Our counterfactual analysis shows that the Fed should have raised the federal funds rate by a small amount over and above the level suggested by a Taylor‐type rule in the early 2000s.

  April 25, 2016   doi: 10.1111/infi.12081   open full text
• Measuring Unobserved Expected Inflation .
  Rafi Melnick.
  International Finance. April 25, 2016
  The aim of this study is to develop an eclectic but robust model that allows for a better measure of expected inflation and facilitates testing for all sorts of biases. Improving the measure of expected inflation is of critical importance for conducting monetary policy. In many circumstances, indicators of expected inflation move in opposite directions, and this divergence may be critical for the setting of the interest rate. I estimate the model for a special set of Israeli data via the Kalman filter methodology and then test for systematic biases, a better normalization of the model, liquidity problems and inflation risk – which could all be present in current measures of expected inflation.

  April 25, 2016   doi: 10.1111/infi.12080   open full text
• Adoption of the Gold Standard and Real Exchange Rates in the Core and Periphery, 1870–1913.
  Andre Varella Mollick.
  International Finance. January 27, 2016
  In this paper I estimate the speed of adjustment to shocks to real effective exchange rates (REERs) during the gold standard years. Adoption of the gold standard by the United States in 1879 resulted in all four core countries (France, Germany, the United Kingdom and the United States) being fully committed to gold. I use the concept of half‐life (HL) to measure the time it takes for a deviation from purchasing power parity (PPP) to dissipate by 50%. Relative to the years 1870–1913, between 1880 and 1913 the half‐lives of REERs in core countries decrease from between 4.4 and 5.2 years to between 3.1 and 3.4 years, with similar declines across dynamic panels. Combined with evidence elsewhere that interest rates adjusted quickly, the evidence herein suggests that adjustment in goods markets was faster following adoption of the gold standard.

  January 27, 2016   doi: 10.1111/infi.12079   open full text
• Monetary Policy in a Downturn: Are Financial Crises Special?
  Morten L. Bech, Leonardo Gambacorta, Enisse Kharroubi.
  International Finance. April 14, 2014
  This paper analyses the effectiveness of monetary policy during downturns associated with financial crises. Based on a sample of 24 developed countries, our empirical analysis suggests that monetary policy is less effective following a financial crisis as the monetary transmission mechanism is partially impaired. In particular, our results suggest that the benefits of accommodative monetary policy during a downturn are elusive when the downturn is associated with a financial crisis. In addition, we find that private sector deleveraging during a downturn helps to induce a stronger recovery.

  April 14, 2014   doi: 10.1111/infi.12040   open full text
• Communications Challenges for Multi‐Tasking Central Banks: Evidence, Implications.
  Pierre L. Siklos.
  International Finance. April 14, 2014
  The communications challenges facing central banks that share macroprudential responsibilities with other agencies are daunting. Central bank surveys and an index of central bank transparency reveal that central banks have adopted the necessary institutional arrangements to communicate effectively a price stability objective. However, their communications strategy is ill suited to dealing with financial stability issues. Recent events require a departure from the pre‐crisis narrative that entailed a predictable relationship between inflation and output gaps, of which financial stability was considered a by‐product. I argue that central banks should adopt a hybrid form of inflation and price level targeting as well as require that macroprudential regulators jointly communicate their determination to act in concert, especially when the financial system is under stress. The current practice of announcing the rationale for the setting of monetary policy instruments is no longer an effective communication strategy when central banks must also evince a concern for financial stability.

  April 14, 2014   doi: 10.1111/infi.12043   open full text
• What Is a Prime Bank? A Euribor–OIS Spread Perspective.
  Marco Taboga.
  International Finance. April 14, 2014
  Since the outbreak of the financial crisis in 2007, the level and volatility of the Euribor–OIS spreads have increased significantly. According to the literature, this variability is mainly explained by credit and liquidity risk premia. I provide evidence that part of the variability might also be explained by ambiguity in the phrasing of the Euribor survey. The participants in the survey are asked at what rate they believe interbank funds are exchanged between prime banks; given the lack of a clear definition of a prime bank, this question might leave room for subjective judgment. In particular, I find evidence that some of the variability of the Euribor rates might be explained by changes in the survey participants' perception of what a prime bank is. This evidence adds to the difficulties already encountered by previous studies in identifying and measuring exactly the determinants of the Euribor rates. I argue that these difficulties are at odds with the clarity, simplicity and replicability that should be required of a widely used financial benchmark.

  April 14, 2014   doi: 10.1111/infi.12044   open full text
• Sovereign Yield Spreads During the Euro Crisis: Fundamental Factors Versus Redenomination Risk.
  Jens Klose, Benjamin Weigert.
  International Finance. April 14, 2014
  The intensity of the euro crisis has been reflected in significant increases in sovereign bond yields in the most troubled countries. This has triggered a debate over whether this increase can be attributed solely to fundamental factors or whether part of the increase represents redenomination risk that one or more countries will drop out of the European Monetary Union and reintroduce their own national currencies. Using a novel market‐based indicator from the virtual prediction market Intrade, this paper explores whether such systemic risk is present in the yield spreads of nine euro‐area countries. We find that redenomination risk has played a role in the determination of sovereign yields, and that this risk is related to the expected valuations of newly introduced currencies: those of Portugal, Ireland, Spain and Italy are expected to depreciate, while newly introduced currencies of other countries are expected to appreciate following a break‐up of the EMU. ‘Risk premia that are related to fears of the reversibility of the Euro are unacceptable, and they need to be addressed in a fundamental manner.’ (ECB President Mario Draghi, August 2012) ‘Es gibt fundamentale Zweifel der Märkte an der Sicherheit der Währungsunion.’ There are fundamental doubts on the financial markets about the integrity of the [European] monetary union. (Bundesbank President Jens Weidmann, 10 July 2012)

  April 14, 2014   doi: 10.1111/infi.12042   open full text
• Do Better Capitalized Banks Lend Less? Long‐Run Panel Evidence from Germany.
  Claudia M. Buch, Esteban Prieto.
  International Finance. April 14, 2014
  Higher capital features prominently in proposals for regulatory reform. But how does increased bank capital affect business loans? The real costs of increased bank capital in terms of reduced loans are widely believed to be substantial. But the negative real‐sector implications need not be severe. In this paper, we take a long‐run perspective by analysing the link between the capitalization of the banking sector and bank loans using panel cointegration models. We study the evolution of the German economy for the past 44 years. Higher bank capital tends to be associated with higher business loan volume, and we find no evidence for a negative effect. This result holds both for pooled regressions as well as for the individual banking groups in Germany.

  April 14, 2014   doi: 10.1111/infi.12041   open full text
• Testing the Strategic Asset Allocation of Stabilization Sovereign Wealth Funds.
  Fabio Bertoni, Stefano Lugo.
  International Finance. July 24, 2013
  None of the models that have been developed to determine the optimal strategic asset allocation (SAA) of stabilization sovereign wealth funds (SWFs) has received direct empirical validation, primarily because there is a lack of transparency regarding some of the key parameters that characterize the problem. In this paper, building on a mean‐variance framework, we derive three sets of parsimonious statistical tests to compare the actual SAA of SWFs to a theoretical optimum. We apply these tests to the portfolio of the world's largest stabilization SWF (the Norwegian Government Pension Fund—Global or GPF) for the period between 2002 and 2005. The empirical analysis confirms that the static and dynamic deviations of the GPF's SAA from the market equity portfolio are consistent with the theoretical predictions.

  July 24, 2013   doi: 10.1111/j.1468-2362.2013.12022.x   open full text
• Taylor's Rule Versus Taylor Rules.
  Alex Nikolsko‐Rzhevskyy, David H. Papell.
  International Finance. July 24, 2013
  Does the Taylor rule prescribe negative interest rates for 2009–11? This question is important because negative prescribed interest rates provide a justification for quantitative easing once actual policy rates hit the zero lower bound. We answer the question by analyzing Fed policy following the recessions of the early‐to‐mid‐1970s, the early 1990s and the early 2000s, in the context of both Taylor's original rule and latter variants of Taylor rules. While Taylor's original rule, which can be justified by historical experience during and following the recessions, does not produce negative prescribed interest rates for 2009–11, variants of Taylor rules with larger output gap coefficients, which do produce negative interest rates, cannot be justified by the same historical experience. We conclude that the Taylor rule does not provide a rationale for quantitative easing.

  July 24, 2013   doi: 10.1111/j.1468-2362.2013.12024.x   open full text
• Testing the Effectiveness of Market‐Based Controls: Evidence From the Experience of Japan With Short‐Term Capital Flows in the 1970s.
  Taro Esaka, Shinji Takagi.
  International Finance. July 24, 2013
  This paper tests the effectiveness of marginal reserve requirements employed by Japan in the 1970s to influence short‐term capital flows. We thereby contribute to the ongoing debate on the use of capital controls—market‐based ones in particular. While the case for using market‐based controls relies on the mixed evidence from the experience of Chile with unremunerated reserve requirements, testing for their effectiveness is hampered by the endogeneity of such a measure, which is typically imposed or intensified when inflows surge. We address this problem in the Japanese context by applying the method of propensity score matching, and find that an increase in marginal reserve requirements modestly reduced short‐term capital inflows through non‐resident free‐yen accounts. The impact was not statistically significant, however, implying that the price elasticity of short‐term capital flows was likely small. We conclude that market‐based controls must be nearly prohibitive, perhaps combined with administrative measures, to be effective in a meaningful way.

  July 24, 2013   doi: 10.1111/j.1468-2362.2013.12023.x   open full text
• Structural Reforms and Macroeconomic Performance in the Euro Area Countries: A Model‐Based Assessment.
  Sandra Gomes, Pascal Jacquinot, Matthias Mohr, Massimiliano Pisani.
  International Finance. July 24, 2013
  The recent financial crisis is likely to have damaged the potential output of many countries belonging to the euro area. Moreover, the heterogeneity in long‐run macroeconomic performance among Member States may not be sustainable in the presence of strong monetary and financial integration, thus suggesting the need for coordinating structural reforms. Using a multi‐country dynamic general equilibrium model of the euro area, we assess the macroeconomic effects of increasing competition in the labour and services markets in Germany and the rest of the euro area and, in an alternative scenario, Portugal and the rest of the euro area. Our main results suggest that (i) a unilateral increase in competition in the labour and services markets would increase long‐run output; and that (ii) cross‐country coordination would make the macroeconomic performance of the different regions more homogeneous, in terms of both price competitiveness and of real activity.

  July 24, 2013   doi: 10.1111/j.1468-2362.2013.12025.x   open full text
• Cross‐Border Banking in Europe and Financial Stability.
  Dirk Schoenmaker, Wolf Wagner.
  International Finance. July 24, 2013
  In this paper, we propose country‐specific and systemic metrics that can be used to judge whether cross‐border banking in a country (or region) takes a desirable form. Applying these metrics to the EU countries, we find that the countries with the largest banking centres, the UK and Germany, are well diversified. By contrast, the New Member States (NMS) are highly dependent on a few West European banks and vulnerable to contagion effects. The Nordic and Baltic regions are closely interwoven with little diversification. At the system level, the EU banking system is weakly diversified, with an overexposure to the United States and an underexposure to Japan and China. This explains why the recent US‐originated financial crisis had such a significant impact on European banks.

  July 24, 2013   doi: 10.1111/j.1468-2362.2013.12026.x   open full text