The analysis of trade imbalances is further complicated by the fact that not all financial flows are debt obligations or IOUs (i.e., I owe you). In the previous stories, we assumed that all financial account transactions corresponded to international lending or borrowing. In actuality, many international asset transactions involve sales or purchases of productive assets. For example, if a foreigner purchases shares of Microsoft stock in the U.S. market, the transaction would be recorded as a credit entry on the financial account and would add to a financial account surplus. However, in this case we could not claim that someone in the United States borrowed money from the rest of the world because there is no obligation to repay principal and interest in the future. Instead the foreign purchaser of the U.S. asset has purchased an ownership claim in a U.S. corporation that entitles him to the future stream of dividends plus capital gains if he sells the stock later at a higher price. If the company is profitable in the future, then the investors will earn a positive return. However, if the company suffers economic losses in the future, then the dividends may be discontinued and the stock’s price may fall. Alternatively, the U.S. dollar could experience a significant depreciation. The end result could be losses for the foreign investor and a negative rate of return. In either case the foreign investor is not “entitled” to a return of his original investment or any additional return beyond. This same type of relationship arises for international real estate transactions and for foreign direct investment, which occurs when a foreign firm substantially owns and operates a company in another country.
The introduction of the Free Movement of Persons Act (FZA) in 2002 repre- sents the greatest reform of immigration policy since 1931. As a matter of fact, the current FZA is comparable to the immigration policy Switzerland had before 1931. In the alien act of 1931 Switzerland, like most European countries very much shaken by the aftermaths of the worldwide economic depression, con- strained firmly the arrival of foreign workers. It will take a few years before the consequences of the dramatic changes introduced in the new FZA in 2002 can be properly assessed. Therefore, our current knowledge is of a provisional nature. I am sure that the next years will be full of good and bad experiences, full of political debates and upheaval.
The relationship between trade and environment is a complex and highly debated issue. Addressing this relationship is fundamental in order to achieve sustainable development. As a result of increasing global economic inter-dependence and further trade liberalization as well as growing pressure on the environment and the use of natural resources, there is an ever growing inter-face between trade and environment. It is widely recognized that trade and environment can be mutually supportive, but, differences remain on effective implementation. The Commission Communication on Trade and Environment, adopted in 1996, underlined that a mutually supportive relationship between trade and environment can occur but is in no way automatic. In fact, trade liberalization and trade policy have positive and negative impacts on the environment. However, a number of conditions should be met to ensure that the net gains deriving from trade liberalization will support and reinforce the protection of the environment.
determines monetary policy. There are twelve voting members, including the seven members of the Fed Board of Governors and five presidents drawn from the twelve Federal Reserve banks on a rotating basis. The current Chairman of the Board of Governors is Ben Bernanke (as of January 2010). Because Bernanke heads the group that controls the money supply of the largest economy in the world, and because the FOMC’s actions can have immediate and dramatic effects on interest rates and hence the overall United States and international economic condition, he is perhaps the most economically influential person in the world today. As you’ll read later, because of his importance, anything he says in public can have tremendous repercussions throughout the international marketplace.
Many people who learn about the theory of comparative advantage quickly convince themselves that its ability to describe the real world is extremely limited, if not nonexistent. Although the results follow logically from the assumptions, the assumptions are easily assailed as unrealistic. For example, the model assumes only two countries producing two goods using just one factor of production. No capital or land or other resources are needed for production. The real world, on the other hand, consists of many countries producing many goods using many factors of production. In the model, each market is assumed to be perfectly competitive when in reality there are many industries in which firms have market power. Labor productivity is assumed to be fixed when in actuality it changes over time, perhaps based on past
Organization (WTO) and individual free trade agreements. However, at the same time, countries have raised barriers to trade in a variety of subtle ways. For example, the United States revoked a promise to maintain a program allowing Mexican trucks to enter the United States under the North American Free Trade Agreement (NAFTA), it included “Buy American” provisions it its economic stimulus package, it initiated a special safeguards action against Chinese tire imports, and it brought a case against China at the WTO. Although many of these actions are legal and allowable under U.S. international commitments, they are nevertheless irritating to U.S. trading partners and indicative of the rising pressure to implement policies favorable to domestic businesses and workers. Most other countries have taken similar, albeit subtle, protectionist actions as well.
For the monetary policy rate equation, standard control variables, such as output gap, lagged policy rate, and inflation are statistically significant and have the right signs (Table 2.5). The results indicate that in the absence of FX debt, the policy rate reaction to exchange rate movements is limited. This is in line with a traditional Taylor rule approach where monetary policy reacts to inflation and the output gap. However, when exchange rate changes are interacted with FX debt, the coefficient becomes statistically significant. The coefficient of 0.08 implies that, for a country with a 10% of FX debt-to-GDP, a 10% depreciation is associated with an increase in policy rate by 0.08 percentage point in the following month. The reason why the coefficient is significant with a one-month lag – instead of contemporaneously – is likely due to the fact that decisions on changes in policy rates as opposed to decisions to do FX interventions are taken in planned policy meetings that occur with a lower frequency. Moreover, since policy rate inertia is high (the coefficient for a lagged policy rate is 0.73-0.99) a longer lasting depreciation will be related to a further increase in policy rates. For the countries in our sample, Figure 2.8 shows a total increase in policy rates over the first month and a quarter (cumulative) that is associated with a 10% deprecation. For the cumulative response of policy rates, we assume that the other variables such as inflation and output gap stay constant. As expected, the effect is larger for countries with high levels of FX debt.
Fluctuations in aggregate economic activity have accompanied market economies throughout history. The recessions have been severely disruptive in many cases causing widespread unemployment, and have slowed down the long run capital accumulation process by hurting demand conditions, and the profitability expectations of the firms. Neither the labourer, not the owner of capital likes recessions though they do not mind boom conditions. But overall they are better served with a steady growth path of the economy with less uncertainty and fear afflicting them in the short run. The birth and continuation of stabilization policy has to be understood in this context. It must be admitted however, that the warranted stabilization policy prescribed under different circumstances and in different times and places have covered a wide-ranging proposals generating a lack of consensus on the theory of such policy. The debate that took off since the publication of General Theory in 1936, has never really cooled down though the mainstream literature today is dominated by the models which are the descendants of new classical macroeconomics. Lucas has observed (1987) that costs of business cycles were insignificant with a hands off approach taken by macro-policy makers and stability in the monetary aggregates. This has not only stimulated further theoretical and empirical studies to prove or disprove him, but also challenged new-Keynesian theorists to provide robust micro-foundations for a structure that can generate their essential propositions.
It is very important for managers, investors and financial policy-makers to detect and analyze factors affecting financial markets to obtain optimal decision and reduce risks. The importance of market analysis and attempt to improve its behavior understanding, has led analysts to use the experiences of other professionals in the fields such as social sciences and mathematics to examine the interaction of market in a different way. This article reviews the use of networks and graph theory to analyze the behavior of social and financial phenomena that in recent years has been expanded. First, the original of this theory that donate from discrete mathematics, is introduced and then some details are given about the characteristics of a network, such as power law property, scale-free networks and minimum spanning tree. The results show that financial markets dynamics have caused the dynamically development of the approaches, methods and models of market analysis, so the effect of investment opportunities on each other was evaluated to identify market behavior
Question 2. Imagine that Congress passes a constitutional amendment requiring the U.S. government to maintain a balanced budget at all times. Thus, if the government wishes to change government spending, it must change taxes by the same amount. The constitutional amendment implies that the government can no longer use fiscal policy to affect employment and output.
Strategic currency hedging policy can be an important risk control measure for funds with international assets. Passive currency exposure can be seen as a source of risk with no compensating risk premium. Hedging currency exposure removes return component that is a source of expected risk but not expected return. Leaving assets unhedged could be the correct policy decision, but it should not be the default position. The decision should be based on a systematic analysis of the costs and benefits of currency hedging. Given that currency adds risk, has zero expected excess return over long periods of time, and is relatively inexpensive to hedge, it is puzzling that the international investors’ default position is not 100% hedged rather than the industry norm of 0% hedged.
the argument that banking is central to economic health, because, among other things, “banks are the primary source of liquidity for all other classes and sizes of institutions, both financial and nonfinancial” and ”are the transmission belt for monetary policy.” See also Mark Olson, Governor, Fed. Reserve Bd., Speech at the Annual Washington Con- ference of the Institute of International Bankers: Are Banks Still Special? (Mar. 13, 2006), http://www.federalreserve.gov/newsevents/speech/olson20060313a.htm (reflecting on Corrigan’s paper and concluding that indeed, a “strong case can be made that banks continue to be special”). The same thing goes for the financial markets more generally. See, e.g., John O. McGinnis, The Decline of the Western Nation State and the Rise of the Regime of International Federalism, 18 C ARDOZO L. R EV . 903, 913 (1996) (“Global capital
Even though rate ceilings are ineffective, I do find that liquidity provision, which is a policy that the ECB undertook in its OMT program, was effective. In providing liquidity, the central bank credibly pledges to purchase sovereign debt at potentially sub-market rates. The model suggests that such a policy is effective at removing sentiment fluctuations, but that its welfare consequences are ambiguous, since some limited-commitment based de- fault will remain after implementation. This trade-off can be understood in the context of the debate between the core and the periphery: The periphery wants the central bank to provide liquidity to protect them from malignant market sentiments, while the core fears that with such a backstop the periphery will rack up unsustainable debt levels and bring about another, more fundamental crisis. Both channels are active in the model and so the welfare consequences of such provision will depend on the underlying parameterization.
asymptotic conditions are not fulfilled, short-term constraints on monetary policy can do the job (Ireland, 2000). Another problem is that when the rate of interest becomes very low, monetary authorities have less leeway with adjusting it downwards in the face of recession. Some economists propose alternative ways to overcome the zero- bound interest rates (Goodfriend, 2000), but such problem appeared to be tougher than previously thought few years after the onset of the International Financial Crisis of 2007- 2012. Another problem is that deflation has efficiency problems parallel to those of inflation, even at very low interest rates (Lucas, 1994). However, the welfare cost of implementing a zero rate of interest are claimed to be negligible (Wolman, 1997).
to Zhang (2014), who used an information-based theory to discuss the determinants of international currency and its implication for monetary policy, but my approach is different in several aspects. First, there is an additional round of financial market since exporter and importer rely on bank-intermediated finance for trade settlement. Second, the cost of using a certain currency comes from the fixed cost in banking sector, which is more tractable and realistic. This means home currency use is also costly, so agents make a binary choice of using home or foreign currency, and distinct currencies are no longer perfect substitutes. Lastly, the role of government is not ex- plicitly stipulating home currency use. Instead, it would decide on whether to absorb the initial cost of financial market and make its own currency international.
Wealth subsidies to borrowers follow the standard prescription in credit-rationing models, where redistribution in favor of poor entrepre- neurs supports increased borrowing and investment. In my model, in- formal lenders also face binding credit constraints, suggesting that these policy implications need to be modi ﬁ ed. Consider a reform that redistributes one dollar from the entrepreneur to the moneylender. If rationed entrepreneurs and moneylenders access the bank, the transfer affects the bargaining weights and subsequent bank lending, but not the project's size since every dollar is invested. Under market segmentation, a reallocation in favor of the bank-rationed moneylender increases in- vestment. As the moneylender's share of the investment outcome, not the overall size, determines the incentive-compatible bank loan [Eq. (20)], an additional dollar of moneylender wealth draws more bank money into the project. A similar result is obtained in the com- petitive benchmark if entrepreneurs' opportunity cost of being dili- gent exceeds moneylenders' cost, ϕ M b ϕ E . Although every dollar is
The estimations of Equation (2.3) at 15 minutes frequency for trade and volume based order flow are illustrated in Figure 2.3. The results indicate that the effects of order flows at the first trading hour and near lunch-time were notoriously greater in 2008 and 2009, compared to the following trading hours. Differences in the results between the samples could be related to the fact that the economic conditions at which the market operated in 2008 were different than in 2009. In 2008, EMEs were more cautious about foreign economies, some even responded anticipatively to a possible worsening of the global environment. In 2009, markets had already incorporated a good portion of pessimism. That said, we realise that as we do not provide a behavioural model in this chapter, we cannot state whether the differences between the results seen in Figure 2.3 are due to changes in the agents behaviour. However, according to what we observe in the data, in the first trading hours the exchange rate volatility was also high and the number of trades were only around 3% of the total traded on average each day (see Table 2.1). Therefore, although these results could be seen as good news for a policy maker or major agent aiming to impact the CLP/USD rate, we do not interpret our results as meaning that by trading large amounts throughout those times of the day a trader would fully accomplish such an objective.
The sudden increase in Italian government bonds yields in the second half of 2011 is studied as natural experiment. Figure 1 plots the spread between Italian and German government bonds between January 2010 and July 2012. In this paper I concentrate on the 11 months between January 2011 and November 2011. During these months the spread increased from about 170 b.p. to more than 500 b.p.. The increase of the spread was concentrated in the second half of the year and policy makers responded slowly to it. The European Central Bank intervened only in December 2011 with a Long term Refinancing scheme (LTRO) that was designed to alleviate the stress in the sovereign debt markets. As no major policy interventions happened before December 2011, it is possible to compare dynamics in the banking sector in the five months between July and November 2011 with dynamics in the initial six months of the same year using a diff-in-diff approach to uncover the consequences of high government yields on the banking system.
The global financial crisis, which began in the middle of 2007 and reached its apex in the winter of 2008, following the collapse of the investment bank Lehman Brothers, marks a defining point in the history of finance. It serves as a reminder that our ability to tame markets and perfectly share risk is still a distant prospect, only alive today in the theoretical domain. The once cherished belief among academics and policy makers that we were living the good life, in the world of a ‘great moderation’, belongs to a distant and seemingly naive past. But for all the pain and anguish that arises from a crisis, from the mass unemployment and sharp fall in output, to the loss of public provisions, one group arises from the rubble with an apparent treasure trove – the economists. The plethora of new and interesting observations which arise from a crisis provide the impetus for an explosion in research and new ways of thinking, as the process of ‘creative destruction’, usually synonymous with the grubby practicalities of capitalism, works itself into the ivory towers of academia.
The present thesis comprises three essays in international …nance, with a focus on the foreign exchange market. The …rst chapter assesses the predictive ability of a comprehensive set of empirical models of exchange rates, in addition to a standard technical trading strategy, on monthly exchange-rate returns for four developed and four emerging countries across di¤erent horizons. My motivation is the large gap that exists between the models used by academics and those adopted by market practitioners. The former tend to employ long run equilibrium equations based on fundamental variables and use standard distribution theory in their modeling approach. In contrast, the majority of market practitioners adopt chartism, which is essentially the use of technical trading rules that lack a theoretical foundation. However, none of these two competing approaches has managed, so far, to provide a model of exchange rate behaviour that performs well at di¤erent frequencies. The aim of this chapter is to provide a statistical and economic investigation of a comprehensive menu of fundamental models and a chartists’rule, across di¤erent forecast horizons, in an attempt to shed some light on this long-standing debate.