This paper focuses on investigating the cross-border financial contagion based on a fuzzy dynamical system scenario simulation from a perspective of analyzing the volatility of international capital ...flows for a panel of 50 countries in emerging markets and advanced economies from 1980 to 2011. Increasing evidence has shown that financial globalization has developed into a complex nonlinear dynamical system made up of economic subsystems with extensive financial connections and linkages. The contagion effects of the spread of bonanzas in the 50 countries are identified and analyzed. The Hodrick-Prescott filter is employed to address the long-term net capital inflow trend. The comovement of financial contagion between the source country of financial turbulence and the volatility-affected country is described as a fuzzy dynamical system in which the driving and response systems are coupled. A fuzzy dynamical system scenario simulation model under a liberal economy is established by employing nonlinear differential equations to describe the contagion mechanism and the international capital flow volatility effects. The model is then extended to a dynamical system model with macroeconomic control. The coupling strength uncertainty is addressed by employing an interval type-2 fuzzy theory method. The properties of the volatility equilibrium point for the two models are discussed, and the volatility contagion principles based on locally asymptotic stability analysis are derived to explain the different volatility transmission patterns. Policy suggestions are given in three situations for providing managerial insights for policymakers and the explorations of response strategies are also presented. The global financial crisis in 2008 is used as an experimental study to demonstrate the validity and effectiveness of the simulation and modeling method.
How does the participation of foreign investors on local bond markets impact the volatility of bond prices and yields? An answer to this question is important for policy makers from emerging markets ...in their attempts to liberalize access to financial markets. However, empirical literature gives inconclusive answers to this question. Reasons are that studies analyze diverse types of bonds and apply their analyses to different samples of countries and for different phases in the opening up of markets. We add to existing knowledge by empirically investigating the impact of foreign investors' participation on the volatility of prices of two types of Chinese bonds, government bonds and policy bank bonds, as well as for three stages in the liberalization of the Chinese bond market. We find that foreign investors' participation does not exert significant effects on volatility until late in the opening of the bond market. In addition, we uncover that those bonds which are more influenced by government policies, policy bank bonds, are also more strongly affected by international capital flows. From a policy perspective, our results emphasize the importance of increasing the openness of China's local currency bond market, of stabilizing foreign investors' expectations and, in turn, international capital flows.
We analyze how capital flows into the sovereign debt market affect government bond prices, liquidity, and exchange rates. To address endogeneity concerns, we construct a measure of informationless ...capital Flows Implied by (mechanical) Rebalancings (FIR) in the largest emerging markets local currency government debt index. FIR is associated with higher returns and greater depth in the sovereign debt market after the rebalancings. Also, larger inflows (outflows) are associated with greater currency appreciations (depreciations). Our results highlight the increasing importance of capital flows driven by demand shocks, due to the growing relevance of benchmark indexes as the preferred habitat for institutional investors.
•We examine the impact of macroprudential policies (MPPs) on cross-border bank flows.•We find that the domestic banking sector structure underpins MPP effectiveness.•Higher levels of regulatory ...quality are positively related to MPP effectiveness.•Higher bank profitability and bank intermediation efficiency raise MPP effectiveness.•Banking sector channels also drive spillovers from MPPs across assets and regions.
Using a large sample of advanced and emerging market economies over the period 1999–2012, we examine the effectiveness of macroprudential policies (MPPs) in managing cross-border bank flows. Conditioning on the structure of the banking sector in the MPP-implementing country, we find that higher regulatory quality and a higher credit-to-deposit ratio increase the effectiveness of MPPs, while a higher cost-to-income ratio has the opposite effect. If all three financial variables are evaluated at the median, the marginal effect of our preferred MPP measure leads to a reduction of international bank inflows in percent of GDP by around half a percentage point and is only marginally significant. However, when the more enhanced 25th (10th) percentiles of their respective distributions are considered, we observe, as a response to the same MPP measure, a reduction of bank inflows by 3.44 (5.39) percentage points that is highly statistically and economically significant. Additionally, we find that the structure of the domestic banking sector determines spillovers from MPPs across asset classes, while spillovers from MPPs across countries are a function of banking sector conditions both at home and abroad.
The purpose of this article is to study the occurrence of the Lucas paradox in the region of Central-Eastern Europe. According to the research conducted by Robert Lucas (1990), the direction of the ...international capital flows is different than the neoclassical theory suggests. The capital does not flow from the richer, high-income economies to the poorer, but rather stays in those with the higher capital resources or flows to the other ones with similar level of GDP. The paper verifies whether the paradox appears in the region, in the way that it examines the impact of the GDP on the FDI inflows. Additionally, the study implements few basic models with factors that may potentially resolve the puzzle of the capital flows. The study method is based on panel data estimations, initially using pooled OLS, and subsequently using fixed or random effects models as appropriate. The examined economies are the member states of the European Union, from the region of Central-Eastern Europe, and the examined years are 2000-2018. Based on the literature, and the widely emphasized need for differentiating between the types of international capital flows, the article focus is on the foreign direct investment only, as they constitute large part of the whole global capital flows. Results of the research confirm the presence of the paradox in the region in the examined period. Even though the estimation of the additional models helps to remove the effects of the paradox for the region, it does not fully explain under which circumstances the neoclassical theory would be applicable. None of the applied models reverses the sign of the GDP variable to negative, keeping it statistically significant at the same time.
We live in a new world economy characterized by financial globalization, historically low interest rates, and frequent credit booms and busts. To study this world, we extend the rational-bubbles ...framework of Martin and Ventura (2015) to include many countries and general preferences. We find that financial globalization and low interest rates create an environment that is conducive to credit bubbles. These bubbles raise world savings and generate capital flows that may not be efficient. A global planner would adopt a policy of “leaning-against-investor-sentiment”, taxing credit in those times and countries where credit is excessive and subsidizing it elsewhere. An important characteristic of this policy is that it is expectationally robust, in the sense that it isolates the world economy from fluctuations in investor sentiment. This policy may be hard to implement in a decentralized fashion, though, as individual countries are unlikely to internalize the effects of their policies on the world interest rate.
This paper examines the drivers of the retrenchment in cross-border banking in the European Union (EU) since the global financial crisis, which stands out in international comparison as banks located ...in the euro area and in the rest of the EU reduced their cross-border claims by around 25%. Particularly striking is the sharp and sustained reduction in intra-EU claims, especially in the form of deleveraging from cross-border interbank loans. Examining a wide range of possible determinants, we identify high non-performing loans as an important impediment to cross-border lending after the crisis, highlighting the spillovers from national banking sector conditions across the EU. We also find evidence that prudential policies can entail spillovers via cross-border banking in the EU, albeit with heterogeneity across instruments in terms of direction, magnitude and significance. Our results do not point to a major role of newly introduced bank levies in explaining cross-border banking developments.
Abstract
This article establishes four key findings of the growing literature on experience effects in finance: (i) the long-lasting imprint of past experiences on beliefs and risk taking; (ii) ...recency effects; (iii) the domain-specificity of experience effects; and (iv) imperviousness to information that is not experience-based. I first discuss the neuroscientific foundations of experience-based learning and sketch a simple model of its role in the stock market based on Malmendier et al. (2020a, b). I then distill the empirical findings on experience effects in stock-market investment, trade dynamics, and international capital flows, highlighting these four key features. Finally, I contrast models of belief formation that rely on “learned information” with models accounting for the neuroscience evidence on synaptic tagging and memory formation, and provide directions for future research.
Since the 1970’s developing and developed countries have experienced unprecedented public debt levels. This surge in public debt has emphasized the importance of public debt management. Since risks ...such as reducing economic growth, increasing inflation, and depreciation of the national currency accompany unplanned public debt accumulation, governments should be alert not to endanger economic growth with ill-considered borrowing. In this paper, we aim to analyze Iran’s external debt variations concerning major macroeconomic variables such as GDP growth as a proxy of economic growth, inflation, and sovereign oil generated incomes. The method that is applied in this research is cross wavelet transform which is a powerful mathematical approach for analyzing the financial data. Our results show there are different patterns in small and large scales between variables and external debt as a dependent variable has different relations with endogenous and exogenous factors. In the short run, low oil prices as an exogenous variable, during the 1980s have shaped governments’ debt accumulation behavior but on larger scales, indigenous variables such as governments’ budget deficits have been much more dominant in shaping governments borrowing patterns. In a chronological view, US cruel sanctions and the Iran-Iraq war were major events affecting sovereign borrowing behavior.
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