by Nick Sander & Ganesh Natrij
This project seeks to understand the macroeconomic effects on a country receiving capital flows from abroad, in particular equity and debt (portfolio) inflows.
Capital flows
Financial Globalization
by James Wilcox
More than a dozen countries have both sizable conventional banks and Islamic banks. Instead of paying fixed deposit interest rates, which are prohibited by sharia law, Islamic banks offer profit and loss sharing (PLS) accounts. Payments to PLS accounts should vary with banks’ earnings. To the extent that they do, PLS accounts may be more equity-like than deposits at conventional banks. However, widespread consensus holds that Islamic banks’ payments to depositors are nearly indistinguishable from the interest rates paid by conventional banks. We estimate how much Islamic banks pass through their PLS-related earnings to PLS-related accounts and how much their responses to various factors differ from those of conventional banks. We also analyze how much Islamic banks’ profit and loss sharing has been obscured by previous data difficulties and by their smoothing over time the payments to PLS accounts. The results may shed light on the prospects for PLS loans and deposits as a source of more-equity-like financing from banks for smaller businesses, which often obtain few conventional loans from banks.
Capital flows
Financial Globalization
by Barry Eichengreen, William Jungerman and Mingyang Liu
Although multiple studies have attempted to estimate the impact of Brexit on FDI flows into and out of the UK, no previous study appears to have undertaken a similar analysis of portfolio capital flows and financial intermediation services. This project will take three approaches to addressing these questions. The first approach will use data from the IMF’s Consolidated Portfolio Investment Survey to estimate the impact of EU membership on capital flows. Using these data, it will be possible to estimate a gravity-theoretic model of total gross portfolio capital inflows and total gross portfolio capital outflows for each country pair, pooling cross-sections for different years and attempting to identify an EU membership effect. A second approach will then replicate this analysis using bank-intermediated flows using the Bank for International Settlements’ Locational Banking Statistics. The third approach will then analyze the determinants of international financial center status and ask how this is affected by the same variables (notably by EU membership, customs union membership, and participation in the euro area). The financial consultancy Z/Yen Group provides annually a list of top international financial centers based on an extensive online questionnaire. Its Global Financial Centres Index (GFCI) is an ordinal ranking of financial centers around the world (averaging some 70 in number). Rank-ordered logit models will be used to analyze the determinants of financial center status, where the key explanatory variables will be financial links (assets and liabilities of the country in which the financial center is located, again from the CPIS) and trade data (from the IMF’s balance of payments statistics), where the effects of these variables will allowed to vary with EU membership. These estimates will then be used to construct counterfactuals for various Brexit scenarios to answer the question of how London’s financial center status will be affected.
For a paper draft, see this.
Capital flows
Financial Globalization
by Ross Levine
This research will evaluate the impact of the 1400-1900 African slave trade on household and firm financing constraints today. The study of the historical determinants of finance is important both for understanding the evolution of the institutions that shape the operation of financial systems and for providing guidance to current policy analysts and policymakers about key barriers to the development of more efficient financial markets and institutions. The project will exploit cross-country and cross-ethnic group differences in the intensity with which people were enslaved and exported from Africa during the 1400-1900 period to identify the impact of the historic slave trade on modern financial systems. This work will provide evidence on whether the slave trade—which has had an enduring, deleterious effect on social cohesion—continues to harm the operation of credit institutions.
Capital flows
Financial Globalization
by Chris Jauregui and Ganesh Viswanath Natraj
For a presentation of preliminary results, see this.
When the US sneezes, do other countries catch a cold? (Rey 2015) suggests that there is a global financial cycle in asset prices driven by US monetary policy as the center country, suggesting that small open economies with floating exchange rate regimes do not have true monetary independence. In this project, we investigate both financial and real spillovers of monetary policy, using high-frequency identification of monetary announcements from major central banks in advanced countries (Bernanke and Kuttner, 2005 and Gurkaynak et al, 2005). To identify real spillovers of monetary shocks to countries abroad, we use high-frequency “economic-news” tracking portfolios (ETPs), constructed using intraday asset returns and survey-based economic forecasts (Lamont, 2001). ETPs are linear combinations of financial asset returns that best mimic “news” about future real output, inflation, or unemployment, and so their responses to high frequency monetary shocks provide a good proxy for the real spillovers of monetary news across borders. We also test if international monetary policy spillovers were dampened by unconventional monetary policies following the financial crisis of 2007. In addition, we propose an equilibrium modeling framework to account for presence of financial spillovers; these financial linkages are due to the fact that the US dollar is used as a vehicle currency for raising debt and capital flows. The financial channel of a strengthening US dollar may cause a decline in the small open economy’s ability to source dollar denominated debt, and balance-sheet pressures leading to contractionary real effects for the small open economy (Gourinchas 2016 and Aoki, Benigno and Kiyotaki 2016).
Capital flows
Financial Globalization
by Mauricio Ulate, Rupal Kamdar and Walker Ray
On November 8, 2016, India stopped accepting all 500 and 1,000 rupee (approximately 7 and 15 dollars) notes, its two largest bills, as legal tender. This removed about 86% of cash in circulation. New 500 and 2,000 rupee notes were eventually issued, but the process of printing them and getting them distributed to the states took longer than anticipated. Around 98% of transactions in India occur in cash, so demonetization had profound consequences, with long queues at banks, low daily limits on withdrawals of the new bills, and certain sectors of the economy slowing down significantly. The move was done for motives related to counterfeiting and money laundering and, as such, was unrelated to the state of the Indian macro-economy. This is why it could serve as a natural experiment to study the real effects of monetary shocks, price rigidities and relative substitution patterns following a liquidity crunch. This project intends to use disaggregated data on prices and quantities of different consumption categories across regions in India to study these interesting topics. Preliminary results on the prices of agricultural goods seem to indicate that prices respond strongly and somewhat persistently to demonetization.
Development, Capital flows
International Trade & Development, Financial Globalization