Foreign direct investment and economic growth: Is more financial development better?

We investigate the extent to which an increase in financial development affects the positive effect of foreign direct investment on economic growth. Although the financial sector is beneficial for economic growth, the effect of further financial development on growth is found to become insignificant. Using a dynamic panel threshold model on 62 middle- and high-income countries spanning the period 1987–2016, we re-examine the possible nonlinearity between finance, foreign direct investment, and growth. Consistent with the “vanishing effect” of financial development, we find significant evidence that foreign direct investment fosters growth in general, but the growth effect of foreign direct investment becomes negligible when the ratio of private sector credit to gross domestic product exceeds 95.6%. This finding is robust to different econometric methods, various subsamples and interaction analyses, and distinct financial development indicators.     

Trade tariff,wage gap and public spending

This paper studies the interplay between wage gap and government spending in a small open economy facing a shock in trade policy. We consider a specific factor model with an export sector, which uses skilled labour, and an import-competing sector, which uses unskilled labour. We find the conditions under which there exists an inverse (direct) relation between trade liberalization (protection), which increases (decreases) the skilled-unskilled wage gap, and the level of government expenditure. We also show how either an unbalanced distribution of political bargaining power, or tariff revenue co-financing public spending may break this inverse relation. Moreover, the direct relation between tariff protection and public goods provision can be strenghtened by progressive taxation and weakened by regressive taxation.     

Quantile spillovers and dependence between Bitcoin,equities and strategic commodities

This paper has two aims. We first examine the dynamic spillovers between Bitcoin and 12 developed equities, gold, and crude oil for different market conditions using a Bayesian Time-Varying Parameter Vector Autoregressive (TVP-VAR) model with daily spot prices. Our econometric approach enables us to capture the left and right tails as well as the shoulders of the return distribution corresponding to volatility spillovers under the bear, normal, and bull market states among these financial assets. We quantify and trace the dependence and directional predictability from Bitcoin to other assets using the sample cross-quantilogram. Our key findings offer convincing evidence of time variation in the level of volatility. Spillovers between Bitcoin and other financial assets intensify during extreme global market conditions. Secondly, results from the cross-quantilogram indicate strong dependence and positive directional predictability between Bitcoin and most equities and crude oil when market returns are bullish. However, during the bearish market period, there is negative dependence and predictability from Bitcoin to stocks in Finland, the Netherlands, the U.S.A, and the crude oil market only. This implies that Bitcoin can act as a hedge to stocks in Finland, the Netherlands, the U.S.A, and the crude oil market. However, insignificant dependence and directional predictability from Bitcoin to the remaining assets indicate that Bitcoin may act as a safe-haven to these assets during bearish markets. Our findings hold important implications for both international investors and portfolio managers who consider Bitcoin as part of their portfolio diversification and other investment strategies.     

Structural current accounts in the European Union countries: cross-sectional exploration

This paper investigates structural determinants of the current account balance and assesses whether the current accounts in the European Union countries were consistent with the calculated structural current accounts between 1995 and 2017. We estimate current account regressions using cross-sectional data for 94 countries in 2008–2016 and confirm the main findings with panel data estimates. We document that the current account depends on the real exchange rate in a nonlinear way. The real exchange rate affects the current account at low income levels, but it ceases to be important at high income levels. Based on structural current account estimates for the European Union countries, we document that after the 2008 crisis current accounts adjusted towards structural current accounts in deficit countries, but persisted above structural current accounts in surplus countries.     

Elections and Capital Flows

This paper investigates the extent to which elections affect capital flows. I find little evidence of political capital flow cycles in advanced economies. In emerging and developing countries, however, presidential elections significantly lower preelection foreign direct investment (FDI) inflows but have no effect on other types of capital flows. Furthermore, I find evidence that these cycles are not caused by economic crises related to elections or preelection manipulation of policy variables. These results suggest that uncertainty about future government policies, which should have greater impact on more irreversible forms of capital flows like FDI, may be an important factor in generating this cycle.     

Monetary Policy Transmission with Interbank Market Fragmentation

This paper shows how interbank market fragmentation disrupts the transmission of monetary policy. Fragmentation is the fact that banks, depending on their country of location, have different probabilities of default on their interbank borrowings. Once fragmentation is introduced into standard theoretical models of monetary policy implementation, excess liquidity arises endogenously. This leads short-term interest rates to depart from the central bank policy rates. Using data on monetary policy operations, I show that this mechanism has been at work in the euro area since 2008. The model is used to analyze conventional and unconventional monetary policy measures.     

A Welfare-Based Analysis of International Monetary Policy Spillovers at the Zero Lower Bound

We study the welfare effects of international monetary policy spillovers at the zero lower bound, focusing on the effects of forward guidance in a large economy (“foreign”) on its smaller trading partner (“home”) in scenarios motivated by the global financial crisis. We find that foreign forward guidance has an overall prosper-thy-neighbor effect on the home economy as long as it increases foreign welfare. This finding holds under alternative assumptions about exchange rate pass-through or the degree of international financial integration. However, foreign forward guidance may worsen the trade-off between the stabilization objectives of home monetary policy.     

Official Demand for U.S. Debt: Implications for U.S. Real Rates

We estimate a structural term-structure model of U.S. real rates, where arbitrageurs accommodate demand pressures exerted by domestic and foreign official investors. Official demand affects rates by altering the aggregate price of duration risk, and thereby bond risk premiums. Although foreign central banks' demand contributed to reduce long-term real rates mainly in the years prior to the global-financial crisis, the Federal Reserve's demand lowered rates during the quantitative easing period. Overall, the two-factor model, augmented to account for changing liquidity conditions, offers a good representation of real rates during the 2001–16 period; however, we flag some caveats and possible extensions.     

FX Intervention in the New Keynesian Model

We develop an open-economy New Keynesian Model with foreign exchange (FX) intervention in the presence of a financial accelerator and shocks to risk appetite in international capital markets. We obtain closed-form solutions for optimal monetary and FX intervention policies assuming the central bank cannot commit to future policies, and we compare the solution to that under policy commitment. We show how FX intervention can help reduce the volatility of the exchange rate, of inflation, and of the output gap, thus mitigating welfare losses associated with shocks in the international capital markets. We also show that, when the financial accelerator is strong, there is a risk of indeterminacy (self-fulfilling currency and inflation movements) although FX intervention can reduce this risk and thus reinforce the credibility of the inflation targeting regime. Model simulations match well the impact of a VIX shock obtained by local projections on a panel of inflation targeting emerging markets.