Multinationals, Hedging, and Capital Structure under Exchange Rate Uncertainty

This paper examines the interplay of the financing and hedging decisions of a risk-averse multinational firm having a wholly-owned foreign subsidiary. Exchange rate risk management of the multinational firm is shown to have direct impacts on its international capital structure decision and on its currency of denomination decision. If a currency forward market exists, the multinational firm will devise its international capital structure so as to minimize the global weighted average cost of capital. Or else the multinational firm has to rely on a money market hedge through issuing more foreign currency denominated debt and less domestic currency denominated debt, thereby resulting in a higher global weighted average cost of capital. JEL Classification Numbers: D81, F23, G32     

Foreign debt,global liquidity,and fiscal sustainability

We empirically investigate fiscal sustainability by comparing countries in the different economic groups with a dataset covering 180 countries during the period from 1980 to 2015. As the OECD countries have higher international debt ratio than other countries, they have higher probability to be exposed to global risk factors. Non-OECD countries turn out to be more fiscally solvent than OECD countries due to their limited access to international financial market. However, we also find that better access to international liquidity increases fiscal sustainability within the sample of OECD countries, while it does not improve the fiscal solvency in case of non-OECD countries.     

The drachma, foreign creditors, and the international monetary system: tales of a currency during the 19th and the early 20th centuries

Fixed exchange rate regimes can be regarded as a “rule with escape clauses,” allowing the monetary authorities to temporarily suspend convertibility and enact a discretionary policy only under well-understood contingencies, such as wartime emergencies and financial panics. Seen from this perspective, adherence to the specie convertibility rule enables peripheral countries to establish credibility of the nation’s economic policy and, thus, to obtain access to the core countries’ capital markets. An example of a peripheral country is Greece during the 19th and early 20th centuries. The evidence assembled in the paper suggests that Greece tried very hard to adhere to “good housekeeping rules.”     

International Financial Contagion and the Fund —A Theoretical Framework

In this paper we provide a model of contagion in which countries are linked through the international capital market which allows borrowing and lending for consumption smoothing. Borrowing from the International Monetary Fund also provides a mechanism for countries to smooth consumption intertemporally. Facing a large shock that makes it impossible for a country simultaneously to achieve a desired minimum level of consumption and to service its foreign debt, the country will default. This will put some upward pressure on world interest rates, which raises the debt service costs of other indebted countries and can generate further rounds of defaults. In this environment the Fund has an important systemic function in lending to members to limit the extent of contagion and default. The Fund can be seen as internalizing the externality generated by the contagion that spreads through the channel of the world capital market that links all countries. JEL Classification Numbers: E44, E61, F33, F34     

Debt and development: The role of foreign capital in economic growth

Capital flows, whether between individuals or nations, are dominated by a two- fold paradox. Borrowers are initially primarily interested in obtaining sufficient funds for their needs, but once they have obtained a loan, their indebtedness becomes their principal concern. While a loan is being negotiated the lenders usually have the upper hand, but once it is made, they become dependent on the borrowers for repayment with interest. Their power to withhold future loans becomes their only real measure of control. Borrowing and lending has costs and benefits, and these balance out only in exceptional cases for both the borrowing and lending countries and the principal social groups within them. The debate about the impact of international capital flows accordingly has a long history. This paper begins with a historical perspective, and then reviews the principal characteristics of capital flows to developing countries since the 1950s. A discussion of the impact of capital flows on development, with a particular emphasis on trends in developing country indebtedness, follows. A brief examination of borrowing and debt management issues for borrowers, lenders and the international community concludes the paper.     

Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries

According to reputation models of sovereign debt, the incentives to repay are proportional to the income insurance benefits provided by the access to international markets. This paper, however, documents that private net lending to developing countries exhibits a procyclical or acyclical pattern, contradicting this premise. By contrast, official debt net flows exhibit a countercyclical patter. In addition, the paper shows that (both current and past) defaults are associated with lower net debt flows. The findings suggest that, while reputation models may explain the preferred creditor status enjoyed by official lenders, they cannot account for the presence of sovereign debt markets in developing countries.     

Capital Flows and Economic Growth in the Era of Financial Integration and Crisis, 1990–2010

We investigate the relationship between economic growth and lagged international capital flows, disaggregated into FDI, portfolio investment, equity investment, and short-term debt. We follow about 100 countries during 1990–2010 when emerging markets became more integrated into the international financial system. We look at the relationship both before and after the global crisis. Our study reveals a complex and mixed picture. The relationship between growth and lagged capital flows depends on the type of flows, economic structure, and global growth patterns. We find a large and robust relationship between FDI – both inflows and outflows – and growth. The relationship between growth and equity flows is smaller and less stable. Finally, the relationship between growth and short-term debt is nil before the crisis, and negative during the crisis.     

中国对外金融的政策排序——基于国家对外资产负债表的分析

文章立足于中国国际投资头寸表,以提高中国对外净资产为目标,讨论了中国对外金融开放的政策排序。增加对外负债的前提是提高对外资产的投资收益,这一逻辑决定了人民币汇率形成机制改革、外汇储备管理体系改革、资本流出管理改革是当前最迫切的改革内容,人民币国际化与资本流入管理改革应该在上述改革的基础上推进。     

Private capital flows,stock market and economic growth in developed and developing countries: A comparative analysis

Empirically we investigate how three types of private capital flows could promote economic growth in recipient developed and developing countries. Our focus is on the role of stock markets as a channel through which foreign capital flows could promote growth. The findings reveal that FDI exhibits a positive impact on growth, while both foreign debt and portfolio investment have a negative impact on growth in all sample countries. However, our results indicate that stock markets might be a significant channel or leading institutional factor through which capital flows affect economic growth. The findings provide clear implications that the negative impact of private capital flows can be transformed into a positive one if the stock market development has attained a certain threshold level, regardless of whether it is in developed or developing countries.     

External balance sheets as countercyclical crisis buffers

The external balance sheets of many emerging market countries are distinguished by their holdings of assets primarily in the form of foreign debt and foreign exchange reserves, while their liabilities are predominantly equity, either foreign direct investment or portfolio equity. We investigate the claim that this composition served as a buffer for the emerging markets during the global financial crisis of 2008–09. We use data from a sample of 67 emerging market and advanced economies, and several indicators of the crisis are utilized: GDP growth rates in 2008–09, the occurrence of bank crises and the use of IMF credit. Our results show that those countries that issued FDI liabilities had higher growth rates, fewer bank crises and were less likely to borrow from the IMF. Countries with debt liabilities, on the other hand, had more bank crises and were more likely to use IMF credit. We conclude that the “long debt, short equity” (hold debt assets, issue equity liabilities) strategy of emerging markets did mitigate the effects of the global financial crisis.     

The shift from sterling to the dollar, 1965–76: evidence from Australia and New Zealand

The management of foreign exchange reserves has recently attracted attention from both policy‐makers and historians. Historical research has focussed on the nineteenth century and the interwar period, with less attention to the strategies of smaller countries in the final transition from sterling to the dollar in the post‐1945 period. This article examines the evolution of reserve currency policy from the perspective of Australia and New Zealand in the 1960s and early 1970s. As in the 1930s, economic uncertainty and a shift in global economic power prompted changes in reserves strategy. Patterns of trade and debt and falling confidence in British economic policy prompted a move away from sterling, but the timing and extent of this transition were affected by the fragility of the sterling exchange rate, lack of alternative assets, and continued dependence on the London capital market. The choices for Australia and New Zealand were thus constrained, but they were able to leverage their position as holders of sterling to engage in agreements that provided an exchange rate guarantee for their sterling holdings and continued access to the London capital market. This mitigated the effect of the final global transition from sterling to the dollar while protecting their interests.     

The mother of all sudden stops: capital flows and reversals in Europe, 1919–32

New data documenting European bond issues in major financial centres from 1919 to 1932 show that conditions in international capital markets and not just in borrowing countries are important for explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centres at the end of the 1920s figured importantly in the decline in foreign lending. This article draws parallels with Europe after 2008.     

Learning the fiscal theory of the price level: Some consequences of debt-management policy

This paper examines the consequences of the scale and composition of the public debt in policy regimes in which monetary policy is ‘passive’ and fiscal policy ‘active’. This configuration of policy is argued to be of both historical and contemporary interest, in economies such as the US and Japan. It is shown that higher average levels and moderate average maturities of debt can induce macroeconomic instability for a range of policies specified as simple rules. However, interest-rate pegs combined with active fiscal policies almost always ensure macroeconomic stability. This suggests that in periods where the zero lower bound on nominal interest rates is a relevant constraint on policy design, a switch in fiscal regime is desirable.     

金融市场差异与全球经济失衡

本文利用两国动态一般均衡模型对比分析了在开放经济前后两国利率、资本存量、消费和对外负债的变化,研究了封闭与开放均衡时期金融市场差异在形成两国相应经济变量数量差异过程中的作用,以及金融市场对资本跨境部门间流动和经常账户变动的影响,进而探究金融市场在全球经济失衡中的作用。研究结果表明,金融市场发展水平较高国家在提供无风险资产方面具有绝对优势,它的金融部门较生产部门对国际资本的吸引力更强,而金融市场发展水平较低的国家则恰好相反。由此,金融市场差异通过对资本的配置影响消费与投资,进而使两国经常账户顺逆有别。本文还通过将39个国家2000年后的相关数据进行面板回归分析对这一结论进行了验证。     

Capital income taxation of Swedish households, 1862–2010

This study describes the evolution of capital income taxation, including corporate, dividend, interest, capital gains and wealth taxation, in Sweden between 1862 and 2010. To illustrate the evolution, we present annual time-series data on the marginal effective tax rates on capital income (METR) for a marginal investment financed with new share issues, retained earnings or debt. These data are unique in their consistency, thoroughness and time span. We identify four tax regimes separated by shifts in economic policy. The first regime stretches from 1862 until the Second World War. The METR is low, stable and does not exceed 5% until the First World War, when the METR begins to drift upwards and varies depending on the source of finance. The outbreak of the Second World War establishes the second regime, when the magnitude and variation of the METR sharply increase. The METR peaks during the third regime in the 1970s and 1980s and often exceeds 100%. The 1990–1991 tax reform represents the beginning of the fourth regime, which is characterised by lower and smaller variations in the METR. The METR varies between 15% and 40% at the end of this period.     

International capital flows,debt overhang and volatility

This paper shows how international capital flows originate boom‐bust and sunspot episodes in a neoclassical growth model of a small, open economy. A limit is imposed on how much the economy can borrow from foreign creditors and it is made endogenous by assuming that the debt‐to‐GDP ratio is procyclical. The steady state is locally indeterminate when the credit multiplier is larger than some threshold level, whereas saddle‐point stability prevails when the credit multiplier is low enough. As a consequence, high levels of the credit multiplier lead to both booms followed by busts and sunspot‐driven volatility near the steady state, while, in contrast, low levels ensure monotonic convergence. Compared with saddle‐path equilibria, boom‐bust and sunspot equilibria are associated with both lower welfare and debt overhang, that is, a crowding‐out effect of credit: when the economy is highly leveraged, it uses savings to cut down foreign debt, at the expense of both human and physical investment. Numerical examples show that indeterminacy arises for debt‐to‐GDP ratios that fall within the range of available estimates. Finally, the effects of shocks to the world interest rate on output and consumption are amplified and persistent in the debt overhang regime.     

Audit Regulation and Cost of Equity Capital: Evidence from the PCAOB's International Inspection Regime*

This study investigates the relation between audit regulation and cost of equity capital. There is scant empirical evidence on this relation because changes in audit regulation are frequently accompanied by other major regulatory changes. We exploit variation in the timing of regulatory changes induced by foreign governments' staggered allowance of PCAOB inspections. Using a difference-in-differences design, we find that foreign SEC registrants with auditors from countries that allow PCAOB inspections enjoy a lower cost of capital, relative to foreign SEC registrants with auditors from countries that prohibit inspections. Furthermore, we find that this cost of capital effect is attenuated for companies with higher-quality governance mechanisms. Finally, we document that inspection access is associated with higher-quality analyst forecasts, which suggests that this change in audit regulation reduces information risk for market participants.     

Cross‐Country Evidence on the Importance of Auditor Choice to Corporate Debt Maturity

We examine the importance of Big Four audits in reducing agency costs evident in corporate debt maturity worldwide. Analyzing a large sample of public firms from 42 countries reveals that the fraction of long‐term debt in firms' capital structures rises with the presence of a Big Four auditor, suggesting that higher‐quality audits substitute for short‐term debt for monitoring purposes. In additional analyses, we find that the role that auditor choice plays in debt maturity is concentrated in firms from countries with strong legal institutions governing property rights and creditor rights. Collectively, our research implies that Big Four audits matter to corporate debt maturity, although the impact is isolated in firms operating in countries with more protective legal regimes.     

维护中国外汇储备的价值

目前的世界金融危机,很可能使中国持有的许多债券甚至美国的政府债券连本金都无法收回。外汇储备的境外资金流入,降低了中国国内资金的回报率,控制了一个个中国产业。应采取三项措施：只要中国还没有出现对外贸易逆差,就严格禁止国外资金流入;立即对资本项目下对外资金往来实行集中计划控制,管制资金汇出;对中国外汇储备中外国债务人违约,不还本付息,中国政府可强行以债务人所属国在中国的所有金融权益抵偿中国外汇储备受到的损失。必要时可抛售其相应国家的债券。