Policy rate pass-through and the adjustment of retail interest rates: Empirical evidence from Malaysian financial institutions

The paper examines the interest rate pass-through from money market rates to various retail rates in Malaysia within the framework of an error-correction model. We estimate the short- and long-run interest rate pass-through and analyse the asymmetric behaviour of financial institutions under different monetary regimes. The results show that both deposit and lending rate pass-throughs are incomplete. However, pass-through and speed of adjustment vary across financial institutions and retail rates. This analysis also shows that interest rate adjustments are asymmetric, with more significant adjustments taking place under monetary easing than under monetary tightening. These results provide support for the existence of the interest rate channel of monetary policy in Malaysia. There is thus a need to conduct effective monetary operations to support efficient monetary transmission in Malaysia.     

Lessons of the crisis for emerging markets

This paper analyzes the impact of the global financial crisis on emerging markets. It argues that the crisis will have enduring implications for policy toward the development and liberalization of financial markets. In particular, emerging markets will rely (even) less on external finance and adopt a less permissive approach to foreign bank presence. In contrast, the crisis will have a much more limited impact on other aspects of globalization. More controversially, the paper argues that the crisis is unlikely to have a major impact on the structure of the international monetary system.     

The dynamic effects of shocks to labour markets: evidence from OECD countries

This paper uses a set of plausible long-run identifying restrictionson a three-variable system, including output growth, real wagegrowth, and the unemployment rate, to isolate three independentstructural shocks which drive fluctuations in those variablesin a sample of 16 OECD countries during 1950-96. These shocksare interpreted as aggregate demand, productivity, and laboursupply disturbances. As a by-product of the previous analysis,the cyclical behaviour of real wages in response to a demandshock is re-examined and two indices of real wage rigidity arederived.     

Exchange-rate regimes for emerging markets: moral hazard and international overborrowing

This paper investigates the role of the exchange-rate regimein a simple Fisherian model of the overborrowing syndrome. Wheredomestic banks are subject to moral hazard, the choice of exchange-rateregime may have important implications for the macroeconomicstability of the economy. Banks that enjoy government guaranteeshave an incentive to increase foreign borrowing and incur foreign-exchangerisks that are underwritten by the deposit insurance system.In the absence of capital controls, this increases the magnitudeof overborrowing and leaves the economy both more vulnerableto speculative attack and more exposed to the real economicconsequences of such an attack. While 'bad' exchange-rate pegswill tend to exacerbate the problem of overborrowing in emergingmarkets, it is unclear that flexible exchange rate always dominatesfixed exchange rates. A 'good fix' - one that is credible andclose to purchasing power parity - may reduce the 'super riskpremium' in domestic interest rates and thereby narrow the marginof temptation for banks to overborrow internationally. Contraryto the current consensus regarding the lessons that should bedrawn from the Asian crisis, a good fix may better stabilizethe domestic economy while limiting moral hazard in the bankingsystem.     

Financial markets and the current account: emerging Europe versus emerging Asia

Financial globalisation has been associated with divergent current account patterns in emerging markets. In this paper we test for the relevance of financial market characteristics in explaining different current account patterns in emerging Europe and emerging Asia. We find that better developed and more integrated financial markets increase emerging markets’ ability to borrow abroad. The degree of financial integration within the convergence clubs as well as the extent of reserve accumulation are found to be the most significant factors to explain divergent current account patterns in emerging Europe and emerging Asia.     

The role of banks in financial integration: evidence from new EU members

EU enlargement involves the simultaneous liberalisation of goods and financial markets. While the issue of free trade in capital versus goods has frequently been the subject of study in international economics, the emphasis has typically been on physical capital (machines etc) rather than financial capital. This paper considers this distinction in a world with asymmetric information, moral hazard and hence credit rationing, and explores the resulting ambiguous theoretical predictions via an econometric analysis of the entry of the Central and Eastern European Countries to the EU.     

Contagion in the stock markets: The Asian financial crisis revisited

This paper presents empirical evidence of herding contagion in the stock markets during the 1997 Asian financial crisis, above and beyond macroeconomic fundamental driven co-movements. We analyze the cross-country time-varying correlation coefficients among the stock prices for the countries of Thailand, Malaysia, Indonesia, Korea, and the Philippines, between crisis and tranquil periods. Macromodels are constructed and implemented to capture the pure contagion effects on the markets. After controlling for the economic fundamentals for the five countries, the paper finds strong evidence of herding contagion.     

Prospects for integration of financial markets in CIS countries

This article deals with macroeconomic preconditions for financial integration and strengthening the role of the ruble in the post-Soviet space. Particular attention is paid to the developmental priorities of stock markets and the interaction of the CIS exchanges. The integration of the financial infrastructure, the implementation of cross-border payments in national currencies, stock market development, and the growth of investment activity in CIS countries are important areas of integration processes and dealing with the crisis.     

The integration of National financial markets: A review of theory and findings

Zusammenfassung Die Integration nationaler Finanzm?rkte. Ein überblick über Theorie und Beobachtungen. — Dieser Aufsatz bewertet das Ausma der monet?ren und finanziellen Integration unter zwei Aspekten. In den beiden ersten Abschnitten werden Studien analysiert, die sich mit der empirischen Bedeutung von Transaktionskosten und Wechselkursrisiken besch?ftigen, Faktoren, die nationale Geldm?rkte segmentieren k?nnen. In den letzten beiden Abschnitten wird dagegen untersucht, ob die Studien, die Zins?nderungen, Aktienkurse und Kapitalstr?me einbeziehen, st?rker mit der Annahme konsistent sind, da\ die Kapitalm?rkte integriert sind, oder mit der Annahme, da\ sie segmentiert sind. Weder die Studien über das Ausma\ der Kapitalmarktintegration noch die Studien über Transaktionskosten und Wechselkursrisiken führen zu Ergebnissen, die mit der Annahme vereinbar sind, inl?ndische und ausl?ndische Aktiva seien vollst?ndig substituierbar. Keine stützt die Behauptung, es g?be keinen Raum für monet?re Unabh?ngigkeit. Alle sind mit der Ansicht vereinbar, da\ die M?rkte verbunden und ?hnlichen Kr?ften unterworfen sind, aber diese Folgerung schlie\t nicht aus, da\ es Raum für nationale W?hrungspolitik gibt. Die Folgerung, da\ es bis jetzt noch keine Beobachtungen gibt, die mit der Small-country-Annahme konsistent sind, bedeutet nicht, da\ es keine Gründe für eine monet?re Integration gibt, aber sie deutet darauf hin, da\ eine ?konomische Begründung für die monet?re Integration weitgehend mit den Kosten argumentieren mu\, die durch eine nationale Segmentierung der Kapitalm?rkte entstehen.

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Résumé L’intégration des marchés nationaux financiers: une revue de la théorie et des résultats. — Cet article évalue le cadre de l’intégration monétaire et financière de deux points de vue. Les deux premières sections considèrent les études qui s’occupent de la signification empirique de deux facteurs, les frais de transaction et la risque de taux de change, qui pourraient segmenter les marchés nationaux d’argent. Les dernières deux sections, en contraste, considèrent si les études qui incluent les changes des taux d’intérêt, les prix des obligations et les flux des capitaux, sont presque plus consistantes avec la proposition que les marchés nationaux des capitaux sont intégrés ou avec la proposition que les marchés des capitaux sont segmentés. Ni les études sur le cadre de l’intégration de marché financier ni les études sur les frais de transaction et la risque de taux de change ne conduisent aux conclusions qui sont comparables avec la supposition de la substitutionalité parfaite entre les actifs locaux et étrangers. Aucune ne supporte la proposition qu’il n’y a pas de place pour l’indépendance monétaire. Toutes les études sont consistantes avec la vue que les marchés sont reliés et soumis aux forces similaires mais cette conclusion ne dénie pas qu’il y aurait quelque place pour une politique monétaire nationale. La conclusion qu’il n’y a pas encore une évidence étant consistante avec la supposition de petit-pays ne veut pas dire qu’il n’y a pas des arguments pour l’intégration monétaire mais elle suggère, selon une argumentation économique, qu’ils probablement basent considérablement sur les frais de segmenter les marchés nationaux des capitaux.

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Resumen La integración de mercados financieros nacionales: una revisión de la teoría y los resultados. — Este artículo evalúa el ámbito de la integración monetaria y financiera desde dos puntos de vista. Las primeras dos secciones consideran estudios que se ocupan de la significación empírica de los factores, costos de transacción y riesgos cambiarios, que pueden segmentar los mercados monetarios nacionales. Las últimas dos secciones consideran en contraste, si los estudios que envuelven cambios en las tasas de interés, precios de equidad y flujos de capital son màs cercanamente consistentes con la proposición que los mercados de capitales nacionales están integrados o con la proposición que ellos están segmentados. Ni los estudios del ámbito de integración de mercados de capital ni los estudios de costos de transacción y riesgos cambiarios llevan a conclusiones que son compatibles con el supuesto de la perfecta sustituibilidad entre activos domésticos y extranjeros. Ninguno da apoyo a la proposición que no hay lugar para una independencia monetaria. Todos son consistentes con la visión que los mercados están conectados y sujetos a fuerzas similares, pero esta conclusión no niega que puede haber algún márgen para una política monetaria nacional. Concluir que todavía no hay ninguna evidencia consistente con el supuesto del país peque?o no significa que no haya un caso para la integración monetaria, sino que sugiere, que si el caso ha de hacerse sobre bases económicas, con gran probabilidad dependerá fuertemente de Ios costos de segmentar los mercados de capitales nacionales.

     

Innovation dynamics and financial markets in developed countries from a self-organization perspective

The paper examines the relation between economic dynamics and financial market development in industrial countries. It shows that innovation-based development alone has a long-term future. Investment in education and research is translated by the financial market into innovations and technologies. The level of development of the financial market determines the dynamics and competitive of the economy.     

The effect of financial deepening on inequality: Some international evidence

This paper uses an unbalanced panel data analysis of 126 countries for the period 1963–2002 to analyze the effects of financial deepening on inequality. The principal findings can be summarized as follows: (1) financial deepening reduces inequality; (2) economic growth reduces the equalizing effects of financial deepening; (3) inequality increases with an increase in trade openness; (4) the disequalizing effects of trade openness decrease as a country grows; (5) financial deepening and trade openness therefore have asymmetric effects on inequality; and (6) these effects are robust to the choice of financial variables, inequality measures, and model specifications.     

Observations on the conditionality of international financial institutions

Conditionality, the terms imposed by international financial institutions on borrowing countries, has been regarded by critics as being too inflexible and focussing too narrowly on demand forces and monetary policy instruments. The major intent of the paper, however, is to shift the discussion of conditionality to its functions in relation to private international lending. Conditionality provides information to lenders and certification of borrowers which, by decreasing uncertainty, may increase the quantities and reduce the costs of private lending. Yet restrictions on total and/or foreign credit may also reduce competition. These are examples of neglected issues of conditionality which deserve more attention.     

Factors affecting bank loan quality: a panel analysis of emerging markets

This study investigates the factors affecting the loan quality of banking sector in seventeen emerging and developing markets using quarterly panel dataset covering period of 2010–2019 and utilising feasible generalised least square methodology. Our empirical analysis suggests that inflation and lending rates negatively affect the banks’ loan quality measured by non-performing loans. On the contrary, economic growth and capital adequacy show a positive impact on banks’ loan quality. The inclusion of the ratio of net open position in foreign exchange to capital and its’ lagged values, as an additional factor, has marked out this research from other studies. Our results reveal that the ratio has a significant negative impact on loan quality in banking. This finding, as it was also seen in Asian crises of 1997, indicates that the higher the ratio net open position in foreign exchange to capital cause moral hazard problem leading to the higher non-performing loans in banking sectors.

     

The micro-economic effects of financial market structure: evidence from 20th century North American steel firms

This paper analyzes the historical relationship between domestic financial institutions, firm level financing decisions, and average capital costs in a sample of US and Canadian firms from a large and economically important manufacturing industry—primary steel production. We find that national capital market characteristics and firm specific characteristics were important determinants of 20th century US and Canadian steel firms’ financing decisions. We also show that, despite source-specific price differences, average capital costs were approximately equal in the two countries, and the firms’ financing decisions were important determinants of these average capital costs. We conclude that firms structured their balance sheets in an effort to exploit the idiosyncratic features of their domestic financial institutions, and thereby, minimize their average capital costs.     

Broadening access to land markets: Financing emerging farmers in South Africa

This article reports on a pilot survey of commercial farms acquired by disadvantaged people in the province of Kwazulu‐Natal, and describes a recent financial strategy to improve access to land. The survey tested a sampling technique to gather information about the rate of land redistribution, the source of terms and conditions of loans used to finance land, and the nature of property rights, managerial arrangements and land use patterns on farms acquired by disadvantaged people. It was estimated that only 0,09 per cent of the farmland available for redistribution was transferred to disadvantaged people during 1995. This low rate of transfer was attributed largely to legislation regulating the subdivision of farmland, and liquidity problems created by traditional mortgage loans. Recent experiments involving mortgage loans with graduated repayment schedules have helped to address the cashflow problem. However, these financial innovations, funded largely by the private sector, are not widely available and their impact is constrained by the Subdivision of Agricultural Land Act. It is recommended that the government amend or scrap this Act, and include financial strategies used by the private sector in its own range of land redistribution programmes.     

The financial integration of China: New evidence on temporally aggregated data for the A-share market

In the presence of de jure capital account inconvertibility, but in spite of high trade openness of China, existing empirical work, using daily data, has not found any evidence of international financial integration of its A-share market. In this paper we shed new light on this issue, examining a long sample of active trading, over 1992–2005, within the framework of a regime-switching error correction model, with a major focus on the role of temporal aggregation. With end-of-week closing prices we do not find any long run relationship between the Shanghai market and either the New York or the Hong Kong market, thus replicating previous findings. However, with weekly-averaged indices, up to late 1996, the Shanghai index was cointegrated with the S&P 500. Subsequently, this relationship broke down and a long run relationship with the Hang Seng index gradually arose. Information flows, as well as the prospects of de jure financial opening, and the growing awareness of valuation concepts among Chinese domestic investors, in the presence of identical fundamentals (multiple listing of Mainland firms), help explain the evidence of long run financial integration in spite of capital controls.