Financial Globalization,International Business Cycles and Consumption Risk Sharing*

In spite of two decades of financial globalization, consumption‐based indicators do not seem to signal more international risk sharing. We argue that the fraction of idiosyncratic consumption risk that gets shared among industrialized countries has actually increased considerably over the period 1980–2000 and, in particular, during the 1990s—from around 30 to more than 60 percent. However, standard consumption‐based measures of risk sharing—such as the volatility of consumption conditional on output or international consumption correlations—have been unable to detect this increase because consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialized countries since the 1980s. First, the volatility of output at business‐cycle frequencies has declined by more than has the volatility of permanent fluctuations. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Second, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated.     

Causal Relationship Between the Current Account and Financial Account

We demonstrate that a different causal relationship exists between the current and financial accounts in developed and developing countries. Using the Granger causality test, we clearly determine that the financial account is by and large responsible for the current account in developing countries; instead of financing the current account, the financial account thrusts the current account into an imbalance. In developed countries, however, the current account leads the way, and the financial account, as its name indicates, serves to finance a current account imbalance. This represents a forewarning that countries, which lack a sophisticated financial system to channel funds to proper locations, should not recklessly liberalize capital mobility.The author would like to thank an anonymous referee for valuable suggestions.     

OPTIMAL FOREIGN BORROWING REVISITED

Foreign capital has become increasingly important in financing investment and growth in developing countries. Foreign capital flows, however, can be volatile as is evident from the recent financial crises. It has also recently been noted by researchers that there is little systematic empirical evidence that foreign capital contributes to the economic growth of developing countries. In this context, this paper attempts to theoretically reevaluate the borrowing behaviour of a developing economy that relies on foreign borrowing for its capital formation. In particular, this paper investigates the implications of different lending policies of international financial institutions. It is found that no matter whether the borrowing interest rate increases with the level of foreign debt per capita or with the foreign‐capital/total‐capital ratio, the economy always moves toward the stationary state. The result holds even when the representative agent regards the interest rate given as constant. This implies that foreign borrowing does help economic growth, irrespective of lending policies of international financial institutions.     

低人力资本回报能否驱动产业结构演化升级——兼论国际金融危机对中国制造业自主创新的影响

国际金融危机对发展中转型国家的产业影响主要表现在传统劳动密集型加工制造业面临新的生存危机.这一方面是由于国际金融危机引发的国际贸易保护主义导致外贸出口额大幅缩减,但更为主要的是发展中转型国家传统劳动密集型加工制造业自身所处的国际低端产业价值链所致.实现制造业产业结构演化升级必须依赖自主创新.本文通过实证检验发现人力资本回报过低是目前制约处于转型期的中国产业结构演化升级的主要瓶颈.为此,必须利用国际金融危机淘汰竞争时手的效应,尽快提高国民的人力资本报酬,实现自主创新,推动产业结构演化升级,增强国家先进制造业的产业竞争力.     

Determinants of International Research Collaboration: Evidence from International Co‐Inventions in Asia and Major OECD Countries

International research collaboration has become important in recent years. This paper analyzes what gains drive the expansion of international research collaboration and what costs prevent it, with a special focus on the incidence of international co‐inventions (ICIs) in Asia and major Organisation for Economic Cooperation and Development countries. The major findings are as follows. ICIs become more prevalent in those technology sectors where scientific literature becomes important as prior art, inventor team size increases, and the relative inventor resources of the own country in the world declines. Thus, ICIs allow a country to exploit more efficiently the world stock of new knowledge and to realize the gains from combining diverse sources of knowledge and skills. Moreover, the results of estimating a gravity model centered on the USA and Great Britain suggest that language differences measured by Test of English as a Foreign Language scores matter significantly. The results also suggest that exporting from these two countries are significantly and positively associated with ICIs.     

Does international integration matter for financial development in Africa?

This article analyses the links between international financial and trade integration and financial development in sub-Saharan African (SSA) countries. It is based on a panel data set using methods that tackle slope heterogeneity, cross-sectional dependence and nonstationarity. The results do not point to a general direct robust link between trade and financial integration and financial development in SSA, once we control for other factors such as GDP per capita and inflation. The findings may be due to a number of factors including distortions in domestic financial markets, relatively weak institutions and/or poor financial sector supervision. We find some indication that financial integration is more important for financial development in countries with better institutional quality. Stronger scores in some measures of the quality of banking regulation and supervision are also linked to a positive association between integration and financial development in some of our results. Thus, African policy-makers should be cautious about expectations regarding immediate gains for financial development from greater international integration. Such gains are more likely to occur slowly and through indirect channels.     

Addiction to debt forgiveness in developing countries: Consequences and who gets picked?

We explore whether the expectation of debt forgiveness discourages developing countries from attaining sustainable fiscal independence through improving their tax effort. While the international financial community advises poor countries to improve revenue mobilization, the same international community routinely bails out poor countries that fail to meet their loan repayment obligations, among other reasons as a result of the low tax effort they exercise. The act of bailing out creates an expectation about receiving debt forgiveness time and again in the future. The key prediction of our theoretical framework is that in the presence of debt forgiveness, countries’ tax efforts will decline and more so the higher the intensity of the bailouts. We test this proposition using data for 55 countries from 1995 to 2015. We find that debt forgiveness is significant in lowering tax effort. In addressing the potential of reverse causality, we also find that the international financial community has been more forgiving to countries that exert lower tax effort. These results, which are robust to various specifications, have significant policy implications for donor and recipient countries.     

Currency crises and the real economy: The role of banks

This paper attempts to explain the divergent output effects of currency crises through a very simple and intuitive model that relates the effects of a devaluation not only to the financial fragility of banks, but also to the degree of financial market imperfection. The model shows that countries with higher degrees of financial market imperfection and/or a banking sector whose balance sheets are weak, in terms of having low net worth and high foreign currency exposure, are much more likely to suffer a contraction in the wake of a currency crisis.     

International asset markets and real exchange rate volatility

The real exchange rate is very volatile relative to major macroeconomic aggregates and its correlation with the ratio of domestic over foreign consumption is negative (Backus–Smith puzzle). These two observations constitute a puzzle to standard international macroeconomic theory. This paper develops a two country model with complete asset markets and limited enforcement for international financial contracts that provides a possible explanation of these two puzzles. The model performs better than a standard incomplete markets model with a single non-contingent bond unless very tight borrowing constraints are imposed in the latter. With limited enforcement for both domestic and international financial contracts, the model's asset pricing implications are brought into line with the empirical evidence, albeit at the expense of raising real exchange rate volatility.     

Aggregate demand gap based on a simple structural VAR model

This paper presents aggregate demand gaps for seven OECD countries using structural VAR estimation. These estimates are far more robust than HP-filtered series-typical estimates for GDP-gaps-and demonstrate that both aggregate demand and supply shocks were important in the recent global financial crisis.     

Housing market volatility connectedness among G7 countries

This study investigates international linkages among housing markets in the G7 countries, using the connectedness methodology developed in Diebold and Yilmaz (2012, 2015). We find that volatility connectedness varies over the business cycle, with a surge during the global financial crisis. We also show that the United States and Italy were major net transmitters of housing market volatility shocks to other countries during the global financial crisis and the European debt crisis, respectively.     

Does the Degree of Development Matter in the Impact of Banking Crises on International Trade?

This paper analyzes how a country's degree of economic development affects the impact of banking crises on international trade. To this end, we estimate a gravity model of trade using a sample of 139 countries over the period 1975–2012. Our results show that middle income countries are generally the most negatively affected. In contrast, financial turmoil appears to have less impact on bilateral trade flows among high income countries and, more specially, among low income nations. The level of financial development, contract enforcement, as well as the extent of the use of banking credit within international trade all help to explain our findings.     

Changing International Financial Architecture: Growing Chinese Influence?

It is often said that the 21st century will be the Asian century. Based on population and gross domestic product projections, it certainly looks as if this will be so. Will the existing international financial institutions give more voices, votes, and top positions to Asia? Or will Asia create its own institutions that would rival the old architecture? This present paper argues, first, that China, and possibly India, will be in a position to be so influential that the international financial architecture may have to go through significant changes. Second, the three large crises in the last 20 years have made Asian countries more confident that they can manage capital flows by accumulating large foreign reserves and by adopting sound macrofinancial policies. After 2009, China started to push various initiatives that will amount to creating its own sphere of influence with new regional institutions in the future.     

Taxation of International Private Capital Flows and Securities Transactions in Developing Countries: Do Public Finance Considerations Augment the Macroeconomic Dividends?

This paper examines policies to tax international private capital flows and securities transactions in developing countries. Many recent studies focus on the macroeconomic dividends associated with these policies (namely, their contribution to macroeconomic and financial stability and lengthened investor time horizons). In this paper I explore whether the potential of these policies to raise much‐needed tax revenues in developing countries augments their well‐known macroeconomic benefits. To my knowledge, there has been no effort to examine systematically the public finance issues related to the taxation of international private capital flows or securities transactions in the developing country context. I conclude that the public finance implications of these policies in middle‐income developing countries offers additional support to the macroeconomic case for them. To different degrees, taxation of international private capital flows and securities transactions has the potential to raise modest revenues in middle‐income countries. However, far more important is the potential of these policies to offer valuable macroeconomic dividends on the national level. These national macroeconomic dividends have the potential to bear fruit globally. This is because experiences with financial contagion over the last decade suggest that global financial stability can be enhanced via the promotion of domestic financial stability in developing countries.     

The role of international reserves holding in buffering external shocks

An extended literature analyses the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s. Empirical studies on the self-insurance motive suggest that high-reserves economies are more resilient to financial crises and to international capital inflows volatility. They show also that pre-crisis foreign reserve accumulation explains post-crisis growth. However, some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear, meaning that reserve holding is subject to diminishing returns. This article devotes more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks. For a sample of nine emerging economies, we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap. While a major part of the literature focuses on the global financial crisis, we investigate this question by considering two sub-periods: 1995–2003 and 2004–2013. We implement threshold VAR model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold. We find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time. Hence, the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified.     

Fundamentals versus external shocks: Brazil's growing exposure to currency crises

While financial globalization does not lack theoretical economic merit, the more far-reaching practical consequences of this phenomenon are often not fully appreciated from the vantage point of North America or the European Union. In particular, globalization can make it more difficult for emerging economies to achieve macroeconomic stabilization. This is especially true if the countries in question have chosen the vehicle of pegged exchange rates as an important element of domestic anti-inflation policy. The chief macroeconomic difficulties for emerging economies in a world of volatile capital flows can include a loss of monetary control, a real appreciation of the domestic currency, and a worsening of economic fundamentals leading to damaging currency crises. This paper concentrates on the recent experience of Brazil as illustrative of the abject plight faced by many developing countries attempting to secure economic stabilization against the background of the present globalized international economy.This paper has benefitted from discussion with participants of the Forty-Sixth International Atlantic Economic Conference, Boston, MA, October 8–11, 1998.     

信贷紧缩:全球性的深度解剖

美国次贷危机不仅引起了世界著名金融机构的巨额亏损,而且还导致了发达国家金融市场中漉动性短缺;同时,受通货膨胀的影响,全球绝大部分中央银行开始了周期性的加息政策安排.信贷紧缩已经构成了对全球经济增长的曩重大威胁.为此,加强贴现窗口、拍卖贷款权和引进外部资金已经成为国际范围内主要固家金融管理层的共同选择.     

“金砖四国”股票市场间相依结构分析

金融市场间的相依关系及其结构分析是金融风险测度、资产组合管理等金融理论和实务中的一个重要问题,而基于线性相关系数是难以正确刻画非线性条件下金融资产间的相关结构,特别是尾相依关系。为研究"金砖四国"新兴股票市场间的相依结构,文章构建了一个混合Copula模型,对"金砖四国"股票市场间的相依结构进行建模分析,并将结果与单一阿基米德Copula模型进行了比较,表明混合Copula模型既能保留单一Copula模型的特性,更能灵活、全面地刻画变量间的相依关系。实证研究的结果表明:在样本数据期间,"金砖四国"股票市场间存在非对称相关关系,相依结构上存在差异;中国上证综指波动较为剧烈,与其它三国指数间以下尾相依为主;巴西、印度、俄罗斯三国股指间的相依结构相似,联动相关性相近,并无显著的下尾相依关系。     

International policy coordination mechanism with respect to the moral hazards of financial intermediaries

This paper examines the impact of cross-border financial externalities on moral hazards of the banking sector, and an international policy coordination mechanism to reduce the moral hazards of the banking sector considering cross-border financial externalities. We demonstrate that the moral hazard of banking, such as reducing the monitoring efforts, is aggravated by cross-border financial externalities, while the introduction of an international policy coordination mechanism might reduce the moral hazard caused by these externalities. Moreover, international policy coordination is less likely to be sustained when the policy maker is short-sighted and the banking sector has greater political influence. However, when the distortionary cost of a liquidity aids policy is lower with high administrative transparency, and cross-border financial externality is greater, the coordination mechanism is more likely to be sustained. The results imply that efforts to launch an effective international financial coordination mechanism should start with countries with higher administrative transparency, more political stability, and enhanced financial integration.     

Spillover Effects of the 2008 Financial Crisis in Latin America Stock Markets

This paper examines the transmission of the 2008 US financial crisis to four Latin American stock markets using daily stock returns from 2006 to 2010, analyzing before, during and after the 2008 financial crisis. The empirical evidence presents a financial contagion by showing persistently higher and more volatile pair-wise conditional correlations during the crisis period. This indicates there are structural changes in mean and volatility of the correlation coefficients due to the 2008 financial crisis in Latin American markets. The results here could be useful in international portfolio diversification decision-making in Latin American region. In addition, the predicting the volatility in different markets could be a useful input for reducing financial instability in crisis episodes to policy makers.