Foreign direct investment and trade: The case of Vietnam

By making use of a gravity model, this paper examines the impact of FDI on exports, imports and net export of Vietnam. The empirical analysis presented in this paper is based on a recently released panel dataset involving Vietnam's 19 major trading partners for the period 1990-2007. The paper also considers the impact of FDI on trade during three sub-periods: the pre-Asian financial crisis, the post-Asian financial crisis and during the Asian financial crisis period. The empirical analysis reveals that a complementary relationship exists between FDI and exports and FDI and imports. While the impact of FDI on net-exports is insignificant during the full sample period, a significant positive relationship exists between net-exports and FDI in the post-Asian financial crisis period.     

Can the Islamic bank be an emerging leader? A panel data causality analysis

This short note investigates the ability of Islamic banks (IBs) to play a leading role in revamping and driving conventional banking. To this end, we used a panel of 10 major conventional banks (CBs) and 10 IBs over the period 2006–2013. We applied panel regression tests and carried out a panel causality analysis. Our findings identified no significant causality effect from IBs to CBs and indicated that IBs are not able to play a role of leader.     

Explaining banking stability in Sub-Saharan Africa

The study examined banking stability in Sub-Saharan Africa. The results reveal that banking spread (Net Interest Margin – NIM) is the main determinant of stability and the major means to achieve stability during crises periods. We however find the existence of a threshold effect in NIM.Crises in the banking sector consistently showed to reduce stability. While the results show that high percentage of foreign banks reduce stability, we find foreign banks help stabilize the banking sector in periods of crises. The results show that diversification could also have a positive impact on stability (Z-score) even though this relationship was not robust enough. The results also largely support the competition-fragility view. Particularly, we find that less competition during crises periods can help improve stability. Again, we find evidence for both concentration-stability and concentration-fragility hypotheses depending on the stability measure used. We however find that when large banks in concentrated markets are well regulated, stability could be improved. Weak regulatory environment reduces stability (Z-score) directly and matters during crises periods. Our results are robust to the use of different indicators of stability and estimation methods.     

The euro exchange rate during the European sovereign debt crisis – Dancing to its own tune?

This paper studies the determinants of the euro exchange rate volatility during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility increased in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions.     

Granular institutional investors and global market interdependence

We study the propagation of global investment risk across markets through the granular view of institutional investors. Applying the conditional value-at-risk estimation to micro-level weekly observations of international mutual funds between 2003 and 2011, we find that idiosyncratic shocks to large institutional investors explain both aggregate market risk and cross-market risk interdependence. Conditional on the US capital markets being in financial distress, idiosyncratic shocks to the top 10% largest funds investing in the US explain about 40% of the risk fluctuations in other non-US markets. The findings are also economically and statistically significant for the top largest funds investing in non-US markets, with the effects becoming especially large during the global financial crisis of 2007–09. These results are robust after controlling for common risk factors and applying alternative measures of idiosyncratic shocks.     

Efficiency and productivity changes in Greek airports during the crisis years 2010–2014

The aim of this study is to evaluate the operating efficiency and productivity changes of the Greek airports, during the first years of the severe economic crisis in Greece (2010–2014), by using two methods: Data Envelopment Analysis (DEA) and Malmquist Productivity index (MPI). Findings have shown that, despite the dramatic effects of the economic crisis on the socio-economic life of the country, overall airport efficiency and productivity improved, mainly due to exogenous factors such as international tourism growth. The MPI reveals that over the period of the study, airports have experienced an annual average increase in total factor productivity (TFP) of 0.9% (an increase of 3.6% over the examined period). On examining the components of this productivity change, it becomes evident that this is due to the combination of both positive (a slight progress) annual average technology change (0.5%) and technical efficiency change (0.4%). The results also indicate that 65.8% of airports have an increase in average TFP during the period 2010–2014, ranging between 0.4% and 20%. However, as Greek airports operate at poor levels of efficiency, there is still considerable space for improvements in most of the airports.     

Sentiment,mood and outbound tourism demand

We investigate spillover effects from sentiment and mood shocks on US outbound tourism demand from 1996 until 2013. We use the Index of Consumer Sentiment and Economic Policy Uncertainty Index as proxies for sentiment and the S&P500 as a proxy for mood. We find a moderate to high interrelationship among sentiment, mood and outbound tourism demand. More importantly, sentiment and mood indicators are net transmitters of spillover shocks to outbound tourism demand. The magnitude of spillover effects sourced by sentiment and mood is time-varying and depends on certain socio-economic and environmental events. Our results have important implications for policymakers and travel agents in their efforts to predict tourism arrivals from key origin countries and to plan their tourism strategy.     

Does easing monetary policy increase financial instability?

This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of US monetary and regulatory policy in the run up to the Subprime mortgage crisis. There are two main results. First, interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available instrument, monetary policy faces a trade-off between macroeconomic and financial stability. This trade off is both qualitative and quantitative in response to contractionary shocks, while it is only quantitative in response to positive shocks. We show that a second instrument, such as a Pigouvian tax on credit to households on the demand side of the market, is needed to restore efficiency in the economy when both frictions are at work.     

Currency crisis early warning systems: Why they should be dynamic

Traditionally, financial crisis Early Warning Systems (EWSs) have relied on macroeconomic leading indicators when forecasting the occurrence of such events. This paper extends such discrete-choice EWSs by taking the persistence of the crisis phenomenon into account. The dynamic logit EWS is estimated using an exact maximum likelihood estimation method in both a country-by-country and a panel framework. The forecasting abilities of this model are then scrutinized using an evaluation methodology which was designed recently, specifically for EWSs. When used for predicting currency crises for 16 countries, this new EWS turns out to exhibit significantly better predictive abilities than the existing static one, both in- and out-of-sample, thus supporting the use of dynamic specifications for EWSs for financial crises.     

The effect of banking market structure on the lending channel: Evidence from emerging markets

This paper analyses the extent to which the level of bank competition influences monetary policy transmission. Using a large panel dataset of 978 banks from 55 countries, and employing the Lerner index model as a measure of market structure, our results show that an increase in banking sector competition weakens the effectiveness of monetary policy on bank lending. The findings are robust to a broad array of sensitivity checks including control of alternative measurements of the Lerner index, different samples and different methodological specifications. By extension, these results have important policy implications for regulators in assessing the effectiveness of monetary policy transmission mechanisms.