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Abstract Recent global imbalances have changed the way international capital flows are shared among developed and developing countries. In the new environment, the U.S., a former lender, has become a [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jet.2010.01.008 Byline: Martin Bodenstein Keywords: International business cycle; Multiple equilibria; Real exchange rate Abstract: The empirical literature provides a wide range of estimates for trade elasticities at the aggregate level. Recent contributions in international macroeconomics suggest that low (implied) values of the trade elasticity may play an important role in understanding the disconnect between international prices and real variables. However, a standard model of the international business cycle displays multiple locally isolated equilibria if the trade is sufficiently low. The main contribution of this paper is to compute and characterize some dynamic properties of these equilibria. In simulations, the presence of multiple equilibria is shown to imply a volatile and persistent real exchange rate. Author Affiliation: Board of Governors of the Federal Reserve System, Division of International Finance, 20th Street and Constitution Avenue NW, Washington, DC 20551, USA Article History: Received 9 August 2006; Revised 9 August 2009; Accepted 23 December 2009 Article Note: (footnote) [star] I thank Roc Armenter, Christopher Gust, Luca Guerrieri, Jonathan Heathcote, and Ricardo Nunes for valuable comments and discussion. I am particularly grateful to an anonymous associate editor whose suggestions greatly improved this paper. The views expressed in this paper are solely the responsibility of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.

For the first time in modern history, leading emerging nations have a real chance to shape the evolution of the world economy. Key actors in this scenario are the BRIC [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmacro.2008.06.003 Byline: Karl T. Whelan Abstract: This paper presents some new results on the effects of technology shocks on hours worked based on structural VAR specifications containing various measures of US productivity growth and hours. These specifications can produce different answers depending on which sector of the economy is examined, which transformation of hours worked is used, and on how many lags are chosen for the VAR. However, it is shown that the results from the stochastic trend specification used by Gali [Gali, Jordi., 1999. Technology, employment and the business cycle: do technology shocks explain aggregate fluctuations. American Economic Review, 89, 249-271] are robust across changes in data definition and lag length, while the results from the per capita hours specification of Christiano, Eichenbaum, and Vigfusson [Christiano, Lawrence., Eichenbaum, M., Vigfusson, R., 2003. What happens after a technology shock? Federal Reserve Board, International Finance Discussion Paper, 2003, p. 768] are not. These results provide support for Gali's findings that technology shocks have a negative impact effect on hours worked and that these shocks play a limited role in generating the business cycle. Author Affiliation: University College Dublin, School of Economics, Dublin 4, Ireland Article History: Received 13 June 2007; Accepted 18 June 2008

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2008.08.007 Byline: Christopher M. Meissner (a), Nienke Oomes (b) Abstract: What determines the currency to which countries peg or 'anchor' their exchange rate? Data for over 100 countries between 1980 and 1998 reveal trade network externalities are a key determinant of anchor currency choice. This implies currency anchoring strategies could be sub-optimal. Hence, certain currencies could be oversubscribed as anchors, and changes in anchor choices of a small number of countries can have a large and rapid impact on the international monetary system. Other factors related to anchor choice include the symmetry of output co-movements and the currency denomination of liabilities. Author Affiliation: (a) Department of Economics, University of California, Davis, One Shields Avenue, Davis, CA 95616, USA (b) International Monetary Fund, 700 19.sup.th Street NW, Washington, DC 20431, USA

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jdeveco.2008.04.001 Byline: Elias Papaioannou Keywords: Capital flows; Institutions; Law and finance; Politics; Banks; International finance Abstract: This paper uses a large panel of financial flow data from banks to assess how institutions affect international lending. First, employing a time varying composite institutional quality index in a fixed-effects framework, the paper shows that institutional improvements are followed by significant increases in international finance. Second, cross-sectional models also show a strong effect of initial levels of institutional quality on future bank lending. Third, instrumental variable estimates further show that the historically predetermined component of institutional development is also a significant correlate of international bank inflows. The results thus suggest that institutional underdeveloped can explain a significant part of Lucas [Lucas, Robert E. 1990. 'Why Doesn't Capital Flow from Rich to Poor Countries?' American Economic Review (Papers and Proceedings), 80 (2): 92-96. 1990] paradox of why doesn't capital flow from rich to poor countries. The analysis also does a first-step towards understanding which institutional features affect international banking. Author Affiliation: Dartmouth College, Economics Department, 311 Rockefeller Hall, Hanover, HN 03755, USA Article History: Received 7 February 2007; Revised 1 April 2008; Accepted 4 April 2008 Article Note: (footnote) [star] The paper builds on Chapter 3 of my London Business School doctoral thesis. I want to express my gratitude to my advisor Richard Portes and Antonio Ciccone and Julian Franks for detailed comments and encouragement. This research started while I was a graduate intern at the Capital Markets and Financial Structure Division of the European Central Bank. A special thanks goes to Jesper Berg and Annalisa Ferrando. I also received valuable feedback from Francesco Caselli, Simon Commander, Nicolas Coeurdacier, Wouter Denhaan, Charles Engel, Vitor Gaspar, Christos Genakos, Francisco Gomes, Florencio Lopez-de-Silanes, Steven Ongena, Charlotte Ostergaard, Enrico Perotti, Morten Ravn, Stefano Rossi, Gregorios Siourounis, and seminar participants at various conferences. Bernadette Lauro offered great assistance with the data. I also thank an anonymous referee and Gordon Hanson (the Editor) for valuable suggestions that significantly improved the paper's context. All errors are mine.

For many years the analysis of IMF conditionality overlooked the extent to which it was implemented. However, more recently, increasing attention has been paid to implementation. Theoretical contributions have focused on the importance of special interest groups, but empirical evidence has failed to provide compelling support for the theory. Indeed, empirical studies have reported mixed results that sometimes seem to be conflicting. This paper identifies a range of economic, political and institutional factors that may, in principle, influence implementation. Focusing in particular on the irreversible interruption of IMF programs, it tests an econometric model designed to capture these influences 'over 1992-2004' exploiting improved sources of data. The results suggest that significant determinants of interruption are trade openness, the existence of veto players and the amount of resources committed by the Fund. The paper interprets the results, tests their robustness, briefly examines cases that initially appear to be inconsistent with the overall findings and discusses the implications of the results for policy. Key words--IMF, implementation

A unique long-run dataset of regulatory constraints on capital account openness is used to explain global stock market correlations. It is argued that changes in the co-movement of stock indices are not random and are driven by greater freedom to move funds internationally.

A major factor that drives cross-border financial integration has been the pace of financial innovation as well as the creation of the euro. Cross-country variation in financial globalization and forecasts in the global financial integration are discussed.

This paper analyzes the impact of corporate international diversification (CID) on domestic and world betas through the notion of psychic distance between countries. Using a large European sample of 598 firms, out findings indicate that this dimension significantly influences corporate risk exposure. By isolating three additive components of the Foreign Sales Ratio (FSR), we obtain the most significant results by geographically partitioning the sample, provided that firms are further classified by sector. Our framework sheds new light on how the CID of firms belonging to Sweden and the United Kingdom, as well as the Consumer Cyclical, Consumer Non-Cyclical and Information Technology sectors, sometimes can reduce and sometimes increase firm betas. JEL classification: F23; F30; G12; G15; G31 Keywords: International Finance; Capital market-asset; Valuation; International business; Multinational corporation; Risk management

A stable international monetary system has emerged since the early 1990s. A large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks. These countries place few restrictions on capital mobility and allow their exchange rates to float. The domestic focus of monetary policy in these countries does not have any obvious international cost. Inflation targeters have lower exchange rate volatility and less frequent 'sudden stops' of capital flows than similar countries that do not target inflation. Inflation targeting countries also do not have current accounts or international reserves that look different from other countries. This system was not planned and does not rely on international coordination. There is no role for a center country, the IMF, or gold. It is durable; in contrast to other monetary regimes, no country has been forced to abandon an inflation-targeting regime. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed. JEL classification: F02; F33 Keywords: Fixed; Financial; Exchange; Rate; Capital; Controls; Durable; Regime

Gravity models have been widely used to describe bilateral trade in goods. Portes and Rey [Portes, R., Rey, H., 2005. The Determinants of Cross-Border Equity Flows. Journal of Intemational Economics, 65(2), 269-296.] applied this framework to cross-border equity flows and found that distance, which proxies information asymmetries, is a surprisingly very large barrier to cross-border asset trade. We adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework. Providing different instruments for both endogenous variables, we show that a 10% increase in bilateral trade raises bilateral asset holdings by 6% to 7%. The reverse causality is also significant, albeit smaller. Controlling for trade, the impact of distance on asset holdings is drastically reduced. Keywords: Gravity models; International finance; International trade; Simultaneous equations JEL classification: F36; F10; C31

Implications of external finance constraints on large investment projects as a function of time are examined. A fixed capital-stock adjustment costs model is used to study investment hazard of firm due to external finance constraints.

This paper considers a developing nation that faces a foreign exchange shortage and hence its demand for foreign goods is limited both by its income and its foreign exchange balance. Availability of international credit relaxes the second constraint. We develop a simple model of strategic interaction between lending institutions and firms, and show that the availability of international credit at concessionary rates can leave the borrowing nation worse off than if it had to borrow money at higher market rates. This 'paradox of benevolence' is then used to motivate a discussion of policies pertaining to international lending and the Southern government's method of rationing out foreign exchange to the importers. JEL classification: L10; F30; O10 Keywords: Bank-firm interaction; Foreign aid; International credit; Welfare comparison

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2006.01.001 Byline: James R. Lothian Abstract: The focus of this paper is on capital flows from developed to less developed countries and in particular on the question of why such flows are not much larger. I first outline the theoretical arguments with regard to such flows and then go on to review the historical evidence on international financial integration more generally. I then turn to the related literature on economic development, which over the past decade has shifted its emphasis from technology and capital accumulation to the underlying institutional factors that affect investment. I present evidence that such factors also affect to rich-to-poor country capital flows. Good policies - pursuit of price stability, fewer direct interventions and sound institutional structures - are accompanied by higher capital flows and bad policies by lower capital flows. Author Affiliation: Schools of Business, Fordham University, 113 West 60th Street, New York, NY 10023, USA Article Note: (footnote) [star] A Keynote Address to the Conference on Emerging Markets Finance London, May 5-6, 2005., [star][star] Sponsored by the Cass Business School, the Journal of International Money and Finance, the Frank J. Petrilli Center for Research in International Finance, the Economic and Social Research Council and the European Bank of Reconstruction and Development.

A study analyzing the effect of global taxes on regular development aid is presented.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2005.07.005 Byline: Daniel Kaufmann (a), Gil Mehrez (b), Sergio L. Schmukler (a) Abstract: This paper investigates whether resident enterprises' managers have an informational advantage about the countries where they work. We test this informational advantage hypothesis by using a unique dataset, the Global Competitiveness Survey. The findings suggest that local managers do have valuable information about the country where they reside. Local managers' responses improve conventional estimates of future volatility and changes in the exchange rate, which are based on economic fundamentals. These findings provide support to the theories that claim that asymmetric information is present in international financial markets and is important to understand financial crises. Author Affiliation: (a) The World Bank, 1818 H Street N.W., Washington, DC 20433, USA (b) International Monetary Fund, 700 19th Street N.W., Washington, DC 20431, USA

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2005.04.002 Byline: Claudia M. Buch (a), Joerg Doepke (b), Christian Pierdzioch (c) Abstract: This paper discusses whether the integration of international financial markets affects business cycle volatility. In the framework of a new open economy macro-model, we show that the link between financial openness and business cycle volatility depends on the nature of the underlying shock. Empirical evidence supports this conclusion. Our results also show that the link between business cycle volatility and financial openness has not been stable over time. Author Affiliation: (a) University of Tuebingen, Mohlstrasse 36, 72074 Tuebingen, Germany (b) Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60006 Frankfurt a.M., Germany (c) Saarland University, Im Stadtwald, 66123 Saarbrucken, Germany

The impact of dollar exchange for euro, on global economy, is examined.

The viability of global currency and its economic advantages are examined.

Byline: Freddy Van den Spiegel (1) Keywords: Dollar; reserve currency; international monetary system Abstract: The actual role of the US Dollar as the international reserve currency is an essential part of a financial architecture, which was conceived after World War II. Since then the world-wide economic, financial and political landscape has fundamentally changed. The article describes through which mechanisms the actual financial architecture will be challenged and what will be the consequences and occasional outcome. Author Affiliation: (1) Chief Economist Fortis Professor, Financial Markets and Financial Management, Free University Brussel, Pleinlaan 2, 1050, Brussel, Belgien Article History: Registration Date: 01/01/2004

The economic performance of developing countries in the 15-year period is analyzed. The role of dollars in the evolution of international financial structure is studied.

Byline: Hali Edison (1), Ronald MacDonald (2) Keywords: exchange rate mechanism; credibility; interest rate linkages; cointegration Abstract: Recent proposals for reforming the international monetary system often focus on a target zone arrangement for the dollar, euro and yen. Theoretical research suggests that a credible target zone confers on a participant some short-run discretion in the setting of interest rates, and recent empirical research suggests that this was indeed the case for the Classical gold standard, perhaps the best example of a credible target zone. In this paper we examine the extent of short-run interest rate discretion (SRID) conferred by another experiment with target zones, namely the ERM experience. Amongst our findings is the result that countries that had a credible commitment to the ERM did indeed have SRID. Author Affiliation: (1) Research Department, International Monetary Fund, Washington, DC, 20431, USA (2) Department of Economics, University of Strathclyde, Glasgow, G41 4PZ, UK Article History: Registration Date: 07/10/2004

The reform of the international financial system with a focus on the role of the Internationl Monetary Fund (IMF) is discussed. It concludes with an appraisal of the step that should be achieved to make the international financial system safer.

The factors that will influence the effectiveness of conditionality and International Monetary fund (IMF) programmes as signalling devices are identified. It is argued that the key to strengthening the signalling role of conditionality is improving the implementation of the programmes the Fund supports.

The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption-real exchange rate anomaly, is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.

The crises of the 1990s convinced many observers that intermediate exchange rate arrangements are fragile and crisis prone. But calling for emerging markets to abandon the exchange rate as an anchor for policy compels those issuing the call to offer an alternative. In this article, the author assesses whether inflation targeting is a viable alternative for emerging markets. He focuses on distinctive characteristics of the policy environment that bear on its feasibility: these include the speed of pass-through, the difficulty of forecasting inflation, imperfect credibility, and liability dollarization. The author concludes that none of these complications renders inflation targeting infeasible, although a number render it more complex.

Abstract: This paper extends prior research by jointly incorporating market indices, interest rates (both short- and long-term) and spot cross exchange rates, to investigate the relationship among seven Pacific-Rim (Australia, [...]

This article discusses the history and the future of the International Monetary Fund in light of debates over its role in international finance since the economic crises in East Asia, Russia and Brazil in the late 1990s, and compares its role as a short-term finance institution to the long-term development role of the World Bank and how these two institutions have overlapped since the Fund began imposing policy based standards on loans in the early 1980s. The IMF developed out of the 1944 Bretton Woods conference on the management of economic markets and monetary policies following the global recession of the 1930s and was created as a stabilization fund to provide countries with short-to-medium term financial assistance during periods of balance of payment deficit, however, the Fund's role increased to managing the Bretton Woods' systems during the 1950s and 1960s, while failing to prevent their collapse in 1971-1973; the author concludes that the Fund should be retained but reformed, including the need for more transparency and more accountability, a clearer delineation between the Fund and the World Bank should exist with the IMF withdrawing from long-term lending in developing countries, and the IMF should also encouraging countries to avoid pegged exchange rates.

In this article, I evaluate specialized forms of intelligence gathering and judgment determination at the heart of contemporary global governance and their connection to the debate about the reform of [...]

This article examines the increasing problems of 20th century international debt, which began with the Bolshevik's repudiation of the Tsar's debt and inter-allied arguments over unpaid debts arising from the First World War and worsened with commercial lending disasters of the 1920s and 1970s-1980s. The author discusses perspectives of debt, including the increasingly unequal distribution of global wealth, the increase in external debt since the 1970s, the limits of convergence, the role of creditor nations, the risky business of lending, and how world-wide economic shocks were created through debtor abuse and lender imprudence.

Byline: Antonio Casas-Gonzalez (1) Keywords: international financial architecture Abstract: Recent economic crises have affected different countries in the last decade. Crises shook not only countries that were directly affected but also other more developed countries. Part of the risk of crises derives from the considerable negative effects imposed on economies by the volatility and reversibility of short-term capital flow. International financial reforms should consider (1) regulation and supervision, (2) statistical standards, (3) the goods and services trade, (4) liquidity and lender of last resort, (5) unified action, (6) private-sector involvement, and (7) other contingency measures. The Venezuelan experience suggests some other domestic reforms, but reforming the international financial system, in the direction of globalization, has to be the principle goal of international organizations. Author Affiliation: (1) Banco Central de Venezuela, Caracas Article History: Registration Date: 09/10/2004

Byline: Robert Z. Aliber (1) Keywords: Bretton Woods; exchange-rate regimes; capital flows; market failure; international monetary system; international financial architecture Abstract: Exchange-rate history can be divided into two periods: the Bretton Woods period and the period of floating exchange rates since the early 1970s. In this second period, financial crises and the roles played by institutions, rules, and commitments in international finance have been of central importance. Many proposals for changing the international financial architecture have been presented to reduce the likelihood of crises, but the source of the problem is in variable capital flows and the floating exchange-rate system. Based on six major financial crises of the last 25 years, the wide range in movements in the exchange rate, which might also be inferred from differences in national inflation rates, reflects changes in the ex-ante cross-border capital flows. As long as currencies are floating, economic conditions among countries are likely to be more variable and diverse: the greater variability in economic conditions suggests greater variability in capital flows. Author Affiliation: (1) University of Chicago, Chicago, Illinois Article History: Registration Date: 09/10/2004

Previous findings of long-run purchasing power parity come mainly from data for industrial countries, raising the issue of whether the results suffer sample-selection bias and exaggerate the general relevance of parity reversion. This study uncovers substantial cross-country heterogeneity in the persistence of deviations from parity. The results show that it is more likely, rather than less likely, to find parity reversion for developing countries than industrial countries. Although some persistence variations may partly reflect country differences in structural characteristics such as inflation experience and government spending, a considerable portion of those variations seems unaccounted for.

Nominal assets play a major role in international financial markets, while trade in indexed bonds is limited. As a result, agents are exposed to both price and exchange rate uncertainty. Nonetheless, previous research on net capital flows has assumed the presence of a risk-free vehicle to intertemporal asset trade. In this paper we develop a general equilibrium intertemporal model with trade limited to nominal bonds and equity. We find that exposure to nominal risk dampens net capital flows, thus making economies effectively more closed.

This paper contains an econometric analysis of international convergence in growth allowing for the possibility of several trend breaks. The results offer further evidence against strong hypotheses of convergence but demonstrate the existence of common trends among subsets of countries. Trend growth estimates for OECD countries have fallen since the early post-war period when catch-up was strong, but nevertheless are generally higher than before the Second World War. Taking these results together with evidence from historical research, it is argued that the recent growth slowdown should not be seen as sufficient reason to reject the hypothesis of endogenous growth.

The course of globalization need not be strictly regulated, nor will it necessarily devolve into a harsh winner-take-all free-market capitalism seen in the beginning of the industrial age. The US/World Bank vision of free capital markets and little or no barriers to trade appears to have many international skeptics, and that vision is certainly subject to modification and negotiation.

Behind the Americanization of world finance lies a reconfiguration of power between richer and poorer countries and between owners and workers nationally and internationally. The last 20 years have been [...]