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  • Institutional characteristics, investment sensitivity to cash flow and Tobin's q: Evidence from the Middle East and North Africa region

    We examine the sensitivity of corporate investment to stock‐market valuations (measured by Tobin's q) and internal funds (measured by cash flow) in a setting that captures the unique country institutional characteristics of the Middle East and North Africa region. We report a higher sensitivity of investments to cash flow than Tobin's q. However, both sensitivities are unaffected by the country institutional characteristics. By examining the sensitivity of investments to cash flow and Tobin's q before and after the 2008 global financial crisis, we document that the investment‐cash flow relation has weakened over time, while the investment‐Tobin's q relation has significantly strengthened. Finally, after dividing our country sample into resource‐rich and resource‐poor countries, the importance of cash flow over Tobin's q in the determination of corporate investment levels is asserted and the role of financial markets is found to be restricted to resource‐rich countries only.

  • Content: International Finance 23/2
  • Fiscal procyclicality in emerging markets: The role of institutions and economic conditions

    Procyclicality of fiscal policy is a common feature in emerging markets, by contrast with high‐income economies, and leads to greater business‐cycle amplitudes. We investigate potential causes of fiscal procyclicality, including a host of economic and institutional variables of especial import in emerging markets. We employ dynamic panel methods in a large sample of countries to investigate what factors are associated with fiscal cyclicality. We find that fiscal procyclicality is mainly due to procyclical fluctuations in government investment expenditure. In addition, we find that procyclical fiscal policy is positively associated with government debt levels, terms‐of‐trade volatility, and costs of foreign borrowing, while negatively associated with better government efficiency. Only a weak association is found between International Monetary Fund program participation and fiscal procyclicality. Finally, we find that certain fiscal rules are associated with lower fiscal procyclicality and, in particular, balanced‐budget rules may help mitigate the adverse cyclicality effects of high terms‐of‐trade volatility and government debt burdens in emerging markets.

  • Introducing dominant‐currency pricing in the ECB's global macroeconomic model

    A large share of global trade being priced and invoiced primarily in U.S. dollar rather than the exporter's or the importer's currency has important implications for the transmission of shocks. We introduce this “dominant‐currency pricing” (DCP) into ECB‐Global, the ECB's macroeconomic model for the global economy. To our knowledge, this is the first attempt to incorporate DCP into a major global macroeconomic model used at central banks or international organisations. In ECB‐Global, DCP affects in particular the role of expenditure‐switching and the U.S. dollar exchange rate for spillovers: In case of a shock in a non‐U.S. economy that alters the value of its currency multilaterally, expenditure‐switching occurs only through imports; in case of a U.S. shock that alters the value of the U.S. dollar multilaterally, expenditure‐switching occurs both in non‐U.S. economies’ imports and—as these are imports of their trading partners—exports. Overall, under DCP the U.S. dollar exchange rate is a major driver of global trade, even for transactions that do not involve the United States. To illustrate the usefulness of ECB‐Global and DCP for policy analysis, we explore the implications of the euro rivalling the U.S. dollar as a second dominant currency in global trade. According to ECB‐Global, in such a scenario the global spillovers from U.S. shocks are smaller, whereas those from euro area shocks are amplified; domestic euro area monetary policy effectiveness is hardly affected by the euro becoming a second globally dominant currency in trade.

  • Safehavenness of the Chinese renminbi

    This paper investigates how safe (or risky) the Chinese renminbi is as an international currency from the perspectives of dollar‐ and euro‐based investors. It estimates the “safehavenness” of the currency, defined as the extent to which the currency plays the role of a safe haven, in both its onshore and offshore markets alongside 20 most‐traded currencies in the world, including those in the special drawings rights (SDR) basket. We find that the Chinese renminbi has generally registered a high level of safehavenness among the most‐traded currencies since it became actively traded in the offshore market. Compared with the other SDR currencies, it consistently ranks below the Japanese yen and U.S. dollar but above the British pound and euro on the scale of safehavenness. Despite market fragmentation, the safehavenness of the Chinese renminbi onshore (CNY) is very similar to, albeit marginally lower, that of the Chinese renminbi offshore (CNH), attributable possibly to a stronger price discovery process in the latter market. These estimation results show striking consistency between dollar‐ and euro‐based investors in their assessment across various time periods characterized by major structural differences.

  • The COVID‐19 crisis: A Hamilton moment for the European Union?
  • Explaining Africa's public consumption procyclicality: Revisiting old evidence

    This paper compiles a novel data set of time‐varying measures of government‐consumption cyclicality for a panel of 46 African economies between 1960 and 2014. Government consumption has, generally, been highly procyclical over time in this group of countries. However, sample averages hide serious heterogeneity across countries with the majority of them showing procyclical behaviour despite some positive signs of graduation from the “procyclicality trap” in a few cases. By means of weighted least squares regressions, we find that more developed African economies tend to have a smaller degree of government‐consumption procyclicality. Countries with higher social fragmentation, and those that are more reliant on foreign aid inflows, tend to have a more procyclical government‐consumption policy. Better governance promotes countercyclical‐fiscal policy while increased democracy dampens it. Finally, some fiscal rules are important in curbing the procyclical behaviour of government consumption.

  • Monetary trilemma, dilemma, or something in between?

    This paper revisits the monetary “trilemma” versus “dilemma” debate by examining empirically interest‐rate policy independence for a large sample of both advanced and developing countries over the period 1973–2014. We broadly concur with the growing body of literature that suggests that the trilemma still holds, emphasizing the important insulating effects afforded by exchange‐rate flexibility. However, as with Han and Wei (2018), we also document the existence of an asymmetric pattern or 2.5‐lemma between the trilemma and dilemma; though, in contrast to them, we find there seems to be evidence of a “fear of capital reversal” rather than a “fear of appreciation.” We further find that holding higher levels of foreign reserves may help countries regain a degree of monetary‐policy autonomy.

  • Less competitive bank markets: Conventional and unconventional monetary policies through bank‐lending channels

    Bank competition in Japan is weakening. This study theoretically analyzes the supply side of the bank loan market to examine how this weak banking competition influences the effectiveness of monetary policies. In a Cournot game, there are efficient banks, and inefficient banks that must pay a risk premium in the call market. Less competitive banks either go out of business or merge with efficient banks. The call rate and risk premium are central banks’ policy instruments. This paper's main finding is that, with a few exceptions, the weak competition reduces the effectiveness of monetary policies because concentration decreases the volume of bank loans. However, concentration makes monetary policy via a reduced risk premium more effective when this policy targets inefficient banks that do not exit or merge. In response to lending declines by efficient banks when they exit or merge, inefficient banks increase their lending activity.

  • Effects of unconventional monetary policy across U.S. industries

    Using industry‐level data for all U.S. states obtained from the U.S. Bureau of Economic Analysis, this paper examines the impact that unconventional monetary policy has had on six U.S. industries. The results indicate that the impact varies across the industries analysed. The results show that total wages and salaries increased the most in the finance sector. However, the strongest impact on total real output was in the wholesale sector.

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