International Finance

Issue Number

Latest documents

• What is the optimal capital ratio implying a stable European banking system?

  This paper aims to determine the ‘new normal’ for banking stability in terms of capital adequacy, reviewing the incidence of banking stress episodes by lagged solvency ratios, based on the experience at the European level after the global financial crisis. We provide rating ladders for both risk‐weighted solvency ratios and a simple gearing (leverage) ratio for time horizons of up to 3 years using well‐known credit risk scoring procedures. Our findings empirically confirm that the recent dual metric structure of the capital adequacy framework is conducive to enhancing the accuracy of banking stability assessment. Specifically, our empirical analysis suggests that both tier 1 capital ratio and leverage ratio generally remain statistically significant in multivariate combinations for crisis probability measurement purposes. Robustness checks with well‐established macrofinancial indicators as control variables suggest that this tandem is hardly replaceable in multivariate early warning systems by combinations of macroimbalance and financial soundness indicators traditionally employed as leading factors of banking crises. Moreover, the pandemic period provides meaningful evidence that robust capital positions, in line with our estimate, have so far been ‘part of the solution’ for dealing with systemic events.

• Financialization and sluggish recovery of firms' investment: Global evidence from the 2007–2008 financial crisis

  After the financial crisis of 2007–2008, the global economy witnessed a trend of sluggish investment recovery and continuous deepening of financialization. Using data on nonfinancial firms from 108 countries over the period from 2000 to 2017, we examine the impact of financialization on firms' postcrisis investment recovery with a probit model. We find that firms' financialization inhibited postcrisis investment recovery, and this finding remains stable under a series of robustness checks. Further discussion shows the hindering impact of financialization on investment recovery is especially dominant among firms with severe financial constraints and firms from advanced economies. Higher financial market yield also exacerbates the restraint effect of financialization on investment recovery.

• Progressive taxation and optimal monetary policy in a two‐country new Keynesian model

  This paper examines the effect of tax progressivity on optimal monetary policy in a two‐country new Keynesian model. We first address the issue that coefficients in both structural equations and the central bank's loss function are crucially affected by a change in tax progressivity in both countries. Second, we show that a change in tax progressivity significantly affects the properties of international monetary policy transmission. Third, we demonstrate that the impact of tax progressivity on international monetary policy transmission depends on the value of the constant relative risk‐aversion coefficients.

• Role of weather in the natural gas market: Insights from the STL‐GARCH‐W method

  Weather has been shown to affect natural gas markets, but there is limited research on the strength and manner in which weather affects predictions of natural gas volatility. In this study, six weather indicators are used as exogenous variables, and seasonal‐trend decomposition‐generalized autoregressive conditional heteroskedasticity‐Weather (STL‐GARCH‐W) and STL‐GJR‐GARCH‐W models are constructed to explore the effect of weather on global natural gas market. The empirical findings indicate that temperature and precipitation have a notable positive effect on natural gas, while solar radiation has a prominent negative effect. Furthermore, the STL‐GARCH‐W model outperform the STL‐GJR‐GARCH‐W model and the benchmark STL‐GARCH model when temperature, precipitation, and solar radiation are considered. In addition, the January effect has been shown to significantly influence natural gas price volatility. Finally, most parameters in both models are of statistical significance, demonstrating that both models accurately forecast natural gas volatility and emphasizing the importance of weather indicators for modelling natural gas price volatility. Our study provides new insights for energy market investors and policy makers.

• Content: International Finance 26/3
• Government bond rates and interest expenditure of large euro area member states: A scenario analysis

  This paper assesses the possible development of government interest expenditures for Germany, France, Italy and Spain. Until 2021, governments could anticipate a substantial further reduction in interest expenditure. This outlook has changed drastically with the surge in inflation and government bond rates. Assuming that bond rates remain at the levels implied by yield curves from December 2022, interest expenditure rises substantially. We also examined scenarios with a further upward shift in yield curves by one or two percentage points. They indicate major medium‐term risks for highly indebted member states with interest expenditure approaching or exceeding levels last observed on the eve of the euro area debt crisis. Governments should take action to achieve a decline in debt‐to‐GDP ratios towards safe levels. They need to make sure public debt remains sustainable at the higher interest rates that are required to achieve price stability in the euro area.

• International heterogeneity of nominal wages and optimal monetary policy

  This paper examines optimal monetary policy in a two‐country model with staggered nominal prices and wages. We show that given home nominal wage stickiness, changes in the degree of foreign nominal wage stickiness substantially impact the worldwide welfare losses and gains from commitment policy. Specifically, the welfare gains from a commitment policy are greatest when nominal wages in both countries are perfectly flexible. However, when nominal wages in the foreign country are stickier, the gains from commitment decrease.

• A study on the optimal shareholding proportion of the controlling shareholders in the competitive mixed‐ownership enterprises: Evidence from Chinese listed companies

  There is a wide debate on the optimal shareholding proportion of controlling shareholders. Under the background of China's mixed‐ownership reform, this paper focuses on a specific firm setting of mixed‐ownership enterprises in fully competitive industries, and tries to find the heterogeneity in the association between controllers' shareholding and firm performance. Specifically, with a sample of China's A‐share listed companies from 2007 to 2018, we find significant differences in this relationship due to different types of controlling shareholders. The effect of controller shareholding on firm performance is not significant in foreign‐controlled enterprises, while that of private enterprises presents a monotone increasing linear relation with statistical significance. No optimal controlling shareholding interval is found in either foreign‐controlled or private‐controlled enterprise. In state‐controlled enterprises, we find an overall inverted U‐shaped with local stage linear relationship between state‐controlling enterprises' controller shareholding and firm performance. The optimal interval of state‐controlling shareholding is 42%–68%.

• Are overconfident CEOs better able to transform innovation into firm value?—Evidence from the United States

  We use innovation premium (IP), proposed by Forbes, as a proxy for firm innovation to present evidence that firm value is positively associated with IP. The positive impact of the IP on firm value is amplified by overconfident CEOs, particularly in the high‐tech and biotech industries with a high proportion of intellectual capital and intangible assets. In a series of tests, we confirm that the results hold after controlling for endogeneity. our findings are consistent with the notion that the beneficial effect of corporate innovations generated by overconfident CEOs exists primarily in industries where innovations are in critical demand.

• Income elasticity of demand and stock market beta

  Systematic risk, or beta, measures stock price variability in the overall stock market. A considerable body of literature focuses on estimating beta. To the best of our knowledge, there is, however, a lack of definitive research on the impact of income elasticity of demand on stock market beta. This study is the first to examine this relationship using 659 publicly traded firms from 47 industries in South Korea from 2001 to 2020. To estimate the value of the stock market beta, we employ an econometric model with a fixed effects‐two stage least squares approach and use industry concentration as an instrumental variable to deal with the endogeneity problem in the estimation. The overall objective of this study is to investigate the influence of income elasticity of demand on stock market beta.

Featured documents

• Tracking Banks’ Systemic Importance Before and After the Crisis

  We develop a methodology to identify and rank ‘systemically important financial institutions’ (SIFIs). Our approach is free of discretion and based entirely on publicly available data, thus filling the gap between the judgment of the regulator and the views that market participants may form with...

• The open economy trilemma in Latin America: A three‐decade analysis

  This study concerns the open economy trilemma in emerging economies, and uses a panel data framework to investigate cross‐dependence among the countries and respective parameters of the 23 countries in Latin America from 1980 to 2010. We examine the impact that trilemma choices impose on economic...

• A mechanism to regulate sovereign debt restructuring in the euro area

  A missing element in the architecture of the euro area is a mechanism for an orderly restructuring of unsustainable sovereign debt. Clear rules for creditor participation in case of overindebtedness would strengthen market discipline and enhance the effectiveness of crisis assistance. We propose a...

• Policy mix and the U.S. trade balance

  The strong policy response of the United States to the 2008–2009 financial crisis raised concerns about its spillovers on other countries. The effects of the monetary stimulus received significant attention, while those of fiscal policy were largely overlooked, despite the combined deployment of...

• Do Better Capitalized Banks Lend Less? Long‐Run Panel Evidence from Germany

  Higher capital features prominently in proposals for regulatory reform. But how does increased bank capital affect business loans? The real costs of increased bank capital in terms of reduced loans are widely believed to be substantial. But the negative real‐sector implications need not be severe....

• The Response Speed of the International Monetary Fund

  The more severe a financial crisis, the greater has been the likelihood of its management under an IMF‐supported programme and shorter the time from crisis onset to programme initiation. Political links to the United States have raised programme likelihood but have prompted faster response mainly...

• Low frequency drivers of the real interest rate: Empirical evidence for advanced economies

  This article presents an empirical analysis of the underlying drivers of the real interest rate in advanced economies since 1980. We adopt a band spectrum regression approach, which allows us to study the link between the real interest rate and its determinants only over low frequencies, leaving...

• Financial Cycles, Housing and the Macroeconomy
• Revisiting the relationship between cross‐border capital flows and credit

  A broad perspective on the sectoral composition of the domestic borrower and recipients of capital flows is needed to deepen the understanding of the mechanisms through which cross‐border capital flows interact with credit provision. Exploring this detail reveals stark differences across (i) credit ...

• Welfare costs of bilateral currency crises: The role of international trade

  This paper shows that bilateral currency crises reduce bilateral trade up to 50% after controlling for the depreciation rate. Using a trade model, these reductions are connected to the welfare costs of currency crises. The results show that a single currency crisis can result in welfare reductions...