International Finance

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• 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.

• A relative answer to the growth–saving puzzle

  Prolonged rapid growth, that is, the ‘catching‐up’ process through which countries close the gap to the development frontier, is known to be accompanied by high rates of household saving. This phenomenon is central in explaining the direction of international capital flows and trade imbalances in the past several decades, yet it is very much in contradiction to prevailing macroeconomic theory. This paper finds that a standard life‐cycle model, even when integrated with uncertainty about future growth and with credit constraints, is completely unable to replicate the relations between growth and saving, represented by three stylized facts gleaned from the empirical literature. However, adding utility from relative consumption to the model allows for the full replication of these relations.

• Capital‐flow volatility in emerging markets: A panel GARCH approach

  This study analyzes the role of push–pull factors on the level, volatility and comovement of capital flows in emerging markets (EMs). Taking the commonality of capital flows into account, we employ the panel Generalized Autoregressive Conditional Heteroscedasticity model developed by Cermeño and Grier for 16 EMs. This method not only accounts for country‐specific heterogeneity and cross‐section dependence but also allows the examination of the sources of the level, volatility and comovement of capital flows in a single step. The results show that domestic factors explain two‐thirds of the variation in net capital‐flow volatility. While both global and domestic factors, with the prominent ones being global risks and domestic economic growth, influence the comovement, their impacts somewhat vary by the types of capital flows.

• 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%.

Featured documents

• Nonlinear exchange‐rate pass‐through in emerging markets

  This paper documents nonlinearities and asymmetries in the transmission of exchange rate fluctuations to prices in a panel of 27 emerging markets for the period 1990–2013. Using local projection techniques, we find evidence of asymmetry in the extent of exchange‐rate pass‐through during episodes of ...

• Public debt, sovereign spreads and the unpleasant arithmetic of fiscal consolidations

  In response to severe fiscal consolidation policies implemented after the Great Recession and the euro area sovereign debt crisis, many have questioned the effectiveness of fiscal consolidations in reducing the burden of public debt. This paper revisits this fundamental policy debate qualitatively...

• The impact of Sino–US trade friction on the performance of China's textile and apparel industry

  This study applies the event‐analysis method and takes three Chinese listed textile and apparel companies that are representative of the upstream, midstream, and downstream of the textile value chain as research objects. By tracking the Baidu index trend of the keyword “trade war” to identify the ‘t...

• Financial Conditions Index and Identification of Credit Supply Shocks for the Euro Area

  The international financial crisis and the euro‐area sovereign debt crisis brought to the fore the importance of financial conditions to the macro‐economy. The complexity of the financial sector means that a wide range of financial variables is needed to fully characterize its functioning in real...

• Macroeconomic Effects of Simultaneous Implementation of Reforms

  This paper evaluates the macroeconomic effects of simultaneously implementing growth‐friendly fiscal consolidation and competition‐friendly reforms in one European country by simulating a dynamic general equilibrium model. Our results are as follows. First, in the case of joint implementation, the...

• Do credit rating agencies reward fiscal prudence?

  Governments are responsible for economic policy implementation, and their actions affect financial and capital market outcomes. Specifically, the way fiscal policy is conducted matters when credit agencies have to decide on how to rate a sovereign. This paper empirically assesses the effect of a...

• Doubly heterogeneous monetary spillovers

  Monetary spillovers are heterogeneous in two ways: how central banks generate them and how countries receive them. First, the Fed is mostly unique in its ability to affect other countries' financial markets, among ten developed central banks. This is noteworthy given the lack of data on other...

• A relative answer to the growth–saving puzzle

  Prolonged rapid growth, that is, the ‘catching‐up’ process through which countries close the gap to the development frontier, is known to be accompanied by high rates of household saving. This phenomenon is central in explaining the direction of international capital flows and trade imbalances in...

• 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...

• Financial reforms and low‐income households' impact on international consumption risk sharing

  Complete financial markets allow countries to share their consumption risks internationally, thereby creating welfare gains through lower volatility of aggregate consumption. Using a panel of 116 countries between 1970 and 2019, I show that a higher share of low‐income households reduces...