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451. Growth-Led Exports: Is Variety the Spice of Trade?

Author:
Joseph E. Gagnon
Publication Date:
11-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Fast-growing countries tend to experience rapid export growth with little secular change in their terms of trade. This contradicts the standard Armington trade model, which predicts that fast-growing countries can experience rapid export growth only to the extent that they accept declining terms of trade. This paper generalizes the monopolistic competition trade model of Helpman and Krugman (1985), providing a basis for growth-led exports without declining terms of trade. The key mechanism behind this result is that fast-growing countries are able to develop new varieties of products that can be exported without pushing down the prices of existing products. There is strong support for the new model in long-run export growth of many countries in the post-war era.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

452. Global Financial Integration: A Collection of New Research

Author:
Mark Carey
Publication Date:
10-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This introductory note summarizes and draws together the work reported in eight research papers written by staff economists of the Board's Division of International Finance as part of a project on global financial integration. The eight papers are also International Discussion Finance Discussion Papers (IFDPs), the numbers of which are specified on the table of contents that appears herein. When viewing this introduction online, the paper titles appearing on the table-of-contents page are web links that may be used to navigate directly to each paper's on-line file.
Topic:
Economics, Globalization, and International Trade and Finance
Political Geography:
United States

453. The Value of Financial Intermediaries: Empirical Evidence from Syndicated Loans to Emerging Market Borrowers

Author:
Gregory P. Nini
Publication Date:
09-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Empirical estimates of the benefit of financial intermediation are constructed by examining the role played by local banks in facilitating syndicated loans to borrowers in emerging market countries. Assuming that local banks possess a superior monitoring ability, the market is ideal for studying the value of intermediation since cross-border lending into emerging markets is plagued by particularly high information and agency costs and the supply of local bank capital is in limited short run supply. Using variation in the propensity of local banks to participate in foreign arranged syndicates, there are two economically important results. First, local banks are much more likely to participate in unconditionally riskier loans. Second, after controlling for borrower characteristics, loan characteristics, and the endogeneity of the local bank lending decision, loans with local bank participation have spreads that are 10 percent lower (29 basis points) than otherwise similar loans. Combined, the results support the conclusion that local banks, a particularly special type of financial intermediary, provide value by considerably reducing financing costs, especially for riskier borrowers.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

454. What Makes Investors Over or Underweight? Explaining International Appetites for Foreign Equities

Author:
Carol C. Bertaut and Linda S. Kole
Publication Date:
09-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well-developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States and London

455. The Performance of International Portfolios

Author:
Francis E. Warnock, Charles P. Thomas, and Jon Wongswan
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper evaluates the performance of U.S. investors' portfolios in the equities of over 40 countries over a 25-year period. We find that these portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We uncover three potential reasons for this success. First, U.S. investors abstained from momentum trading and instead sold past winners. Second, conditional performance tests provide no evidence that the superior (unconditional) performance owed to private information, suggesting that the successful exploitation of publicly available information played a role. Third, the documented preference for cross-listed and well-governed foreign firms appears to have served U.S. investors well. We conclude with a short discussion of the implications of our findings for the home bias literature.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

456. Corporate Governance and the Shareholder Base

Author:
Francis E. Warnock and Karl V. Lins
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses a sample of 4,410 firms from 29 countries to investigate the relation between corporate governance and the shareholder base. In contrast to previous work, our results strongly support the notion that poor corporate governance, at both the firm and country level, negatively impacts the willingness of foreign investors to hold a firm's equity. Specifically, we find that firms whose managers have sufficiently high control rights that they may reasonably be expected to expropriate minority equity investors attract significantly less U.S. investment, especially in countries with poor external governance. Our findings suggest that the prices U.S. investors are asked to pay for firms with poor governance are not low enough to fully compensate them for expected expropriation or increased estimation risk associated with expected poor disclosure by these firms. Because prior research shows that a smaller shareholder base is associated with a lower firm value, our results are consistent with the notion that the shareholder base represents an important channel through which poor expected corporate governance contributes to a reduction in firm value.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

457. Look at Me Now: The Role of Cross-Listing in Attracting U.S. Investors

Author:
Francis E. Warnock, John Ammer, Sara B. Holland, and David C. Smith
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We use a comprehensive 1997 survey to examine U.S. investors' preferences for foreign equities. We document a variety of firm characteristics that can influence U.S. investment, but the most important determinant is whether the stock is cross-listed on a U.S. exchange. Our selection bias-corrected estimates imply that firms that cross-list can increase their U.S. holdings by 8 to 11 percent of their market capitalization, roughly doubling the amount held without cross-listing. All else equal, we find that firms experience smaller increases in U.S. shareholdings upon cross-listing if they are Canadian, from English speaking countries, are members of the MSCI World index, or had higher quality accounting standards prior to crosslisting. We argue that these findings suggest that improvements in information production explain U.S. investors' attraction to foreign stocks that cross-list in the United States.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States and Canada

458. PPP Rules, Macroeconomic (In)stability and Learning

Author:
Luis-Felipe Zanna
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Governments in emerging economies have pursued real exchange rate targeting through Purchasing Power Parity (PPP) rules that link the nominal depreciation rate to either the deviation of the real exchange rate from its long run level or to the difference between the domestic and the foreign CPI-inflation rates. In this paper we disentangle the conditions under which these rules may lead to endogenous fluctuations due to self-fulfilling expectations in a small open economy that faces nominal rigidities. We find that besides the specification of the rule, structural parameters such as the share of traded goods (that measures the degree of openness of the economy) and the degrees of imperfect competition and price stickiness in the non-traded sector play a crucial role in the determinacy of equilibrium. To evaluate the relevance of the real (in)determinacy results we pursue a learnability (E-stability) analysis for the aforementioned PPP rules. We show that for rules that guarantee a unique equilibrium, the fundamental solution that represents this equilibrium is learnable in the E-stability sense. Similarly we show that for PPP rules that open the possibility of sunspot equilibria, a common factor representation that describes these equilibria is also E-stable. In this sense sunspot equilibria and therefore aggregate instability are more likely to occur due to PPP rules than previously recognized.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

459. Is The Corporate Loan Market Globally Integrated? A Pricing Puzzle

Author:
Mark Carey and Gregory P. Nini
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the U.S., other things equal. Differences in borrower, loan and lender characteristics associated with equilibrium mechanisms suggested in the literature do not appear to explain the phenomenon. Borrowers overwhelmingly issue in their natural home market, and bank portfolios display significant home “bias.” This may explain why pricing discrepancies are not competed away, but the fundamental causes of the discrepancies remain a puzzle. Thus, important determinants of loan origination market outcomes remain to be identified, home “bias” appears to be material for pricing, and corporate financing costs differ in Europe and the U.S.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States and Europe

460. Does Monetary Policy Keep Up with the Joneses? Optimal Interest-Rate Smoothing with Consumption Externalities

Author:
Sanjay Chugh
Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Changes in monetary policy are typically implemented gradually, an empirical observation known as interest-rate smoothing. We propose the explanation that timenon- separable preferences may render interest-rate smoothing optimal. We find that when consumers have “catching-up-with-the-Joneses” preferences, optimal monetary policy reacts gradually to shocks to prevent inefficiently fast adjustments in consumption. We also extend our basic model to investigate the effects of capital formation and nominal rigidities on the dynamics of optimal monetary policy. Optimal policy responses continue to be gradual in the presence of capital and sticky prices, with a size and speed that are in line with empirical findings for the U.S. economy. Our results emphasize that gradualism in monetary policy may be needed simply to guide the economy on an optimally smooth path.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States