General Financial Markets
This paper examines the impact of government guaranteed small business loans on urban economic growth, and compares the growth impacts of government versus market financed entrepreneurship. OLS estimates indicate a significant and positive relation between the Small Business Administration’s guaranteed loans and metropolitan growth between 1993 and 2002. However, first-difference and instrumental variable regressions show no growth impact from government guaranteed loans. In contrast, market entrepreneurship significantly and positively contributes to local economic growth.
Stock market liberalizations lead private investment booms. In a sample of 11 developing countries that liberalized, one year later 9 of 11 experience growth rates of private investment above their non-liberalization median. In the second year after liberalization this number is 10 of 11. The mean growth rate of private investment in the two years immediately following stock market liberalization exceeds the sample mean by 23 percentage points.
The hope that lower real interest rates and higher growth would follow the floatation of the Brazilian Real was in large measure frustrated. Two international liquidity crises, caused by the reversal of capital flows, occurred in 2001 and 2002. These crises were associated with higher interest rates, lower economic activity, and higher inflation. Therefore, the term “exchange rate stagflation” seems to characterize the essence of this phenomenon. A stylized model by Caballero and Krishnamurthy  explains these events.
Currently, there is almost no participation from private individuals in China’s corporate bond market and corporate bonds are primarily held by China’s large commercial banks. This paper presents a theoretical proof that such an arrangement is suboptimal from the individual’s perspective. To improve investor welfare, authorities should implement policies to facilitate individual investment in corporate bond.
In recent decades, many middle-income countries (MICs) have liberalized their financial markets. Financial liberalization has typically been followed by a lending boom, during which credit has grown unusually fast. Some of these booms have been punctuated by twin currency and banking crises that are followed by a protracted credit crunch. In this paper we document three credit-market imperfections prevalent in MICs that can explain these boom-bust cycles as well as other macroeconomic patterns observed at higher frequencies across MICs.
We study the determinants of stock market development and the growing migration of capital raising, listing and trading activity to international exchanges. Economies with higher income per capita, sounder macro policies, more efficient legal systems with better shareholder protection, and more open financial markets have larger and more liquid markets. As such fundamentals improve, however, the degree of migration to international exchanges also increases. This leads to gains for corporations in the form of lower costs, better terms and more liquidly-traded shares.
The development of government bond markets and, in particular, their currency composition have recently received much interest, partly because of their perceived links with financial crises. This paper studies determinants of the size and currency composition of government bond markets for a panel of developed and developing countries. We find that countries with larger economies, greater domestic investor bases and more flexible exchange rate regimes have larger domestic currency bond markets, while smaller economies rely more on foreign currency bonds.
Emerging markets exhibit country risk, i.e. domestic interest rates are higher than covered interest parity’s predictions. When a country risk premium is positively correlated with the currency risk premium, a negative shock that provokes the reversal of capital flows harms the small open economy twice, causing both risk premiums to increase, thereby substantially increasing interest rates. Those periods are usually associated with low economic activity, which makes the increase in real interest rates even more detrimental since it increases the vulnerability to recessive shocks.
We review the arguments in the finance and open macroeconomics literature relevant for the Central Bank to set the level of the interest rate in an open economy. The two relevant risks are the currency and country risks. The country risk (Brazil Risk) is measured with different financials instruments and the (unobservable) currency risk is estimated via the Kalman Filter. We show that—besides the currency risk, which is also relevant in developed economies—the country risk is of utmost importance to determine the domestic interest rates.