Theses and Dissertations from UMD
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Item Essays in International Finance(2008-01-23) Daude, Christian; Mendoza, Enrique G.; Vegh, Carlos A.; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Access to private capital markets is the most salient difference between emerging market economies and other developing countries. However, in contrast to developed economies, emerging markets have had a troubled relationship with capital fows. In particular, balance of payments and debt crises have been a recurrent problem. The three chapters of this dissertation contribute to the literature on emerging markets and their relationship with capital markets. Chapter 1 analyzes the effects of volatility on sovereign default risk. Empirically, the paper establishes a concave relationship between spreads and volatility. While for low levels of volatility an increase in volatility is associated with an increase in the sovereign risk premium, the risk premium increases at a decreasing rate. This empirical relationship is robust to different estimation methods, sam- ples and control variables. Furthermore, the relationship between volatility and risk premia is non-monotonic: while at low levels of volatility an increase in volatility implies an increase also in spreads, for sufficiently high levels of volatility this relationship turns negative. The chapter also presents a quantitative model of sovereign debt with default risk consistent with this feature and other characteristics of EME debt. The intuition for this result is the existence of a trade-off between prudential behavior in order to avoid large consumption fluctuations under autarky and the increased likelihood of a default, given default provides some short-run relief under a very bad realization of shocks. Chapter 2 addresses the determinants of the composition of cross-border investment positions. Using a novel database of bilateral capital stocks for all types of investment - FDI, portfolio equity securities, debt securities as well as loans - for a broad set of 77 countries, we show the importance of two key determinants of the composition of cross-border asset positions: information frictions and the quality of host country institutions. Overall, we find that in particular FDI, and to some extent also loans, are substantially more sensitive to information frictions than investment in portfolio equity and debt securities. We also show that the share as well as the size of FDI that a country receives are largely insensitive to corruption in host countries, while portfolio investment is by far the most sensitive to the quality of institutions. Chapter 3 focuses on a related topic to chapter 2. Using bilateral FDI stocks around the world, we explore the importance of a wide range of institutional variables as determinants of the location of FDI. While we find that better institutions have overall a positive and economically significant effect on FDI, some institutional aspects matter more than others do. Especially, the unpredictability of laws, regulations and policies, excessive regulatory burden, government instability and lack of commitment play a major role in deterring FDI. For example, the effect of a one standard deviation improvement in the regulatory quality of the host country increases FDI by a factor of around 2. These results are robust to different specifications, estimation methods and institutional variables. We also present evidence on the significance of institutions as a determinant of FDI over time.Item Essays on Multiple Exchange Rate Systems(2005-09-21) Avellan, Leopoldo Martin; Reinhart, Carmen M; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation measures the impact of multiple exchange rate systems on economic performance and on net capital flows in developing countries. The literature on the effectiveness of capital controls has some problems. Two of them are that it often ignores the endogeneity of capital controls, and that most of the evidence is dominated by some country specific studies. This dissertation fills this gap. It uses a multicountry panel to quantify the effects of parallel rates in the economy, but in doing so it explicitly models the endogeneity of multiple exchange rates. The dissertation is structured as follows. Chapter 1 evaluates the relationship between parallel exchange rates and economic performance in the post Bretton Woods period (1974-2001). The main findings are not only that parallel exchange rates are more likely to be adopted when economic performance is bad, but also that they hurt economic performance, indicating the existence of a negative feedback mechanism linking economic performance and parallel markets. It also finds that liability dollarization and high debt service are possible determinants of the likelihood to segment the foreign exchange market. Chapter 2 evaluates the effectiveness of multiple exchange rates systems as a policy tool to stop capital outflows. Controlling for push and pull factors that drive capital flows, and using data from 46 developing countries for the 1980-2001 period, it cannot find empirical support for the claim that segmenting the foreign exchange market stops capital outflows. The evidence suggests that multiple exchange rates systems do not have any effect on capital outflows, at best. At worst, the evidence suggests that parallel exchange rate systems increase capital outflows rather than discouraging them. This last result can be rationalized with a policy signaling model for capital controls.