This paper examines the volatility of capital flows following the liberalization of financial markets. Utilizing a panel data set of overlapping data, the paper focuses on the response of foreign direct investment, portfolio flows, and other debt flows to financial liberalization. The financial liberalization variable comes from the chronology and index developed by Kaminsky and Schmukler [Kaminsky, G.L. and Schmukler, S.L., 2003, Short-run pain, long-run gain: The effects of financial liberalization, IMF Working Paper WP/03/34.]. Different types of capital flows are found to respond differently to financial liberalization. Surprisingly, portfolio flows appear to show little response to capital liberalization while foreign direct investment flows show significant increases in volatility, particularly for the emerging markets considered.
[Show abstract][Hide abstract] ABSTRACT: This paper provides a first comprehensive analysis of the determinants of UK banks' liquidity policy. We study both idiosyncratic and macro- determinants of banks' liquidity buffers. In particular, we investigate how central bank LOLR policy may affect banks' liquidity buffers. We find that the greater the potential support from the central bank in case of liquidity crises, the lower the liquidity buffer the banks hold. A second finding relates to the way liquidity buffers vary over the economic cycle: UK banks appear to pursue a counter-cyclical liquidity policy, with liquidity lower in upturns. In the spirit of Almeida et al (2004), we finally test whether countercyclical liquidity buffers might be the result of financial constraints on banks' lending policy and find support for this hypothesis. Using these findings the paper draws out a number of implications for banking regulation.
[Show abstract][Hide abstract] ABSTRACT: Banks can make suboptimal liquidity choices and gamble for lender of last resort (LOLR) support. Endogenous bailout rents are driven by the need to preserve bankers' incentives under uncertain net worth. In equilibrium, banks can herd in risk management, choosing suboptimal liquidity when they expect others to do so. Optimal liquidity can be restored by quantitative requirements, but such regulation is costly. An LOLR policy incorporating bank capital information can reduce distorting rents and allow for a more efficient solution, but may only be possible in transparent economies.
[Show abstract][Hide abstract] ABSTRACT: Banks' liquidity holdings are comfortably above legal or prudential requirements in most Central American countries. While good for financial stability, high systemic liquidity may nonetheless hinder monetary policy transmission and financial markets development. Using a panel of about 100 commercial banks from the region, we find that the demand for precautionary liquidity buffers is associated with measures of bank size, profitability, capitalization, and financial development. Deposit dollarization is also associated with higher liquidity, reinforcing the monetary policy and market development challenges in highly dollarized economies. Improvements in supervision and measures to promote dedollarization, including developing local currency capital markets, would help enhance financial systems' efficiency and promote intermediation in the region.
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