Burdekin, Richard C.K., and Thomas D. Willett. Editors’ Introduction to “China’s Global Interdependence: International Reserves, Capital Inflows, Financial Market Transmission, and Exchange Rate Determination.” The Chinese Economy, vol. 52, issue 4, 2019, pp. 295-299.
Efremidze, Levan, Ozan Sula, and Thomas Willett. “Capital Flow Reversals, Sudden Stops, and International Reserve Adequacy: Further Evidence from the Global Financial Crisis.” International Journal of Financial Research, vol. 10, no. 1, 2019, pp. 52-67.
Abstract: Using a dataset of 39 emerging markets, we examined the role of international reserves during currency and capital flow crises. Our analysis revealed that higher levels of reserves are associated with lower intensity crises where intensity is measured by the magnitude of the change in exchange market pressure (EMP) or size of capital flow reversals. We also find evidence for the cushioning effects of reserves during the crises. When used against capital flow reversals, reserves can help mitigate the negative output effects of the crisis. Finally, our findings show that reserve adequacy should be evaluated based on the nature of the potential crisis. Policy makers may prefer to refrain from using reserves if export competitiveness is more important than potential balance sheet effects of currency depreciation.
Pentecost, Eric J., Wenti Du, Graham Bird, and Thomas D. Willett. “Contagion from the Crises in the Euro-Zone: Where, When and Why?” The European Journal of Finance, vol. 25, issue 14, 2019, pp. 1309-1327.
Abstract: The prevalence of contagion between the Euro-zone countries and other European countries since the Greek crisis of 2009 is now well – known, but the factors that influence the pattern of this contagion are not well understood. We investigate this question both within Europe and beyond to the USA and Japan, using an asymmetric M-GARCH model that focuses on extreme values of the risk premia on government bonds. We compare these extreme values with news of major events and find that they are highly correlated. We find a different pattern of contagion emanating from Ireland compared to the other crisis countries of Greece, Italy, Portugal and Spain. We also examine the factors that have made countries vulnerable to contagion and find that financial factors are more important than trade ones. However, intra-Euro-zone trade has also been a significant factor between the major Euro-zone economies. There is little evidence that global factors affect contagion between EU member states, but some evidence that nominal exchange rate movements offer a degree of insulation from contagion for the non-Euro zone states.
Wang, Yanzhen, Thomas D. Willett, and Xiumin Li. “International Capital Flows and the Independence of China’s Monetary Policy.” The Chinese Economy, vol. 52, issue 4, 2019, pp. 300-317.
Abstract: This article estimates the quantitative relationship between international capital flows and China's monetary policy. A major innovation over most previous studies is taking into consideration the effects of changes in the reserve requirement ratio. Employing the method of the Federal Reserve Bank of St. Louis, this article translates the change in the reserve requirement ratio into the change in the monetary base, while the money multiplier remains unchanged. The change in the reserve requirement ratio is combined with the other monetary policies that directly affect the monetary base to construct an integrated measure of monetary policy. We then construct a modified offset and sterilization coefficients model. We find that the failure to take reserve requirement ratio changes into account leads to an underestimation of both the degree of sterilization and of capital mobility as measured by the offset coefficients. The results show that China's capital flows are quite limited, while China's monetary policy is able to almost completely sterilize monetary base fluctuations caused by international capital flows. Thus, we find that China has been able to maintain a great deal of domestic monetary policy independence despite a limited degree of exchange rate flexibility.