Global imbalances and the financial crisis

The recent financial crisis has put the spotlight on the rapid rise in credit which preceded it and the macroeconomic context in which it developed. This article examines the contribution of international savings and investment imbalances to the crisis and how these imbalances have evolved since its onset, focusing on the UK experience as a deficit country over the past decade. It also briefly discusses some implications of the crisis for global imbalances over the medium term.

Macroeconomic policy and stability in international financial markets

This thesis examines two key areas where macroeconomic policy and stability in international financial markets intersect. Part one examines the extent to which economic policy can limit the development of misalignments in exchange rates, without sacrificing policy tools that are needed to maintain internal macroeconomic balance. This issue is addressed in a model where endogenous exchange rate fluctuations are generated by traders selecting alternative forecasting strategies on the basis of an ‘evolutionary fitness rule’, in the spirit of work by Brock and Hommes (1997, 1998). In this setting it is shown how, by changing the relative profitability of available strategies, sterilized intervention can coordinate traders onto strategies based on macroeconomic fundamentals. Empirical evidence in support of the model is provided based on data from interventions by the Japanese authorities in the 1990’s. In addition, simulations of the estimated model are used to calculate confidence intervals for the ex ante probability that interventions of a given size will be effective in pricking bubbles in the exchange rate. Part two moves on to examine the implications for macroeconomic policy of the exponential growth in recent years of the use of financial derivatives. A theoretical model is developed which demonstrates how firms’ use of derivatives for risk management purposes, while increasing the robustness of the financial system to shocks, at the same time reduces the impact of monetary policy on the macroeconomy. This effect arises because the agency costs, which enhance the impact of monetary policy through the credit channel, are reduced by firms’ usage of hedging instruments, in particular interest rate swaps. Using quarterly data on total outstanding swap contracts from 1990, empirical evidence is then presented to show how increased usage of derivatives may have influenced the impact of monetary policy in the United States

Macroeconomic policy and stability in international financial markets

This thesis examines two key areas where macroeconomic policy and stability in international financial markets intersect. Part one examines the extent to which economic policy can limit the development of misalignments in exchange rates, without sacrificing policy tools that are needed to maintain internal macroeconomic balance. This issue is addressed in a model where endogenous exchange rate fluctuations are generated by traders selecting alternative forecasting strategies on the basis of an ‘evolutionary fitness rule’, in the spirit of work by Brock and Hommes (1997, 1998). In this setting it is shown how, by changing the relative profitability of available strategies, sterilized intervention can coordinate traders onto strategies based on macroeconomic fundamentals. Empirical evidence in support of the model is provided based on data from interventions by the Japanese authorities in the 1990’s. In addition, simulations of the estimated model are used to calculate confidence intervals for the ex ante probability that interventions of a given size will be effective in pricking bubbles in the exchange rate. Part two moves on to examine the implications for macroeconomic policy of the exponential growth in recent years of the use of financial derivatives. A theoretical model is developed which demonstrates how firms’ use of derivatives for risk management purposes, while increasing the robustness of the financial system to shocks, at the same time reduces the impact of monetary policy on the macroeconomy. This effect arises because the agency costs, which enhance the impact of monetary policy through the credit channel, are reduced by firms’ usage of hedging instruments, in particular interest rate swaps. Using quarterly data on total outstanding swap contracts from 1990, empirical evidence is then presented to show how increased usage of derivatives may have influenced the impact of monetary policy in the United States.EThOS - Electronic Theses Online ServiceUniversity of Warwick (UoW)Economic and Social Research Council (Great Britain) (ESRC)GBUnited Kingdo

Bulls, Bears and Excess Volatility: can currency intervention help?

Asset mis-pricing may reflect investor psychology, with excess volatility arising from switches of sentiment. For a floating exchange rate where fundamentals follow a random walk, we show that excess volatility can be generated by the repeated entry and exit of currency 'bulls' and 'bears' with switches driven by 'draw-down' trading rules. We argue that non-sterilised intervention - in support of 'monitoring band' - can reduce excess volatility by coordinating beliefs in line with policy. Strategic complementarity in the foreign exchange market suggests that sterilised intervention may also play a coordinating role

The geographical composition of national external balance sheets: 1980-2005

This paper constructs a data set on stocks of bilateral external assets and liabilities for a group of 18 countries, including developed and emerging economies. The data set covers the years 1980 to 2005 and distinguishes between four asset classes: foreign direct investment, portfolio equity, debt, and foreign exchange reserves. A number of stylised facts emerge from it. There has been a remarkable increase in interconnectivity over the past two decades. Financial links have become larger and more frequent and countries have become more open. The global financial network is centred around a small number of nodes, which have many and large links. In addition, the network exhibits ‘small-world’ properties, such as high clustering and low average path length. The combination of high interconnectivity, a small number of hubs, and ‘small-world’ properties makes for a robust-yet-fragile system, in which disturbances to the key hubs would be rapidly and widely transmitted. The global financial network is centred around the United States and the United Kingdom, which have large links and are connected to most other countries. This contrasts with the global trade network, which is arranged in three clusters: a European cluster (centred on Germany), an Asian cluster (centred on China), and an American cluster (centred on the United States).International financial networks; international investment; financial liberalisation

Evaluating CEFR rater performance through the analysis of spoken learner corpora

Abstract Background Although teachers of English are required to assess students’ speaking proficiency in the Common European Framework of Reference for Languages (CEFR), their ability to rate is seldom evaluated. The application of descriptors in the assessment of English speaking on CEFR in the context of English as a foreign language has not often been investigated, either. Methods The present study first introduced a form of rater standardization training. Two trained raters then assessed the speaking proficiency of 100 learners by means of actual corpus data. The study then compared their rating results to evaluate inter-rater reliability. Next, ten samples of exact/adjacent agreement between Raters 1 and 2 were rated by six teachers of English in tertiary education. Two of them had attended rater standardization training with Raters 1 and 2, while the other four had not received any relevant training. Results The two raters agreed exactly in 44% of cases. The rating results between the two trained raters were closely correlated (ρ = .893). Cross-tabulation showed that in one third of the samples, Rater 2 scored higher than Rater 1 and they agreed more often at the higher levels. The better rating performance of Teachers 1 and 2 suggested that rater standardization training may have helped enhance their performance. The unsatisfactory proportion of correctly assigned levels in teachers’ ratings overall was probably due to the high input of subjective judgment based on vague CEFR descriptors. Conclusions Regarding assessment, it is shown that the attendance of rater standardization training is of help in assessing learners’ speaking proficiency in CEFR. This study provides a model for assessing data from spoken learner corpora, which adds an important attribute to future studies of learner corpora. The paper also raises doubts about teachers’ ability to evaluate students’ speaking proficiency in CEFR. As CEFR has been widely adopted in the relevant fields of English language teaching and assessment, it is suggested that the rating training framework established in this study, which uses learner corpus data, be offered to (prospective) teachers of English in tertiary education