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Caroline Duburcq and Eric Girardin
''The stabilization of foreign bank lending: A neglected benefit of hard pegs''
( 2011, Vol. 31 No.2 )
The turmoil in credit markets has brought to the fore again the negative implications of the volatility of foreign bank-intermediated flows to emerging countries. This paper examines whether the adoption of a hard-peg regime can reduce shocks in foreign capital inflows. Using unobserved-components univariate and multivariate models, we separate out the persistent and temporary components of US banking claims to ten Latin American countries during a period ranging from January 1990 to July 2010. Four countries have fixed exchange rates while the other six have flexible rates. Our results vindicate our maintained hypothesis that the adoption of a fixed-exchange-rate regime dampens shocks in foreign capital inflows as far as stocks and flows of US banking claims are concerned. However we cannot attribute this higher stability of US bank lending to hard-peg countries to a higher dependence on US rather than country-specific factors.
Keywords: fixed-exchange-rate regime, international banking flows, unobserved-components model
JEL: F3 - International Finance: General
C3 - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions
Manuscript Received : Jun 06 2011 Manuscript Accepted : Jun 06 2011

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