This paper analyzes the transmission of shocks and policies among and across the Nordic economies and the rest of the world. This spillover analysis is based on a pair of estimated structural macroeconometric models of the world economy, disaggregated into thirty five national economies. We find that the Nordic economies are heavily exposed to external macroeconomic and financial shocks, but have significant scope to mitigate their domestic macroeconomic impacts through coordinated policy responses, given their high degree of regional integration.
The European Union’s (EU) financial stability framework is being markedly strengthened. This is taking place on the heels of a severe financial crisis owing to weaknesses in the banking system interrelated with sovereign difficulties in the euro area periphery. Important progress has been made in designing an institutional framework to secure microeconomic and macroprudential supervision at the EU level, but this new set-up faces a number of challenges. Developments regarding the financial stability may assist in the continuing evolution of the European financial stability architecture.
The Markets in Financial Instruments Directive (MiFID) which comes to life on November 1, 2007, represents a major step toward the creation of a single, more competitive, cross-border securities market in Europe. Together with other components of the European Commission's Financial Services Action Plan, MiFID has the potential to significantly transform the provision of financial services and the functioning of capital markets in Europe. This paper assesses the directive and the dynamics it creates from a broad perspective, focusing on those aspects that carry relatively higher transformation potential, and on the appropriate supervisory arrangements for European securities markets once MiFID is operational.
This Selected Issues paper on Euro Area Policies reviews the integration of Europe’s financial markets and the challenges faced by the new European Union member states with respect to euro adoption. Markets in the Financial Instruments Directive are expected to become applicable in November 2007. The Directive injects new competition among financial intermediaries at all steps of a security’s transaction cycle, from the provision of investment advice to the practical execution and settlement of the transaction, and thus holds the promise to accelerate Europe’s apparently sluggish financial sector productivity growth.
This paper develops a theory of international trade in which financial development and factor endowments jointly determine comparative advantage. We apply the financial contract model of Holmstrom and Tirole (1998) to the Heckscher-Ohlin-Samuelson (HOS) model in which firms' dependence on external finance is endogenous, and the demand for external finance is constrained by financial development. The theory nests HOS model as a special case. A key result that emerges is what we call the law of a wooden barrel: if the external finance constraint is binding, then further financial development will increase the output of the industry more dependent on external finance, and decrease the output of the other industry. It is shown that financial development makes both labor and unemployed capital better off, but incumbent capital worse off. Therefore, financial development depends on the relative strength of political forces among labor, unemployed capital owners, and incumbent capital owners. If only the capital constraint is binding, on the other hand, the standard HOS predictions will apply.
This paper discusses systematic issues in international finance explained in the International Capital Markets report. The paper describes that the nature and extent of recent banking problems in several industrial countries along with the policy responses to those problems. It is observed that balance sheet problems in banking are widespread among the major industrial countries. The paper also analyses recent activity in the European currency unit bond and exchange markets, and reviews developments in the private financing of developing countries and discusses several issues raised by the recent experience, including the broadening of the investor base for developing country securities, the special role played by regional financial centers in East and Southeast Asia, and the systemic implications of the evolving pattern of developing country financing. A key influence on international capital movements in recent years was the rising international diversification of investment portfolios, which is generally believed to have increased in response to the liberalization of exchange and capital controls in many industrial countries in the 1970s and 1980s.
International Monetary Fund. External Relations Dept.
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This year’s capital markets report has been divided into two parts. Part I, Exchange Rate Management and International Capital Flows, examined the implications of the growth and international integration of national capital markets for the management of exchange rates, with particular attention paid to the currency turmoil that enveloped the European Monetary System last year. Part II of the report focuses on several systemic issues in international finance, including recent experience with loan losses—especially in real estate—of banking systems in a number of industrial countries; sources of systemic risk in the rapid growth of off-balance-sheet financial transactions—particularly in the bank-driven, over-the-counter derivative markets; supervisory and regulatory developments; and some capital market issues pertaining to developing countries.
Although banking cannot lay uncontested claim to being the world’s oldest profession, it is clear that the principles that have helped to define sound banking behavior have a long history. At least five of those principles—namely, avoid an undue concentration of loans to single activities, individuals, or groups; expand cautiously into unfamiliar activities; know your counterparty; control mismatches between assets and liabilities; and beware that your collateral is not vulnerable to the same shocks that weaken the borrower—remain as relevant today as in earlier times. Indeed, behind all of the banking or financial sector crises that have emerged in industrial countries over the past decade—ranging from the developing country debt crisis of the early 1980s, to the saving and loan crisis in the United States, to the bank solvency crisis in Finland, Norway, and Sweden, to the spate of banking strains elsewhere—at least one of those principles has been violated.