Two essays on monetary union and international finance

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Title: Two essays on monetary union and international finance
Author: Chen, Nai-Wei
Abstract: This dissertation studies the Economic and Monetary Union (EMU ) and its effects on foreign exchange markets and corporate cash holdings . These two potential effects are examined in the dissertation in two separate essays . The first essay examines the validity of the purchasing power parity (PPP ) condition during three distinct exchange rate regimes (floating -rate , target -zone arrangement , and fixed -rate or common currency ) from January 1973 through January 2004 . My results support PPP , but I find that PPP during the common currency regime holds in fewer EMU countries than during the alternative exchange rate regimes . In addition , PPP between currency blocs holds for all countries examined during the first two regimes , but deteriorates after the introduction of the euro for the EMU countries as opposed to the non -EMU countries . I do not obtain strong evidence supporting PPP for the EMU countries since the euro adoption , but the faster mean reversion I observe in the few EMU countries where PPP does hold , may signal higher market efficiency and economic integration in the future . The second essay investigates corporate liquidity (cash holdings of firms ) from 15 European Union (EU ) countries [12 Economic and Monetary Union (EMU ) countriesthat adopted the euro , and 3 non -EMU countries] from 1993 to 2002 using a dynamic panel data model . My main contributions to the corporate liquidity literature are fourfold . First , I provide evidence that creditor rights also affect corporate liquidity and their effect is more consistent than that of shareholder rights . Second , I show that the recent formation of EMU affects corporate liquidity . Debt and net working capital are better substitutes for cash in EMU countries than non -EMU countries . The adoption of a common currency reduces cash holdings in EMU countries . Third , my results suggest that agency theory plays an important role in explaining corporate liquidity . In particular , the agency view explains corporate liquidity better for EMU firms , probably because of an enhanced capital market integration that weakens the transaction and precautionary motives of holding cash . Fourth , I show that dealing with the endogeneity problem in corporate liquidity studies is important .
URI: http : / /hdl .handle .net /1969 .1 /2557
Date: 2005-11-01

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Two essays on monetary union and international finance. Available electronically from http : / /hdl .handle .net /1969 .1 /2557 .

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