Vahagn Galstyan

Working Papers
Exchange Rates
Central Bank of Ireland
New Wapping Street
North Wall Quay
Dublin 1

Journal Publications

  • Global Risk and Portfolio Flows to Emerging Markets: Evidence from Irish-Resident Investment Funds, (with Benedetta Bianchi and Valerie Herzberg), Journal of International Money and Finance 123, May 2022, 102600.

    Abstract: In this paper we analyse the behaviour of investment fund flows to emerging markets after the Global Financial Crisis (GFC). Our data points towards a structural growth in investment funds that purchase debt rather than equity securities. Empirically, we find that debt flows have higher sensitivity to global risk than equity flows, suggesting an increasing policy focus primarily on debt funds. We also show that Irish-resident funds’ sensitivity to changes in global risk sentiment co-varies negatively with a measure of sovereign credit rating of the receiving emerging market economy, a finding consistent with a notion that good fundamentals in host countries can mitigate outflows arising from swings in external funding conditions. Finally, we show that funds whose equity structure is tilted towards investors residing further away tend to invest less in countries than funds whose investors are closer to the same countries. This is noteworthy, given these results refer to Irish-resident investment funds that intermediate global financial flows.

  • Expectations, Unemployment and Inflation: An Empirical Investigation, International Finance 24, Winter 2021, pp.298-312.

    Abstract: This paper analyses the empirical relation between inflation and unemployment over the past 25 years by using a panel state-space model. After controlling for the global factor, I find that the domestic rate of unemployment explains 11% in the variation of headline inflation, suggesting a significant power that domestic slack has in influencing medium-term core inflation. The global factor, in turn, is well explained by global oil and food prices as well as global trade integration. The contribution of the global slack in explaining the global component of inflation is negligible. Additionally, using a set of threshold regressions, I identify breakpoints that split inflation dynamics into various regimes. In particular, I find a higher sensitivity of inflation to unemployment in high-inflation and/or low-unemployment regimes. This finding is consistent with less frequent price adjustments of firms in low-inflation and high-unemployment environments.

  • International Portfolio Debt and Special Purpose Entities: Evidence from Ireland, (with Eduardo Maqui and Peter McQuade), Journal of International Money and Finance 115, July 2021, 102398.

    Abstract: This paper examines international debt issuance through Irish-resident Special Purpose Entities (SPEs). Using a unique new dataset covering the population of Irish-resident SPEs reporting to the Central Bank of Ireland over the period 2005-2017, we identify cross-country debt financing links channelled through SPEs. The empirical analysis suggests that tax optimisation is an important motive, particularly for sponsors of Irish-resident securitisation vehicles, while investor protection and financial development are important additional considerations for sponsors of non-securitisation vehicles.

  • Bilateral Cross-Border Banking and Macroeconomic Determinants, (with Mary Everett), Review of World Economics 156, October 2020, pp.921-944.

    Abstract: This paper studies the bilateral determinants of the international asset positions of banks, and subsequent bilateral adjustment during the global financial crisis and ensuing recovery phase. We find empirical support for traditional gravity-type variables. Exploiting a comprehensive dataset of bilateral bank assets, combined with a cross-country database on capital controls and macroeconomic policies, empirical evidence is provided for the effects of macroeconomic tools on the portfolio reallocation of internationally active banks. Specifically, higher current account balances in recipient countries are associated with higher inflows in debt assets, while restrictions on asset inflows and higher central bank reserves are related to lower cross-border flows of bank investment during the crisis and post-crisis periods, with heterogeneous effects across asset type. Finally, stronger institutions in recipient countries are positively associated with the international investment of banks, with inflows to debt assets being the most sensitive asset category across the financial cycle.

  • The Currency Composition of International Portfolio Assets, (with Caroline Mehigan and Rogelio Mercado), Journal of International Money and Finance 103, May 2020, 102132.

    Abstract: In this paper, we empirically assess the importance of gravity-type variables and measures of macroeconomic and financial volatilities in explaining portfolio holdings denominated across the main global currencies: US dollar (USD), euro (EUR), Pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF). Our findings underscore the importance of trade ties and membership of the euro area. We also find that international positions co-move with the level of macroeconomic and financial uncertainty. Importantly, we identify heterogeneous patterns at a currency level.

  • Estimates of Foreign Assets and Liabilities for Ireland, Journal of the Statistical and Social Inquiry Society of Ireland 48, March 2019, pp.142-162.

    Abstract: This paper calculates foreign assets and liabilities for Ireland that are more reflective of foreign activities of Irish-resident entities. This is accomplished by stripping from the Irish international investment position the intermediation component that arises from the activities of investment funds and special purpose entities and, to some extent, correcting distortions arising from redomiciled PLCs, intellectual property transfers and aircraft leasing. My estimations not only reduce substantially gross external positions, but also shrink the extent of Irish net foreign indebtedness from 280 to 80 per cent of modified gross national income.

  • International Investment Patterns: The Case of German Sectors, (with Adnan Velic), Open Economies Review 29, July 2018, pp.665–685.

    Abstract: In this paper we exploit the newly augmented Coordinated Portfolio Investment Survey data of the IMF to study the cross-border inter-sectoral portfolio asset holdings of Germany. Our analysis reveals a significant degree of heterogeneity in German international asset positions of various holding entities. The findings of our study also suggest differential relations between portfolio holdings and a set of ``gravity-style'' factors across holder-issuer pairings of various sectors. We conclude that aggregate-level patterns in international portfolio holdings may not persist in sectoral data.

  • Public Debt and Relative Prices in a Cross-Section of Countries, (with Adnan Velic), Review of World Economics 154, May 2018, pp.229-245.

    Abstract: This paper examines the effects of debt and distortionary labor taxation on the long-run behavior of the relative price of nontraded goods. At the theoretical level, in a two-sector open economy model we demonstrate that higher public debt, associated with higher taxation, contracts labor supply in both traded and nontraded goods sectors. Relative prices move inversely with relative supply shifts which, in turn, depend on relative factor intensities. At the empirical level, for a panel of advanced economies, we find statistically significant effects of public debt and taxes on the relative price of nontraded goods, with higher debt and taxes associated with higher relative prices.

  • LIML Estimation of Import Demand and Export Supply Elasticitiess, Applied Economics 50, February 2018, pp.1910-1918.

    Abstract: Following the seminal contribution of Feenstra (1994), I apply limited-information maximum likelihood to estimate import demand and export supply elasticities for a range of eurozone countries. The results highlight substantial inconsistencies in the parameters estimated by the methodology of Fuller (1977) relative to the parameters estimated by the methodology of Hausman et al (2012). The nature of the structural equations reveals complications generated by the limiting behavior of the parameters that can be replicated in finite samples. The results of simulations underscore substantial improvements in parameter estimates in a three-dimensional panel, suggesting that the problem of limiting behaviour can be overcome in larger dataset/panels.

  • Taxation, Debt and Relative Prices in the Long Run: The Irish Experience, (with Adnan Velic), The Economic and Social Review 48, September 2017, pp.231-251.

    Abstract: This paper investigates the effects of public debt and distortionary labour taxation on the long-run behaviour of Irish relative non-traded goods prices. We highlight that higher public debt, acting through higher taxes, has an equivocal impact on the relative supply of non-traded goods and, correspondingly, relative prices. Our empirical analysis for Ireland suggests that taxes and public debt play significant roles in the long run, comoving negatively with the relative price of non-tradables. Accordingly, shifts in public debt and taxation bear implications for the country's international price competitiveness.

  • Debt Thresholds and Real Exchange Rates: An Emerging Markets Perspective, (with Adnan Velic), Journal of International Money and Finance 70, February 2017, pp.452-470.

    Abstract: In this paper we empirically analyze nonlinearities in short-run real exchange rate dynamics. Our findings suggest that real exchange rate misalignments are considerably less persistent and more volatile during times of high debt. Assessing the variance of changes in misalignments, we retrieve evidence indicating that the nominal exchange rate and inflation differentials are more important determinants in states of high debt than in states of low debt. Overall, our results imply that nonlinearities have non-negligible implications for the mechanics of real exchange rate adjustment in emerging markets.

  • The Holders and Issuers of International Portfolio Securities, (with Philip Lane, Caroline Mehigan and Rogelio Mercado), Journal of the Japanese and International Economies 42, December 2016, pp.100-108.

    Abstract: Research on the geographical distribution of international portfolios has mainly focused on data aggregated to the country level. We exploit newly-available data that disaggregates the holders and issuers of international securities along sectoral lines. We find that patterns evident in the aggregate data do not uniformly apply across the various holding and issuing sectors, such that a full understanding of cross-border portfolio positions requires granular-level analysis.

  • Productivity, Trade, and Relative Prices in a Ricardian World, Open Economies Review 26, September 2015, pp.817-838.

    Abstract: In an extended Ricardian model of trade, we study the effects of improving trade deficits on relative prices, and the relation between productivity improvements and real exchange rates. An improvement in the trade balance induces relative wages to overshoot their long-run value, placing downward pressure on the terms of trade of the same order of magnitude found in Armington type models. Once the pattern of specialization changes, some of the decline is reversed with a smaller value of depreciation. We find that persistent productivity differentials do not cause distinct trends in the terms of trade. The result depends on the size of the non-tradable sector and the variability of industry-specific efficiencies. We also find that self-selection into export markets causes the relative price of non-tradable goods to respond to exogenous shift, giving birth to an endogenous Balassa-Samuelson effect. The model also suggests that in the long-run the variation of the real exchange rate is dominated by the volatility of the terms of trade.

  • Country Size and Exchange Rates, Economica 82, April 2015, pp.222-235.

    Abstract: This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a twocountry neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a depreciation of the real exchange rate. Our estimations reveal a systematic pattern in the sensitivity of the real exchange rate to external imbalances: larger countries are characterized by a higher absolute trade elasticity of the exchange rate.

  • Bilateral Portfolio Dynamics During the Global Financial Crisis, (with Philip Lane), European Economic Review 57, January 2013, pp.63-74.

    Abstract: There has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries.

  • The Dynamics of Portfolio Holdings in Emerging Europe, (with Philip Lane), European Economy 75, February 2011, pp.66-81.

    Abstract: In this paper we examine shifts in the bilateral patterns in international portfolio holdings in emerging Europe during the 2001-2008 period. In relation to the 2001-2007 pre-crisis period, we find some evidence that shifts in the geographical composition of portfolio equity liabilities reflect shifts in bilateral trade patterns. In addition, we find that the new member states disproportionately attracted portfolio equity investment from other members of the European Union after 2004. During the crisis period, we find that the bilateral composition of the shift in portfolio positions is affected by the scale of pre-crisis holdings and the geographical proximity of creditors. We also find that countries in the euro area are more likely to maintain portfolio positions in emerging Europe than were investors from other regions.

  • The Composition of Government Spending and the Real Exchange Rate, (with Philip Lane), Journal of Money, Credit and Banking 41, September 2009, pp.1233-1249.

    Abstract: We show that the composition of government spending influences the long-run behavior of the real exchange rate. We develop a two-sector small open-economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.

  • Fiscal Policy and International Competitiveness: Evidence from Ireland, (with Philip Lane), The Economic and Social Review 40, September 2009, pp.299-315.

    Abstract: Our goal in this paper is to investigate the relation between government spending and the long-run behaviour of the Irish real exchange rate. We postulate that an increase in government consumption should be associated with real appreciation, while the impact of government investment is ambiguous. Empirically, we find that an increase in government consumption indeed appreciates the real exchange rate while an increase in government investment is associated with real depreciation. Accordingly, the level and composition of government spending matters for Irish external competitiveness.

  • External Imbalances and the Extensive Margin of Trade, (with Philip Lane), Economic Notes 37, November 2008, pp.241-257.

    Abstract: We quantify the role of the extensive margin in the recent trade dynamics of selected countries that are running large and persistent trade imbalances. We find that the role of the extensive margin is quite substantial, although it varies in significance across the countries in the sample. Finally, we highlight differences in behaviour between the fixed-varieties and varieties-adjusted terms of trade.

  • Central Bank Publications

  • Repricing of Risk and EME Assets: the Behaviour of Irish-Domiciled Funds During the COVID-19 Crisis, (with Silvia Calo and Lorenz Emter), Financial Stability Notes 9, October 2020, Central Bank of Ireland.

    Abstract: In 2020Q1, emerging market economies (EMEs) experienced significant outflows of portfolio investment capital. Irish-domiciled funds contributed to these portfolio outflows through sales of EME securities in response to heightened redemptions. Consistent with previous evidence around the sensitivity of Irish-resident fund flows to changes in global risk appetite, the retrenchment by Irish-domiciled funds in 2020Q1 was greater for debt, rather than equity, securities. Relative to their initial positions, the retrenchment was bigger for hedge funds, suggesting leverage may have acted as an amplifier of asset sales. Overall, though, Irish-domiciled funds also retrenched by less than might have been expected, given the historical relationship between measures of global risk aversion and fund flows to EMEs. In part, this may be due to the fact that, in the face of large redemptions, Irish funds also sold more liquid advanced economy securities. This points to potential common creditor effects acting as a transmission channel of shocks. The analysis also finds that EME countries with stronger fundamentals were somewhat cushioned from the retrenchment. Finally, valuation effects were strongest vis-à-vis EMEs with more flexible exchange rate regimes, suggesting a major role for currency depreciations in driving the observed reduction in positions.

  • External Balance Sheet Risks in Ireland, Part II, (with Valerie Herzberg), Financial Stability Notes 4, June 2020, Central Bank of Ireland.

    Abstract: The COVID-19 pandemic poses financial stability challenges with potential implications for the funding of economies. In the context of external borrowing, the empirical literature has shown that the level and evolution of net external debt liabilities can signal future crisis. Due to Ireland’s role as a financial centre, however, traditional data cannot be used at face value for such purposes. In Galstyan and Herzberg (2018) we focused on the external position of the banking sector only. However, a more encompassing approach is warranted given the shift of liabilities from the banking sector to the government sector in the aftermath of the crisis. Extending our previous work, we provide an estimate of net external debt liabilities for domestically-relevant entities in Ireland and propose a modified threshold indicator for monitoring external vulnerabilities. We find that on the eve of the global pandemic Ireland’s external balance sheet vulnerabilities were relatively limited.

  • Factor Income and the Euro Area Current Account, Economic Letter 8, June 2019, Central Bank of Ireland.

    Abstract: The increase in the current account surplus of the euro area has been accompanied by muted growth in real wages and an increase in corporate profits. I show that these developments are linked. In particular, temporary shifts in labor income covary negatively with the current account, while permanent shifts show little correlation. On the other hand, temporary shifts in capital income covary positively with the euro area current account, while permanent shifts are marginally negatively correlated. With recent income dynamics likely being temporary in nature, the findings suggest that both external and internal imbalances could unwind simultaneously, were the upward pressure in the labor market to translate into a redistribution of corporate profits towards labor income.

  • Understanding the Euro Area Current Account, Economic Letter 7, June 2019, Central Bank of Ireland.

    Abstract: Adopting a savings-investment approach to the current account, I link the euro area current account to a set of factors that have been identified as reliable covariates in the literature. The results suggest that corporate net lending and the fiscal balance are important covariates of the euro area current account. On the other hand, while demographic factors also matter, their relevance is of second order.

  • Inflation and the Current Account in the Euro Area, Economic Letter 4, May 2019, Central Bank of Ireland.

    Abstract: The euro area current account was on average in balance over 1999-2010 period, while the average rate of inflation was close to the ECB target. In contrast, the post-2011 increase in the euro area current account surplus has been accompanied by a period of low inflation. This paper suggests that observed low inflation can be partly explained by the surplus in the external balance. I propose a version of an open-economy inflation Phillips curve showing that, in addition to output gap and inflationary expectations, inflation is also shaped by the trade balance. At an empirical level, I find a statistically significant and negative correlation between the two variables.

  • External Balance Sheet Risks in Ireland, (with Valerie Herzberg), Financial Stability Notes 9, October 2018, Central Bank of Ireland.

    Abstract: Large external imbalances have been a persistent feature of most advanced economies, including Ireland. This is despite significant deleveraging of the Irish banking sector since the financial crisis. Given the presence of internationally oriented activities with little Ireland-related business, early-warning indicator metrics related to the international investment position require adjustments in order to serve as useful monitoring tools. We propose to focus on a metric related to the net external debt liabilities of a narrow set of domestic Irish banks: a closer monitoring of the external balance-sheet risk is warranted when the net external debt liabilities of domestic banks exceed 17 per cent of modified gross national income.

  • Other Short Publications

  • Irish-Domiciled Funds and EMEs During the COVID-19 Market Turmoil, (with Silvia Calo and Lorenz Emter), Financial Stability Review II, November 2020, pp.39.

  • Who Invests in Irish Sovereign Debt Securities?, (with Mary Everett and Peter McQuade), Financial Stability Review II, December 2019, pp.39.

  • An Indicator of External Vulnerabilities, (with Valerie Herzberg), Macro-Financial Review 2, June 2018, pp.19.

  • External Portfolio Investment Liabilities of Ireland, Macro-Financial Review 1, June 2018, pp.18.