Dynamics Of Capital Flows Research Articles

Dynamics of Capital Flows and Global Factors: Case of Emerging Economies

Dynamics of Capital Flows and Global Factors: Case of Emerging Economies

Expectations, sentiments and capital flows to emerging market economies

This paper provides a novel look at capital flow determinants by assessing the role of expectations and media sentiments. Analyzing eight emerging market economies, we assess the effects of macroeconomic expectations and disagreement among professionals and various media-based sentiment indicators. Our results show that survey and sentiment indicators which are available in real time contain useful information about capital flow dynamics which go beyond the effects of conventional push and pull factors for all countries we analyze. News sentiment related to the exchange rate have the strongest effects on capital flows. Finally, we identify substantial heterogeneity across countries.

Capital flow dynamics and the synchronization of financial cycles and business cycles in emerging market economies

This study assesses the dynamics of capital flow, financial cycles, and business cycles in Emerging Market Economies (EMEs). We show that: (a) capital flow cycles tend to be more volatile than financial and business cycles, (b) although significant heterogeneities exist in the dynamics of these cycles across EMEs, financial and business cycles tend to be similar in terms of amplitudes, (c) significant concordance exists between different cycles and between the same cycles across countries, and (d) capital flow cycles tend to lead financial and business cycles. These findings provide clear guidance on the use of central bank policy mix strategy in response to capital flows, financial, and business cycles. Our results also imply strong interconnection between EMEs, in the sense that they appear to simultaneously experience expansions and recessions.

Capital flows to low-income sub-Saharan Africa: an exploratory review

PurposeThe purpose of the paper is to examine macroeconomic and institutional factors that influence capital flows to low-income sub-Saharan African (SSAn) countries. It analyzes capital flows in a disaggregated manner: foreign divert investment, portfolio equity and portfolio debt. There is a gap in the empirical literature in examining the factors that are important for various types of capital flows to low-income SSAn countries. Low-income SSAn countries attract very low levels of foreign investment compared to other developing economies in the SSAn region and other developing economies and this paper attempts to make a contribution in this area.Design/methodology/approachThis paper examines data on capital flows and that of various push and pull factors. Trends and dynamics of capital inflows and their macroeconomic and institutional drivers are analyzed for low-income sub-Saharan African countries. Such an analysis has not been fully explored for low-income SSAn countries.FindingsCapital inflows to low-income sub-Saharan Africa (SSA) have increased sevenfold since the 1990s, dominated by foreign direct investment (FDI). They overtook official development assistance and aid in the 2010s. Mozambique and Ethiopia attract the largest size of FDI compared to other low-income SSAn economies, with natural resources as key factors in the former. The largest share of FDI to low-income SSAn countries comes from other SSAn countries, mostly South Africa and Mauritius. Among macroeconomic push factors, capital inflows are more closely related to commodity prices, while the volatility index and global liquidity are also important. Among macroeconomic pull factors, trade openness and economic growth appear more closely related to capital inflows. The surge in capital inflows in the 2000s also followed the implementation of several regional trade and investment agreements in the region. The improvement in internal conflict in the 1990s and mid-2000s seems to have helped support the increase in capital inflows during that period. This institutional quality variable appears to more closely track capital inflows compared to other institutional quality indicators. There were also improvements in the investment profile, law and order, and government stability in the 1990s to early 2000s when capital inflows picked up.Research limitations/implicationsThis study focuses on low-income SSAn countries, which are less studied in the empirical literature and that face immense developmental needs that require foreign and domestic capital.Practical implicationsFindings of this paper can shed light to policy makers on the factors that are most important to help the region attract capital inflows and areas where further improvement is needed in the macroeconomic and institutional environment.Originality/valueThere is a gap in the empirical literature in examining the factors that are important for attracting capital flows to low-income SSAn countries. To our knowledge, this study may be the first to explore dynamics of capital flows against institional quality for low-income SSAn countries at a disaggregated level.

Japan and the allocation puzzle in an aging world

Capital that flows from rich to poor countries can be important in equalizing living standards across countries. Various factors, however, contribute to the Lucas Paradox and the mixed empirical evidence on the direction of capital flows. Differences in fundamentals, or simply TFPs, international financial market imperfections, differential demographic aging across regions of the world, or fiscal institutions affect the dynamics of capital flows. This paper builds a general equilibrium model of the world economy under imperfect capital mobility, populated by overlapping generations of individuals in three regions: the High-income (HI), Middle-income (MI) regions and Japan. We show that both TFP and aging are important factors to explain capital flows from the MI region to the HI region in the future and that Japan will turn a net borrower in mid-century in a process where the MI region further accumulates its external wealth. An alternative transition path in which the MI region exhibits catch-up in the expansion of the pension system and the TFP growth throughout the century shows significant effects on the predicted external wealth position of Japan.

Anti-Oedipus in the Anthropocene: Education and the deterritorializing machine

The Deleuze/Guattari text Anti-Oedipus burst onto the intellectual scene in 1972 as a radical new means to reconceptualise capitalism and its effects. At the heart of Anti-Oedipus and its analysis of capitalism is the concept of deterritorialization, and how it evacuates identities, culture, values, and, indeed, coherent thought itself, and it makes them susceptible to the equations and dynamics of capital flows. Anti-Oedipus presents the mechanisms with respect to how deterritorialization interacts with and to an extent liberates desire as ‘desiring-machines’. This philosophy of education paper applies the workings of deterritorialization and desire from Anti-Oedipus to the dynamics of contemporary climate change education and the Anthropocene. As such, it posits this dynamic as being critical to present day approaches to the philosophy of education that wish to engage with capitalism and its effects, and at the same time positively enter the climate change debate. This paper suggests that understanding the matrix of deterritorialization, desire, climate change and learning, is perhaps the most important work that can be performed in the philosophy of education today and with respect to the future.

COVID‐19, asset markets and capital flows

This paper empirically examines the reaction of global financial markets across 38 economies to the COVID‐19 outbreak, with special focus on the dynamics of capital flows across 14 emerging market economies. The effectiveness of fiscal and monetary policy responses to COVID‐19 is also tested. Using daily data over the period January 4, 2010 to August 31, 2020, and controlling for a host of domestic and global macroeconomic and financial factors, we use a fixed effects panel approach and a structural VAR framework to show that emerging markets have been more heavily affected than advanced economies. In particular, emerging economies in Asia and Europe have experienced the sharpest impacts on stock, bond and exchange rates due to COVID‐19, as well as abrupt and substantial capital outflows. Quantitative easing and fiscal stimulus packages mainly helped to boost stock prices, notably for advanced and emerging economies in Asia. Our findings also highlight the role that global factors and developments in the world's leading financial centers have on financial conditions in EMEs. Importantly, the impact of COVID‐19 related quantitative easing measures by central banks in advanced countries extended to EMEs, with significant positive spillovers to EME stock markets in Asia, Europe and Latin America. Going forward, while the ultimate resolution of COVID‐19 may be expected to lead to a market correction as uncertainty declines, our impulse response analysis suggests that there may be persistent effects on bond markets in emerging Europe and on EME capital flows.

Structure and dynamics of capital flows between the USA, China and the European Union

Structure and dynamics of capital flows between the USA, China and the European Union

How important are global factors for understanding the dynamics of international capital flows?

We propose a dynamic factor model with time-varying parameters and stochastic volatility to analyze the relationship between global factors and country-specific capital flow dynamics. Studying a global sample of 43 countries from 1994 until 2015, we show that global co-movement of macroeconomic, financial and capital flow variables can explain a major share of country-specific capital flow volatility and that the impact of these variables has become even more important in the aftermath of the 2008–2009 global financial crisis. Our results indicate that country-specific changes in capital flows are strongly affected by fluctuations in global financial cycles and – to some extent – by global real business cycles. We provide also some evidence that the exchange rate regime, the stock of reserves, prudent fiscal policy and more developed stock markets can insulate economies, at least partially, from the global financial cycle.

Assessing the Economic and Financial Fallout from COVID-19; Implications for Macroprudential Policy

COVID-19 has caused an increased demand for safe assets, causing capital to flow out of emerging and developing market economies, while higher credit spreads and a weaker exchange rate have caused a spike in inflation. This paper analyses the fallout to the real economy and fiscal measures implemented by governments to reduce the externalities stemming from COVID-19. It finds that capital flow dynamics during the pandemic have amplified the adverse effects of higher credit spreads on domestic exchange rates. Macroprudential policies designed to address capital flow vulnerabilities will improve the transmission of monetary policy to the real economy and lessen vulnerabilities in the EM financial systems.

Financial Market and Capital Flow Dynamics During the COVID-19 Pandemic

We examine empirically the reaction of global financial markets across 38 economies to the COVID-19 outbreak, with a special focus on the dynamics of capital flow across 14 emerging market economies. Using daily data over the period 4 January 2010 to 30 April 2020 and controlling for a host of domestic and global macroeconomic and financial factors, we use a fixed effects panel approach and a structural VAR framework to show that emerging markets have been more heavily affected than advanced economies. In particular, emerging economies in Asia and Europe have experienced the sharpest impact on stocks, bonds, and exchange rates due to COVID-19, as well as abrupt and substantial capital outflows. Our results indicate that fiscal stimulus packages introduced in response to COVID-19, as well as quantitative easing by central banks, have helped to restore overall investor confidence through reducing bond yields and boosting stock prices. Our findings also highlight the role that global factors and developments in the world’s leading financial centers have on financial conditions in EMEs. Importantly, the impact of COVID-19 related quantitative easing measures by central banks in advanced countries, which helped to lower sovereign bond yields and prop up stock markets at home, extended to EMEs, notably in relation to stabilizing capital flow dynamics. While the ultimate resolution of COVID-19 may be expected to lead to a market correction as uncertainty declines, our impulse response analysis suggests that there may be some permanent effects on financial markets and capital flows as a result of COVID-19, particularly in EMEs.

The Micro and Macro Dynamics of Capital Flows

The Micro and Macro Dynamics of Capital Flows

Social Preferences of Investors and Sustainable Investing

I study portfolio sustainability and capital flow dynamics in socially responsible and conventional mutual funds. I document that a large fraction of conventional funds systematically invests sustainably even without a social mandate, while several socially responsible funds persistently green-wash. Both conventional and socially responsible investors value sustainability as they reward sustainable fund portfolios, but they do not punish weak social performance to the same extent that they reward strong social performance. Socially responsible investors respond to portfolio sustainability only when the fund performs poorly financially. As a result, much green-washing goes unpunished. Further, sustainable portfolios do not financially outperform conventional portfolios, suggesting that investors value sustainability for non-economic reasons.

What Determines Capital Flow Dynamics for Russia

The paper studies the impact of external supply or “push” factors (global economic and financial indicators, oil prices, sanctions etc.) and internal demand or “pull” factors (actual and expected GDP growth rates, institutional indicators, openness indicators etc.) on private sector capital flow components (foreign direct, portfolio and other investments) and capital flow aggregates (gross capital inflow and outflow, net capital inflow) in the Russian case, based on regressions utilizing 1994–2018 quarterly data. Among the external factors, the VIX volatility index, the real effective exchange rate of the U.S. dollar and the sanction intensity index prove to be consistently significant. The impact of sanction shocks is found to weaken over time, probably reflecting adaptation to sanctions. Among the internal factors, only the expected GDP growth rates prove significant. In contrast to existing literature on emerging markets as a whole, no significant impact of the interest rate and GDP growth differentials (with respect to advanced economies) is established. It is demonstrated that the push factors account for the larger share of explained variance of gross capital inflow and outflow as well as net capital inflow. In addition, capital flow volatility indicators are analyzed, with positive correlations found for the VIX index, the U.S. interest rates, the oil price volatility, and the financial account openness index.

Foreign Direct Investment and Debt Financing in Emerging Economies

AbstractThe rich dynamics of capital flows is an important characteristic of business cycles in emerging market economies. In the data external debt is always procyclical, while FDI is procyclical only in normal times. We provide a microfounded rationale for this pattern by linking financial shocks to capital flows. For this purpose, we build a small open economy model in which firms are subject to borrowing constraints, and are either owned domestically or by foreign investors who purchase firms through FDI. During a financial crisis, the valuation gap per unit net worth between foreign and domestic investors widens, which triggers more FDI inflow. Our model produces business cycle moments consistent with empirical observations.

Delegation and the Dynamics of Capital Flows

In this paper, I build a model where financial intermediation slows the flow of capital. Investors optimally learn from intermediary performance to allocate capital toward profitable intermediaries. Intermediaries reach for yield, i.e invest in high tail risk assets, in an attempt to drive flows and reduce liquidation risk. Reaching for yield is stronger among intermediaries with weak opportunities, resulting in a reduction in the informativeness of performance; investors take longer to learn and capital flows become less responsive to performance. Capital becomes slow moving because the reach for yield dampens learning. The model predicts capital immobility to be stronger when tail risk is high; when tail risk is underpriced; and in asset classes with large cross-sectional variation in tail risk exposures.

The Financial Crisis of 2007–09 and Emerging Countries: The Political Economy Analysis of Central Banks in the Brazilian and Korean Economies

Insofar as the global crisis of 2007–09 can be understood as a fully-fledged crisis of the financialization era, it has presented new challenges for central banks. However, this paper argues that the central banks' interventions in key middle income countries (Brazil and Korea) have reinforced the main characteristics of financialization and have been different from their previous foreign exchange crisis of the late 1990s. The key reasons for this sharp contrast in central bank interventions can be found in the origins of the recent crisis — in developed financial markets — which is different from the previous one which originated in emerging markets. Furthermore, the higher level of financial integration of both economies in relation to the late 1990s is a more important factor. The Korean and Brazilian experiences show that liquidity management by central banks has been conditioned by international capital flows, and more importantly they have reinforced this trend through their operations in spite of differences in the dynamics of capital flows, in their timing of reserve accumulation and in their level of financial integration.

Home bias and high turnover: Dynamic portfolio choice with incomplete markets

Why do investors trade a lot in foreign assets and hold so little of them in their portfolios? This paper shows that both observations can arise naturally in the presence of nondiversifiable nontraded consumption risk when each country specializes in production, preferences exhibit consumption home bias, and asset markets are incomplete. Using a general equilibrium two-country, two-sector (tradable and nontradable) model of the world economy with production I show that low diversification occurs because variations in relative prices (i) increase the riskiness of foreign assets and (ii) facilitate risk-sharing across countries. Large and volatile capital flows are necessary to take advantage of international risk premia differentials that occur in response to productivity changes in the nontradable sector. I characterize the optimal portfolio holdings, the evolution of the investment opportunity set, the risk premium, and the dynamics of capital flows using a new methodology for solving dynamic general equilibrium models with incomplete markets and portfolio choice.

Home Bias and High Turnover: Dynamic Portfolio Choice with Incomplete Markets

Why do investors trade a lot in foreign assets and hold so little of them in their portfolios? This paper shows that both observations can arise naturally in the presence of nondiversifiable nontraded consumption risk when each country specializes in production, preferences exhibit consumption home bias, and asset markets are incomplete. Using a general equilibrium two-country, two-sector (tradable and nontradable) model of the world economy with production I show that low diversification occurs because variations in relative prices (i) increase the riskiness of foreign assets and (ii) facilitate risk-sharing across countries. Large and volatile capital flows are necessary to take advantage of international risk premia differentials that occur in response to productivity changes in the nontradable sector. I characterize the optimal portfolio holdings, the evolution of the investment opportunity set, the risk premium, and the dynamics of capital flows using a new methodology for solving dynamic general equilibrium models with incomplete markets and portfolio choice.

Capital flow and foreign interest rate disturbances in a small open economy

This article studies the dynamic response of capital flows when the economy faces a disturbance in world interest rates. The theoretical framework builds upon a fully optimizing dynamic macroeconomic model with capital accumulation and households having finite life spans. The precise path that describes the current account along the transition to the new steady state is characterized. Two extensions of the baseline model are performed. First, it is analyzed how the degree of international capital mobility affects the adjustment path of the current account. Second, a monetary extension of the model is used to study the link between the degree of domestic financial development and the dynamics of capital flows.