Capital Outflows Research Articles

Asset bubbles and financial frictions in small open economies☆

Financial cycles involving asset bubbles frequently coincide with the cyclical expansion and contraction of credit conditions. The collapse of asset and credit bubbles frequently precedes financial crises and economic recessions. We develop a small open economy DSGE model that incorporates asset bubbles and banking frictions. Credit-constrained firms trade in intrinsically useless bubble assets. Financial intermediaries, constrained by their balance sheets, introduce banking friction into financial markets. The static analysis suggests that increases in foreign interest rates unfavorably impact the formation of domestic bubbles. Dynamic analysis indicates that asset bubbles amplify macroeconomic fluctuations, with banking leverage constraints intensifying this effect. Therefore, asset bubbles amplify and propagate economic fluctuations. Unconventional monetary policy, macroprudential policy, and bubbly bailout policy could mitigate the amplification effects of banking leverage constraints and asset bubble bursts on macroeconomic fluctuations, which are mediated through reducing risk premiums, curbing capital outflows, and sustaining asset bubble channels, respectively. Finally, combining unconventional monetary policies with bubbly bailout policies and macroprudential policies yields superior outcomes.

Does the Comprehensive Commercial Logging Ban Policy in All Natural Forests Affect Farmers’ Income?—An Empirical Study Based on County-Level Data in China

The Comprehensive Commercial Logging Ban Policy (CCLBP) in natural forests as the strictest forest conservation measure brings uncertainty to the income of farmers engaged in forest land management. Therefore, clarifying the impact and heterogeneity of the CCLBP on farmers’ income has become a significant issue of current concern. Based on county-level panel data from China covering the period 2000–2020, this study uses Regression Discontinuity Design (RDD) to identify the impact of the CCLBP on farmers’ income. The empirical results show that (1) the CCLBP has a significantly positive effect on farmers’ income, with the policy leading to an increase in farmers’ income of approximately RMB 411–582; (2) the impact of the CCLBP on farmers’ income exhibits regional heterogeneity, with significant positive effects observed in Hebei, Shandong, Hubei, and Shaanxi, significant negative effects observed in Guangxi, and insignificant effects observed in other provinces; and (3) the CCLBP not only promotes the development of non-agricultural industries and labor mobility but also effectively reduces capital outflow, thereby increasing farmers’ income. This study contributes to the understanding of the underlying mechanisms between the CCLBP and farmers’ income, and it has significant practical implications for promoting the increase in farmers’ income, narrowing the income gap among farmers, and achieving common prosperity. It can also provide valuable insights and guidance for global forest protection.

Impact of Account, Transparency, and Accountability Indicators on Economic Growth: Evidence from South Asian Countries

This study examines the intricate relationships between Account, Transparency, and Accountability indicators and GDP growth across a panel of countries, focusing on the Current Account Balance (CAB), Net Capital Account (NCA), Net Financial Account (NFA), CPIA Transparency Rating, and Voice and Accountability (VA). Drawing on economic theory and empirical analysis, we investigate how these variables influence Economic (GDP) growth dynamics. Theoretical underpinnings suggest that positive CAB reflects trade surpluses, contributing positively to GDP through increased economic activity, while NCA inflows stimulate long-term productivity gains. Conversely, negative NFA indicates potential adverse effects on GDP from capital outflows. Empirical findings using fixed effects, random effects, and Feasible Generalized Least Squares (FGLS) regression reveal significant associations: positive CAB and NCA correlate with higher GDP growth, whereas NFA shows a negative impact. CPIA and VA, while important for governance, do not directly affect GDP growth in this context. This research contributes by providing nuanced insights into the drivers of economic growth, informing policy strategies for sustainable development and institutional enhancement.

Capital controls in China: A necessity for macroeconomic stability

This paper investigates the crucial role of capital controls in maintaining macroeconomic stability in China. We develop an open macroeconomic model integrating capital controls within a managed floating exchange rate system. Our model shows that capital controls enhance the effectiveness of foreign exchange interventions by restricting capital outflows and providing a broader array of policy options, though they may also create discrepancies between domestic and foreign asset holdings. Simulations using quarterly time-series data reveal that capital controls are essential for the success of both sterilized and non-sterilized interventions. These results indicate that the combined use of capital controls and foreign exchange interventions can reduce macroeconomic volatility in China. Moreover, our analysis of fixed versus floating exchange rate regimes suggests that an inappropriate regime choice can increase volatility in capital flows. Therefore, China should adopt a balanced financial approach within its managed floating system to stabilize the macroeconomy.

Capital Flight and Nigeria Economic Growth

The study explored the impact of capital outflow in Nigeria and focused on its implications for the country's emerging economy. It reviews relevant literature and theories. It applied the Augmented Dickey-Fuller test to analyze the time series data obtained for the investigation. The ARDL bounds tests for cointegration was used to determine the relationships among the variables. The autoregressive distributed lag method was also employed to evaluate the short- and long-term associations between the explanatory factors and economic growth. Findings reveal a limited correlation between capital outflow and economic growth, whereas foreign direct investment showed a minor negative impact in the long run. It was also revealed in the investigation that leadership style and Governance contribute to capital flight in the country. Recommendations were to the effect that, creation of a favourable economic environment was necessary to reduce capital outflow, promote trade liberalization, and encourage regional integration to enhance market access.

African and international financial markets interdependencies: Does Covid-19 media coverage make any difference?

This study examines the co-movement and time-varying integration between equity, exchange rate, and international market volatility indices across different time–frequency domains using the wavelet and dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity (DCC-GARCH) model and BEKK GARCH for selected African countries. First, the findings indicate that the co-movement between equity and exchange rates during the pandemic was exacerbated by global COVID-19 media coverage. The findings indicate that there has been a substantial risk transfer between exchange rates and stock returns during the COVID-19 pandemic, resulting in a decline in domestic stock returns and subsequent capital outflows, which in turn increased the exchange rate. Given the growing difficulties in diversification, specific information on the volatility of financial market connectedness is required to plan hedging strategies. To explore the influence of global market volatility on Africa’s equity and currency markets, it is crucial to analyse the relationship between regional and global market fluctuations, especially given the negative impact of the COVID-19 pandemic. Our empirical research demonstrates that the VIX and OVXCL indices play a significant role in transmitting spillovers to currency and equity markets in Africa. This suggests that the sentiment indicators provided by the VIX and OVXCL can be useful in predicting the behaviour of Africa’s currency and equity markets

A footloose capital model of economic development

AbstractWe present a footloose capital model in a two‐country economy and the manufacturing and natural resource sectors with heterogeneous manufacturing firms to analyze the impacts of trade liberalization and technological progress on the net capital flows, net export, and social welfare. Our main analytical result is that a lagged country initially experiences capital outflow due to the high technological gap in the manufacturing sector with increasing returns to scale, then capital inflow due to the home market effect. This corresponds with the fact that China was a net importer of manufactured goods initially, and became a net exporter recently. These results are consistent with the data obtained after the reform and opening‐up policy in 1978.

From Historical Context to Contemporary Realities: Illicit Capital Outflows from Nepal

This paper explores illicit capital outflows, explaining its multifaceted implications in underdeveloped countries like Nepal. The paper also highlights the historical dynamics adjacent to illicit financial transfers, including their causes, mechanisms, and repercussions. The paper examines the various facets of illicit capital outflows, corruption, and bad governance mechanisms in Nepal. It explores how modern technology and global financial structures facilitate these outflows, contributing to a drain of resources from Nepal. Moreover, the study delves into historical contexts where significant capital outflows occurred due to political transitions and exploitation of national treasuries. The paper also discusses contemporary instances of illicit financial activities, including illegal transactions through Currency Smuggling, Hundi, and the involvement of banks and business entities in illegal capital flights from Nepal to abroad. It emphasizes the challenges faced by regulatory bodies in curbing these illicit practices and their adverse impacts on economic development, revenue collection, and the formal economy in Nepal.

India’s Balance of Payment Position: An Overview

As far as Indian BOP is concerned, over the years generally balance of trade indicated deficit while balance of services remained in services. Main reason being imports of India for the visible items such as crude oil and gold far exceed the exports by India but on services account India being known for skilled force rendering services abroad and being IT hub, net services stood in surplus and similarly private transfer payments in the form remittances usually indicate surplus. However, surplus in BOP does not always guarantee the prosperity and likewise deficit does not always signals danger towards the solvency of a nation. Surplus on current account and favourable balance of payment may be on account of massive foreign debt and unprecedented private capital inflows. Thus, favourable BOP may eventually become fatal if the reasons for surplus not carefully considered by authorities and rather become careless in managing BOP. Similarly, BOP deficit cannot be taken as threat to the domestic economy if it is due to huge amount of financial aid to other countries and capital outflows but otherwise continuous BOP deficit may eventually lead to a critical situation such as BOP crisis. Thus, BOP analysis should be performed carefully and results of analysis should be critically evaluated to take appropriate measures to save the domestic economy at the global level.

Climate change in Europe and international portfolio allocation: Micro‐level evidence from global funds

AbstractThis paper investigates the impact of climate change on international portfolio allocations of global funds. We select the heat wave disasters in Europe in 2018 as a quasi‐natural experiment and employ the DID framework. Our findings indicate that global funds would reduce their holdings in the affected country after heat wave disasters. The congestion of inland waterways and electricity shortages during the heatwave have resulted in production delays, thereby transmit risks to the financial sector. Countries with higher foreign exposure experience a larger scale of capital outflow after heat waves; while countries with great institutional quality and resilience demonstrate greater capacity to withstand heat wave disasters. The funds with lower risk tolerance are more sensitive to climate change. Additionally, domestic funds will remain in their home countries post‐heatwave when foreign capitals flow away. These findings have important policy implications, and countries with high climate risks should carefully monitor the capital flows. In order to reduce the impact of climate risks, it is crucial to improve the quality of institution and efficiency of government as well as to implement effective disaster prevention and mitigation measures.

The metamorphosis of external vulnerability from ‘original sin’ to ‘original sin redux’: currency hierarchy and financial globalization in emerging economies

How has financial globalization changed the nature of external vulnerability of emerging economies? To answer this question, we first present an overview of the changes in international capital flows and cross-border stocks involving emerging economies from the 1970s to the COVID-19 crisis and then identify relevant recent shifts in financial globalization. We adapt the concept of currency hierarchy to the most recent features of financial globalization. We deploy a stylized balance sheet analysis to better understand the metamorphosis of these economies’ vulnerabilities. We find the occurrence of the phenomenon of ‘original sin’ during financial internationalization. In contrast, in more recent times of financial globalization, the diversification of financial flows and investors and the increase of securities denominated in domestic currency have created additional channels of vulnerability, labeled as ‘original sin redux’. We find that the private sector in Southern economies is mostly exposed to these new vulnerabilities. At first sight, it is good news because it preserves the fiscal space of Southern States in the case of capital outflows. However, it might create new contingent liabilities for the public sector. We call for capital account regulation in a broad sense to target these new complex vulnerabilities.

The Impact of China’s Capital Account Liberalization on the Direction of Cross-border Capital Flows

Objective: This article aims to investigate the impact of China’s capital account openness (OPEN) on cross-border capital flows (CCF). Methods: The research utilizes the ARDL-ECM model for empirical analysis. It begins by summarizing existing literature on the topic and then proceeds to analyze the data spanning from 1998 to 2023. The study explores the long-term cointegration relationship between OPEN and CCF. Additionally, it investigates the correlation between the direction of openness and its effect on CCF. Notably, the research introduces the concept of the volatility of OPEN as an explanatory variable to understand its impact on various types of capital flows. Results: The findings reveal a significant long-term cointegration relationship between OPEN and CCF. This relationship is significantly influenced by the direction of openness. Moreover, the study identifies that the volatility of OPEN notably affects different categories of capital flows. Furthermore, it observes that structural changes in net foreign securities investment are comparatively higher than those in net foreign direct investment. Conclusion: This study underscores several recommendations for the ongoing process of capital account liberalization in China. Firstly, adjust OPEN flexibly to promote or restrict specific types of capital flows. Adopt elastic capital control measures for different types of capital flows to balance the stability of domestic capital markets and the activity of international capital flows. Secondly, careful adjust capital outflow openness to maintain economic environmental stability and prevent capital flight. Lastly, encourage long-term investment, particularly in the real economy and infrastructure sectors, and provide incentives for investors committed to long-term investment.

Anti-Russian Sanctions Impact Areas

Four processes occurring within the country and weakening contemporary Russian society are considered in this paper. These processes include: the reduction in income from foreign trade, the “brain drain”, the depopulation and the capital outflow. Their qualitative and quantitative characteristics are presented; the internal and external factors that contribute to the development of these processes are identified. Numerous restrictions, prohibitions, and sanctions imposed on the Russian Federation aim to stimulate the development of these negative phenomena and expand the scale of their unwanted consequences on the Russian economy and society. The results of the author’s research on the validity of Russia’s adversaries’ choice of the aforementioned processes as objects of sanctions impact on the Russian Federation are presented in this article.

The Impact of Differential COVID-19 Pandemic Containment Policies on International Trade and Capital Flows

ABSTRACT This article develops a two-period two-country model to examine the impact of differential COVID-19 pandemic containment policies on international trade and capital flows. The theoretical analysis shows that asymmetric labor supply shocks resulting from the pandemic generate capital outflows from more affected countries to less affected ones, with the former running current account deficits. The greater the asymmetry in supply shocks, the more pronounced the impact on cross-border capital and trade flows. As the pandemic abated, these flows reversed, creating significant fluctuations over the pandemic cycle. However, globalization acted as a risk-sharing mechanism, moderating potential welfare losses. Using panel data from 42 countries, we investigate how specific containment policies like workplace closures and home isolation mandates affect trade and capital flows. Contrary to findings using higher frequency data, our empirical results confirm key predictions of our model, suggesting more stringent temporary containments, while dampening economic activity initially, may reduce COVID-19 cases and induce current account surpluses and capital inflows over a longer horizon.

The Relationship Between the German Current Account and Financial Account: Evidence from the Toda-Yamamoto Causality Approach

Abstract The paper examines the causality between the German current account and financial account. It contrasts with past research which assumes the current account and financial account to be jointly determined by a saving-investment imbalance. Our analysis decomposes the current account into exports and imports (real resource flows) and the financial account into domestic capital outflows and foreign capital inflows (gross capital flows). Evidence from the Toda-Yamamoto causality test shows that for Germany from Q1.1980 to Q2.2023, the causality runs from the financial account to the current account. It is not real resource flows but gross capital flows which exert significant impacts on the German real exchange rate. The finding implies that over the long run, strong German capital outflows and weak foreign capital inflows contributed to weak wage growth and stagnant investment in Germany, sustaining the persistent German current account surpluses. A reduction of the German current account surpluses requires a policy mix of fiscal expansion and monetary tightening which would expand the absorption of German and foreign capital in the German economy.

Indonesia Transport Loan Projects: Development Outcome Attributions (DOA) on Unemployment, Growth, and Poverty

Our goal was to investigate the effects of international development banks' foreign exchange loan-funded transportation projects. We examined the effects and efficacy of Indonesia's transport loan projects, which were supported by the World Bank and the Asian Development Bank (ADB), to achieve this, 67 projects of $8.85 billion in value were undertaken between 1972 and 2020. This study is significant because it is the first in the history of development assistance—after 100 years—that is based entirely on banking theories and practices, employing attribution techniques and presuming that all loans will be disbursed into Indonesia's economy. Nevertheless, the effectiveness narratives are untrue because—after being converted into Rupiah—less than 10% of the loan fund made it to Indonesia's economy. According to our analysis, the loans from both banks decreased growth by 200% and increased poverty by 220%, even if they were successful in providing jobs. The disbursement delays of five to seven years result in capital outflows of more than $26 for every $1 loan. Fixing this necessitates a 100% payout in Rupiah into Indonesia's national banking systems the same year that the loan agreements are executed.

Health Outcome and Economic Growth: The Case of Malaria in Nigeria

This study has examined the influence of health outcome on economic growth in Nigeria: the case of malaria. The purpose of the study is to investigate the efforts of government on health care system in Nigeria as it influences real gross domestic product within the period of review. Econometrics analyses were employed to carry out the investigation using Autoregressive Distributed Lag (ARDL). The findings revealed that current health expenditure has an unfavourable effect on economic growth, while gross capital formation and secondary school enrolment have positive influence on economic growth in Nigeria. It is, therefore, recommended that the government should endeavour to double her investment in health care system in Nigeria. There are lots of capital outflows as a result of poor expenditure on health care system in Nigeria. The only way to curb this is for the government to be deliberate in her will to invest in this particular sector of the economic which will stimulate improvement in economic growth in general.

Determinants of illicit capital movement in China‐Africa trade: Evidence of trade misinvoicing

AbstractIllicit financial flows have been an issue of great concern over the past decades due to the challenge they present for economic development in Africa. Illicit financial flows undermine the productivity and growth of African economies as countries lose foreign exchange and tax revenues. Countries lose financial resources needed for development programs, hence undermining social service delivery and retarding poverty reduction. To effectively combat illicit financial flows, it is imperative to examine their determinants. This study seeks to examine the determinants of illicit capital movement in the China‐Africa trade through the mechanisms of trade misinvoicing over the period 1990–2019. The IMF's Direction of Trade Statistics (DOTS) database is used to estimate trade misinvoicing. Estimates using mirror trade data indicate that both exports of Africa to China and imports from China to Africa are mainly underinvoiced. The net effect shows that trade misinvoicing in the China‐Africa trade results in net illicit capital outflow for about 44% of countries in Africa. The results from panel data regressions indicate that tax evasion is one of the major factors behind misinvoicing in China‐Africa trade. In addition, corruption control is found to reduce export underinvoicing, while political stability reduces both export overinvoicing and import overinvoicing. Export misinvoicing increases with the presence of natural resources in the exporting country. Other factors associated with trade misinvoicing in China‐Africa trade include openness to trade, current account deficit, and real exchange rate. The study suggests ways to reduce trade misinvoicing in China‐Africa trade.

Can a boost in oil prices suspend the evolution of the green transportation market? Relationships between green indices and Brent oil

The research aims to answer whether the increases in oil prices can hinder the development of the alternative fuels market and green transportation modes. On the one hand, the growing oil prices encourage individuals to choose alternative transport modes. Conversely, the boosts in oil prices attract investors to the oil market instead of alternative fuels. We analyse the relationships between oil and green indices related to widely-understood transport during the period from 2018 to 2022. We investigate factors that affect these relationships, distinguishing between fundamentals and speculation. We discover that the fundamental factors are crucial in shaping the correlation between Brent and green indices. In two of the three analysed cases, the correlation was constantly positive during the studied period, which means that the indices grew together with Brent prices. We show that the effect of increasing oil prices can be twofold — depending on the origin of the change. It can contribute to the interest in alternative transport growth if it results from oil demand shocks driven by economic activity. However, a boost in oil prices following positive oil consumption demand shocks or expectations about the increases of future oil prices can cause capital outflow from the alternative transportation market.

Greasing the revolving door: foreign aid, governance, and private capital flows

<p class="MsoNormal" style="margin-top: 8pt; line-height: 14pt; text-align: justify;"><span lang="EN-US" style="font-family: 'Cambria',serif; mso-fareast-font-family: '等线 Light'; mso-fareast-theme-font: major-fareast; mso-bidi-font-family: 'Times New Roman'; color: black; mso-themecolor: text1;">There is a considerable amount of debate on the impact of capital liberalization on economic performance. Using Three-Stage Least Squares (3SLS) estimation technique introduced by Zellner and Theil (1962), we synthesize studies on the determinants of governance and capital flows. We find evidence of a revolving door relationship. Foreign aid has a negative impact on governance and, thereby reduces capital inflows since bad governance hinders capital inflows. The need to fill the gap created by private capital outflows encourages inflow of foreign aid, which in turn harms governance. Therefore, capital liberalization could grease a revolving door and undermine economic development in the aid receiving countries.</span></p>