Cross-border Capital Flows Research Articles

FX resilience around the world: Fighting volatile cross-border capital flows

The volatility of cross-border capital flow (CF) has become higher in the last two decades. We use a sample of advanced and emerging market economies in the last two decades, with a focus on portfolio fund flows (equities and bonds). We find that the impact of portfolio CF volatility on exchange rate (FX) volatility is diminished in the short-term if specific economic fundamentals of the country are stronger, especially when these fundamentals pass certain threshold levels. The finding is controlled for different exchange rate regimes and the level of capital control. We further introduce an intuitive FX resilience measure that can be used to assess the stability of exchange rates in the context of heightened CF volatility. The decomposed FX resilience measure shows that the major contributing fundamentals to FX resilience are from the finance channel, including short-term interest rate, fiscal surplus, and financial development.

The research on the impact of short-term cross-border capital flows on stock market prices in China

This paper examines the long-term dynamic impact of short-term cross-border capital flows on the Shanghai Composite Index and the CSI 300 Index using monthly data from 2010 to 2020 and a Vector Autoregression (VAR) model. With the financial opening and the internationalization of the renminbi in China, the stock market has gradually liberalized its management of foreign capital. As a result, the A-share market has become a target for passive capital inflows from overseas investors. This has further intensified the volatility of asset prices and posed challenges to China's cross-border capital regulation. According to the study, short-term cross-border capital flows have a negligible impact. However, a positive correlation appears between 4 to 9 months, followed by a significant negative impact in the 10th month, reflecting the oscillatory risks that cross-border capital flows pose to China's stock prices. This finding reflects how Chinese capital controls have limited the short-term negative impact of cross-border capital flight on stock prices. The paper recommends strengthening the regulation of short-term cross-border capital, cautiously advancing the financial opening system, and actively improving the stock market system.

Cross-border capital flows and low-carbon economic development: Examining the impact of foreign shareholding

This study utilizes data from Shanghai and Shenzhen A-share listed companies from 2011 to 2021 to explore the impact of foreign shareholding on the development of a low-carbon economy and the underlying mechanisms. Findings show that foreign shareholding significantly reduces corporate carbon emissions and promotes corporate environmental responsibility and low-carbon transformation. The paper further investigates how foreign shareholding reduces carbon emissions by increasing corporate investments in environmental protection and driving green innovation. Foreign participation is found to improve the efficiency of corporate resource allocation and innovation capabilities, allowing for continuous improvements in low-carbon technologies and production processes. The study also examines the effect of corporate environmental strategies and green technology advancement on the relationship between foreign shareholding and carbon emissions, revealing the heterogeneity of foreign investment impacts on low-carbon development under different corporate environments and capabilities.

Identifying crucial financial markets in the flows of cross-border capital – evidence from China's financial risk network

With the increasing openness of China's financial markets, it is important to address cross-border capital risks. This paper first calculates the stress indicators of financial markets by 24 variables, and then utilizes the Diebold-Yilmaz connectedness approach to examine the spillover effects among the volatility of cross-border capital and the stress indicators of various financial markets. We show both the real estate and stock market are crucial for cross-border capital flow. Using the rolling window method, we find significant time-varying spillovers between cross-border capital and financial markets, which peak during the periods with significant events such as the global financial crisis, the COVID-19 epidemic, and the shift in currency regime. This paper further applies the Markov-switching autoregressive model to identify three different states for the synthetic financial stress. After re-analyzing the subsample data, we observe that stock and real estate markets play significant roles in the low-stress state, foreign exchange and real estate markets in the medium-stress state, and stock and money markets in the high-stress state.

The “Butterfly Effect” of Volatility in Net International Capital Flows: An Analysis of Co-Movement Characteristics and Influencing Factors

This paper employs social network analysis to investigate the characteristics and determinants of co-movement in the volatility of net cross-border capital flows. We have identified a significant “small-world” pattern in the co-movement network. Economies with highly positive or negative co-movement of volatility in net capital flows display regional differences. Furthermore, economies with high trade intensity, large interest-rate spreads, membership in the same economic organization, and geographical adjacency exhibit significantly increased co-movement of volatility in net private capital flows and net other investment flows. Economies with large differences in economic growth present less co-movement of volatility in net portfolio flows.

Exploration of the Reasons for the Federal Reserve’s Interest Rate Hike in 2022 and Evaluation of Policy Effectiveness

After the global economy experienced the impact of the new crown epidemic, the US economy recovered in 2022, but inflation rose rapidly, prompting the Federal Reserve (FED) to take interest rate hikes. This paper analyzes the background and reasons for the Fed’s interest rate hike in 2022, and evaluates its policy effect, aiming to provide experience and lessons for future monetary policymaking. The main findings include: that the interest rate hike significantly reduced the inflation rate in the United States, from 8.0% in the first quarter to 5.67% in the fourth quarter; In the short term, interest rate hikes will hinder the economy, but in the long term, they will help promote stable growth; The interest rate hike led to stock market fluctuations and bond market yields rising, the credit market tightening, and increased the instability of the global financial market; Urge other countries to adjust their monetary policies and increase global economic uncertainty. The significance of this paper is to expand the theory of international financial and monetary policy and provide comparative research value for the policy-making of emerging market countries and developing countries. The policy recommendations include: the United States should strengthen policy transparency and financial supervision to promote the optimization of economic structure; Other countries should strengthen macro policy coordination, improve financial regulatory capacity, achieve economic diversification, maintain monetary policy flexibility, and promote the healthy development of cross-border capital flows.

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.

Coupling and decoupling of ancestral linkages and current cross-border economic activities: Genetics and policy

This paper studies the potential link between the biological evolution of populations and present-day economic interactions by estimating the correlation of shared ancestry among populations with cross-border capital and human flows. To this end, we employ the new concept of genetic distance, based on (dis)similarity of neutral gene alleles, to quantify shared ancestry. We then incorporate the genetic distance measure into an augmented gravity model, traditionally used to analyze the effect of geographical distance on bilateral exchange. Our analysis focuses on bilateral foreign direct investment (FDI) and migration across 135 countries and we use both linear regression techniques as well as the Poisson Pseudo-Maximum Likelihood Estimator to account for any non-linearities in the model. Our results show that a 1% increase in genetic distance reduces FDI flows by 0.08% while controlling for other distance constructs and factors associated with global capital and human movement. Genetic distance also has a negative effect on migration, where a 1% increase in genetic distance reduces migration flows by 0.22%, with all other things remaining constant. Our study, therefore, links shared ancestry with economic behavior, showing how historical connections are associated with current economic exchanges among nations. Additionally, recognizing that ancestral ties are outside human control, we examine policy measures that help nations overcome such distance barriers. Our findings show that strengthening a nation’s institutional quality and adherence to the rule of law can effectively mitigate any negative correlation of distance constructs with economic exchanges. These insights suggest that prudent policies to foster a stable business environment are essential for any nation to attract FDI and human capital, even from geographically or genetically distant nations.

Влияние геополитической напряженности на международное движение капитала

The study examines the impact of geopolitical tensions, which have increased sharply in recent times, on international capital flows. It shows that geopolitical tensions affect cross-border investment flows through three main channels: increased geopolitical risks that encourage international investors to reduce investments in countries with different foreign policies; tighter controls on incoming FDI in many countries to ensure national security; and financial sanctions imposed by Western countries to put pressure on other states. Based on the analysis of investment relations between the United States and China, the contradictions between which are the main source of geopolitical tension in the world, the author confirms the conclusion that the influence of geopolitical factors on capital flows between the countries has increased since the second half of the 2010s. However, the study substantiates that the emerging fragmentation of cross-border capital flows can have not only negative, but also positive consequences for the global economy and finance. The compression of capital flows between the countries of the global North and South may push the latter to establish closer integration ties in the financial sector, create financial infrastructure independent of the West, focused on the needs of developing countries, and accelerate the internationalization of their currencies. As a result, these processes could weaken the dominance of Western countries in the global financial system and facilitate its transition to a more equitable multipolar configuration.

Empirical Insights into Financial Integration: Fintech Credit and Regulatory Dynamics

Financial integration is essential because it has the potential to enhance economic growth and stability by facilitating cross-border capital flows and reducing financial market fragmentation. This study investigates the influence of fintech credit and banking regulations on financial integration in developed and developing countries, spanning 2013 to 2019. We consider financial integration the dependent variable and select fintech credit, banking regulations, bank concentration, remittance volumes, state-owned enterprises, and financial development as explanatory variables. The study employs the Generalized Method of Moments (GMM) to estimate the coefficients. The findings indicate that fintech credit, remittance volumes, and financial development contribute positively to financial integration. In contrast, banking regulations exhibit an insignificant relationship with financial integration. Moreover, the results indicate that bank concentration and state-owned enterprises deter financial integration among nations. The implications of the results suggest that to enhance financial integration, global economies should promote fintech credit, increase remittance volumes, and foster financial development while concurrently discouraging bank concentration and state-owned enterprises.

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.

Economic policy uncertainty and capital flows' tail risk in China

Since the financial crisis, uncertainty has been a focus of attention in the financial sector. As the two-way opening-up of China's financial market continues to accelerate, special attention must be paid to the risks and challenges arising from cross-border capital flows to maintain financial market stability in China. This study uses predictive quantile regression and skewed t-distribution fitting method to examine the impact of Economic Policy Uncertainty (EPU) on the full probability distribution and tail risks of capital flows. Additionally, we apply the “Capital Flows at Risk (CFaR)” analysis framework from the new paradigm of macroeconomic research to the situation in China, to study the impact of EPU on CFaR. We find that EPU significantly affects the predictive distribution of capital flows. When EPU is rising, the downside risk of capital flows, that is, the left-tail risk of capital flows, will increase; however, when EPU is declining, the upside risk of capital flows, that is, the right-tail risk of capital flows, will increase. In recent years, the scale of China's CFaR has shown a fluctuating upward trend, and EPU has increased the scale of CFaR in the country. This study is significant for stabilizing international capital flows and preventing and defusing the external financial shocks of cross-border capital inflows and outflows.

Imperialism and Contemporary Transnational Capitalism

Imperialism was closely studied by Marxists in the early twentieth century. Lenin’s work had the greatest impact, but while some elements remain, important changes have occurred. The specific national character of finance capital has transformed to integrated global capital, as has production. These changes were structured by reengineering the state and rewriting the rules for trade and cross-border capital flows, while at the same time deconstructing the Keynesian social contract. The economic and political changes were led by the emergence of a transnational capitalist class. The resulting social upheavals caused by greater inequality have been accelerated by the crisis of COVID-19, which created new contradictions between and within China and the United States. Technological changes have only added to the problems of global capitalism. Massive speculation was made possible by the speed and reach of the new information and communication technologies, resulting in repeated economic crises. A planetary Green New Deal may offer the best hope to rebuild the economy around productive capital and lay the basis for greater social justice.

Three aspects of the critical analysis of the bank of Russia’s activities

The article analyzes the policy of the Central Bank of Russia in three aspects: setting the key rate, the low level of monetization of Russia’s GDP and determining the causes of inflation. The transition of the Bank of Russia from a liberal to an ultra-liberal policy is proved, expressed in the policy of targeting inflation, the floating exchange rate of the ruble and the liberalization of cross-border capital flows. The logical error of the Central Bank in determining the consequences of raising the key rate is shown. It rises to stop the inflation of demand, and thus causes the inflation of production costs. As a result, the opposite effect is achieved – an increase in inflation. The same process is facilitated by maintaining a low level of GDP monetization and incorrectly determining the causes of inflation in Russia, which is non-monetary in nature in the country. The author concludes that in its policy of expensive money, the Central Bank relies more on political factors than economic ones.

The gravity of Offshore Financial Centers: Estimating real FDIs using a binary choice model

Fiscal and regulatory arbitrage opportunities in Offshore Financial Centers (OFCs) materially distort the economic analysis based on cross-border capital flows. However, despite its significance, there is limited information on the true scale of this phenomenon. This paper focuses on Foreign Direct Investments (FDIs) and fills this gap by using an extensive list of FDIs determinants and estimating a gravity-like binary choice specification to assess how much bilateral FDIs are driven by economic integration motives versus profit shifting opportunities. We find that the share of so-called phantom FDIs, after rising in 2010–15, stabilized at around 40% of total FDIs in recent years and that this share is systematically larger in OFCs, reconciling available evidence on the abnormal amount of recorded FDIs in these countries.

CBISI-LSTM Deep Learning Model for Short-term Cross-border Capital Flow Prediction

CBISI-LSTM Deep Learning Model for Short-term Cross-border Capital Flow Prediction

New Features and Risks of China's Cross-Border Capital Flows and Policy Recommendations

With mainland China as its primary focus, this article analyzes the patterns of cross-border capital movements. Examining the characteristics and potential hazards of these flows, the study conducts an in-depth analysis of cross-border capital and provides an exhaustive review of pertinent literature. China's international direct investment outflows increased significantly, while capital inflows decreased, and the scope of foreign direct investments expanded, according to the findings. In addition, the research illuminates forthcoming obstacles, specifically the consequences of the COVID-19 pandemic on the equilibrium of the global economy and the volatility of exchange rates. In order to strengthen China's economic stability, the article concludes with policy recommendations that emphasize the significance of flexible policy mechanisms and the strategic allocation of foreign exchange reserves.

MANAGEMENT OF CAPITAL FLOWS

The purpose of the research is to study the factors influencing this system, to analyze the theory and actual data related to the application of control measures on cross-border capital flows, to systematize the possible results of this tool, to create a balance and to properly manage capital flows, along with the balance of payments, which is a statistical system reflecting economic transactions, as well as determining its positive and negative consequences. The methodology of the research – in order to investigate the multi-directional effects of capital flows in the research, the methods of analysis, analysis, synthesis and secondary data analysis were used. The practical importance of the research - the results of this research can be used for scientists, politicians, analysts, financial institutions, interested parties in the economy sector to conduct macroeconomic analysis, formulate related policies and create a model related to capital flow management. The results of the research – this research significantly emphasizes the importance of macroeconomic analysis to monitor the economic health of a country, develop sound policies and practices and sustain appropriate growth, strategies to mitigate the potential downsides of capital flow volatility. The originality and scientific novelty of the research – the research highlights the importance of cross-border capital movement in enhancing access to finance, promoting innovation, the benefits of capital flows to the country, and the challenges it can create, contributing to the overall well-being of the economy.

The Effect of Cross-border Capital Flows on Commercial Banks' Risk-taking in China

The Effect of Cross-border Capital Flows on Commercial Banks' Risk-taking in China

The impact of macroprudential cross-border capital flow management on the linkage of domestic and foreign bond markets

While cross-border financing activities have increased significantly in recent years, the inflow of capital also leads to accumulated financial risks. To mitigate financial risks and promote the opening of financial markets, macroprudential management policies for cross-border financing have been implemented since 2016. This paper examines the effectiveness of macroprudential management policies in opening financial markets and managing foreign financial risks. We employ a time-varying parameter vector autoregressive model (TVP-VAR) to quantitatively analyze changes in the spillover effects between China’s bond market and foreign bond markets under different implementation stages of cross-border financing macroprudential policy. Our analysis reveals that the implementation of macroprudential management of cross-border financing has increased the total spillover effect between different bond markets, as well as the spillover effect from other bond indices to the Chinese RMB Bond Index and the spillover effect from other indices to the Chinese USD index. Moreover, our findings indicate that macroprudential management has reduced the total volatility spillover effect and the volatility spillover effect from other indices to the Chinese RMB Bond Index. These results highlight the importance of preventing external risk transmission when China’s financial market is opening to the world.