Cross-border Capital Flows Research Articles

Capital account liberalization and financial deepening: Does the private sector matter?

This paper tests, using cross-sectional and Generalized Method of Moments (GMM) dynamic panel estimation techniques, the effect of freeing cross-border financial transactions on financial sector development for a sample of 90 developed and developing countries over the period 1980–2009. it tests, specifically, if the effect of financial integration on financial deepening depends on some prerequisites in the economy. The main results of the paper are the following: First, in developing countries financial integration is not found to lead to higher financial development unless a set of prerequisites are already in place. Second, to have successful capital account liberalization in middle income countries, there is a need to develop the institutional environment and the private sector as prerequisites. Third, the effect of freeing cross-border capital flows on economic growth is found to depend on the same prerequisites in these countries.

CAPITAL ACCOUNT OPENNESS, POLITICAL INSTITUTIONS AND FDI IN MENA REGION: AN EMPIRICAL INVESTIGATION

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONWhile global cross border capital flows have risen to reach nearly $6 trillion in 2004, only a small fraction (about 6.4 percent) flows to developing countries. Researchers cannot help but ask, doesn't capital flow from rich to poor as predicted by classical economic theory?Some academics and policy makers are seeking to provide a possible explanation for why? despite the surge in capital mobility over the last decade, FDI inflows to developed are much larger than those to developing countries. Addressing this question, an important strand of literature Kaminsky and Schmukler (2003), Kose et al. (2003), Campion and Neumann (2004) and Caprio et al. (2001) have paid special attention to the role of financial liberalization in absorbing FDI. They suggest that can attract more international capital flows by de-regulating activities in their domestic financial markets, liberalizing their capital account transactions and equity markets. Brafu-Insaidoo and Biekpe (2014) employ three explanations on how capital account liberalization affects capital inflows: Firstly, the removal or relaxation of restrictions on foreign ownership limitations can increase FDI inflows. Secondly, the de-regulation of offshore borrowing can attract more foreign private loan inflows through the removal of quantitative restrictions on overseas borrowing and the provision of tax incentives. Thirdly, the abolition of multiple exchange rate practices can enhance the foreign capital inflows by eliminating economic distortion, and reducing the uncertainties and the risks about exchange rates particularly during repatriation of capital or income from capital.Another body of literature (Chan and Gemayel, 2004; Onyeiwu, 2003; Daniele and Marani, 2006; Alfaro et al., 2008) have focused on the role of political stability and institutional quality in boosting FDI. They all suggest that low institutional quality is the leading factor in explaining the lack of capital flows from rich to poor countries. Recently, Asiedu and Lien, (2011) and Okada (2013) have examined the impact of institutional factors on the degree of association between capital control and FDI inflows show that financial openness improves FDI inflow only in with good institutional quality comparing to with poor institutional quality.In this paper, we try to give an explanation on the question why FDI does not flows from rich to poor countries by examining the role of interaction effect of financial openness and institutional quality in enhancing FDI in the MENA region. The MENA region is a particularly interesting example for this study, given that although most member have undertaken financial liberalization in the 1980's as part of the structural adjustment programs of the IMF and World Bank in order to promote FDI, it continues to attract a smaller share of FDI than all other regions except for Sub-Saharan Africa. Over the period between 2006 and 2010, the share of FDI inflows in the MENA region represented on average about 6.5 percent of the world's total FDI inflows, against 23.62 percent in East Asia and Pacific and 8.72 percent in Latin America and Caribbean. The Europe and Central Asia region have maintained the lion's share of global FDI flow (59 percent). This distribution is not only particular to this period or one year, but also of the whole previous decades (World Bank's World Development Indicators).The level of FDI inflows to MENA region is lower for two main reasons: The first one is related to the fact that multinational firms are unlikely to invest in with bad institutions even if these become more financially open. In contrast, if which have good institutions become more financially open, it is expected that international capital flows to these will increase. The second one is that, in the financially open countries, a perceived deterioration in its policy environment could be punished by the flight of capital out of the country. …

: , (Shadow Cross-Border Capital Flows: Contemporary Concepts, Principles and Information Base of Accounting and Measurement)

Russian Abstract: Предметной областью исследования являются вопросы методологии учета и измерения теневых трансграничных потоков капитала. В работе рассматриваются cовременные концепции трансграничного оборота капитала, принципы учета и измерения его теневых компонентов, анализируются основные информационные источники, используемые в международной статистике при оценке масштабов трансграничных потоков капитала в глобальной экономике.English Abstract: Subject areas of the research are the issues of illicit cross-border capital flows accounting and measurement methodology.In the research the modern concepts of cross-border capital turnover, accounting and measurement of its illicit components principles are studied and the main information sources using in international statistics in the estimates of cross-border capital flows in global economy are analyzed.

(Methods of Analysis of Shadow Cross-Border Capital Flows)

Russian Abstract: Предметной областью исследования являются вопросы совершенствования методов измерения и анализа теневых трансграничных потоков капитала. В работе рассматриваются современные методические подходы к оценке масштабов трансграничного оборота капитала, методы измерения его теневых компонентов, используемые в международной статистике, рассматриваются перспективные подходы к анализу их влияния на ключевые макроэкономические показатели.English Abstract: Subject areas of the research are the issues of improvement of illicit cross-border capital flows measurement and analysis methods. In the research the modern methodical approaches to estimates of cross-border capital turnover scales, methods of measurement of its illicit components using in international statistics are studied as well as the perspective approaches to analysis of their impact on the key macroeconomic indicators.

Integration of financial markets, financial development and growth: Is Africa different?

This study uses a dynamic system GMM model and panel data of 30 Sub-Saharan African (SSA) countries from 1976 to 2010 to investigate the impact of international financial integration (IFI) on economic performance. While also examining both the direct and indirect channels through which the effect of financial integration works, our research considers the tripartite relationship between financial openness, financial market development and economic growth. We test the simultaneous openness hypothesis of Rajan and Zingales and examine joint influence of both capital and trade openness on financial development in the region.While using a wide array of measures of financial market development capturing activity and size of financial intermediation and rule-based and quantity-based indicators of IFI, our result shows a negative association between financial integration and economic growth rate in SSA countries, contrary to the theoretical expectation. However, the study identifies a positive and significant association between IFI and financial development, supporting the indirect hypothesis view that IFI may positively influence economic growth through enhancing the depth of the domestic financial system. We observe empirical evidence supporting the simultaneous openness hypothesis in the SSA region. Policy wise, we argue that SSA countries should put in place and strengthen institutions of governance (security of property rights, transparency of legal system and investor-friendly laws) and enhance human capital formation to facilitate technology diffusion and cross-border capital flows.

Денежно-кредитная политика России в условиях кризиса

The author analyzes the challenges for monetary policy in Russia in 2014-2015, related to the strengthening of the impact of external shocks on the Russian economy. It is shown that the transition to a freely floating exchange rate and inflation targeting regime in late 2014 - early 2015 was fraught with increased financial instability and limitation of anti-crisis role of monetary policy. Practical recommendations on improvement of monetary policy in current Russian conditions are offered, including the transition to a limited discretionary policy, strengthening of the exchange rate policy and the introduction of certain restrictions on the cross-border capital flows.

Dealing with Large and Volatile Capital Flows and the Role of the IMF

The last decade has been characterised by the pronounced volatility of capital flows. While cross-border capital flows can have many benefits for both advanced and emerging market economies, they may also carry risks, which require appropriate policy responses. Disentangling the push from the pull factors driving capital flows is key to designing appropriate policies to deal with them. Strong institutions, sound fundamentals and a large domestic investor base tend to shield economies from adverse global conditions and attract less volatile types of capital. However, when the policy space for using traditional macroeconomic policies is limited, countries may also turn to macro-prudential and capital flow management policies in a pragmatic manner. The IMF can play an important role in helping countries to deal with capital flows, through its surveillance and lending policy and through international cooperation.

Financial Intermediation, Resource Allocation, and Macroeconomic Interdependence

This paper studies the role of the financial sector in affecting domestic resource allocation and cross-border capital flows. I develop a quantitative, two-country, macroeconomic model in which banks face endogenous and occasionally binding leverage constraints. Banks lend funds to be invested in tradable or non-tradable sector capital and there is international financial integration in the market for bank liabilities. I focus on news about economic fundamentals as the key source of fluctuations. Specifically, in the case of positive news on the valuation of non-traded sector capital that turn out to be incorrect at a later date, the model generates an asymmetric, belief-driven boom-bust cycle that reproduces key features of the recent Eurozone crisis. Bank balance sheets amplify and propagate fluctuations through three channels when leverage constraints bind: First, amplified wealth effects induce jumps in import-demand (demand channel). Second, changes in the value of non-tradable sector assets alter bank lending to tradable sector firms (intra-national spillover channel). Third, domestic and foreign households re-adjust their savings in domestic banks, and capital flows further amplify fluctuations (international spillover channel). A common central bank’s unconventional policies of private asset purchases and liquidity facilities in response to unfulfilled expectations are successful at ameliorating the economic downturn.

Cross-Border Investment and Financing Reforms in Shanghai Pilot Free Trade Zone

In the past three years, Shanghai Pilot Free Trade Zone has taken a series of reforms on cross-border investment and financing, including implementing filing system of cross-border investment and financing, establishing split accounting management system, promoting RMB cross-border use and improving the degree of capital account convertibility. These measures have greatly improved the legal environment of cross-border capital flows and practically respected the autonomy of enterprises.

Taper Tantrum and Emerging Equity Market Slumps

ABSTRACTIn the post-global financial crisis period, the central banks of the advanced economies pursued unconventional monetary policies, such as the United States (U.S.) Federal Reserve’s quantitative easing (QE). Those policies and their unwinding may significantly affect cross-border capital flows and thus destabilize the financial systems of emerging markets. For example, emerging markets experienced substantial financial instability during the taper tantrum triggered by U.S. Federal Reserve Chairman Ben Bernanke’s May 2013 announcement of the potential unwinding of QE. In this article, we examine the spillovers from the taper tantrum on emerging markets more rigorously by using econometric analysis to empirically assess the effect on equity markets in emerging markets. Our central finding that virtually all emerging-market equity markets were affected by the taper tantrum highlights the need for emerging-market authorities to remain vigilant about the effects of advanced-economy monetary policies on their financial stability.

Developments in, Financial Markets, Capital Flows, and International Financial Institutions, with a Focus on Asia

One of the effects of globalization is the reduction of the barriers to capital flows between the economies of the world. (Bekaert and Hodrick, 2012). In Asia, as in other parts of the world, these cross border capital flows result from activities that take place in the financial markets of the financial centres of the world. In this essay, recent developments in the Financial Markets, Capital Flows, and International Financial Institutions, associated with the financial centres of Asia, are discussed. In the process the world ranking of the financial centres of Asia are discussed, as are the various financial markets operating in the financial centres; the openness as well as Private and Official Flows of the respective economies of Asia are discussed; as well as the International Financial Institutions which operate through the financial centres to facilitate capital flows, with emphasis on those International Financial Institutions which have countries and entities of Asia as members.

Currency Exchange Rate as a Tool of Strategic Analysis (Evidence from Russian Industry)

Due to the transition to the policy of floating exchange rate, currently undertaken by many countries of the world including Russia, the impact of exchange rates on domestic production becomes particularly important. Growth strategy of manufacturing companies, conducting cross-border financial operations, requires mandatory consideration of the impact of the exchange rate on output. The issue of effective accounting of the exchange rate fluctuations in the strategies of Russian companies has become particularly acute over the last years due to economic sanctions. The sanctions apply to the mutual trade and cross-border capital flow. As a result, import substitution has become one of the leading strategic lines of development for Russian companies. Implementation of effective development strategy based on import substitution is possible only if a perspective of exchange rate dynamics is taken into account. This paper is aimed at examining the dynamics of the exchange rate (evidence from Russia) and its relationship with the development strategies of manufacturing companies. The article analyzes theoretical approaches to the assessment of the real exchange rate impact on the manufacturing companies’ output, a mechanism of unification has been developed through analyzing three main channels of influence – demand redistribution, overall level of effective demand and cost of imported material resources. With the help of the authors’ technique, the impact of the real exchange rate on production in Russia in 2002-2012 has been assessed. This analysis was executed separately for enterprises involved in mechanical engineering, metallurgy, consumer goods industry, food processing and chemical industry. The calculations yielded the results which vary considerably for different industries. It is not only the intensity of the effect of exchange rate fluctuations on the output that differs, but also the duration of the lags between currency shocks and production inconsistencies. The obtained results are recommended for use in the strategic management systems of Russian manufacturing companies, as well as in development and implementation of state economic policy.

Capital Account Liberalization in China

This paper considers the costs and benefits, if any, of short-term cross-border capital flows. It argues that short-term capital flows may be regulated with the introduction of a Tobin tax that applies to both inbound and outbound capital flows but not flows associated with current account transactions. It is shown that with such a Tobin tax, the “Impossible Trinity” becomes possible. Capital account convertibility for China and market determination of the exchange rate of the Renminbi may be accelerated if a Tobin tax is adopted and implemented.

The impact of financial integration in Botswana

This study examines the impact of financial integration in Botswana. Direct and indirect transmission channels to growth are investigated. Financial integration commonly influences growth through encouraging cross border capital flows, transferring technologies and managerial expertise and promoting risk sharing. These market developments that are realized translate into enhanced access to finance as intermediation channels improve. Our empirical results are in line with previous literature in that financial depth does occur in the wake of the financial integration era and positively influences growth in Botswana. Not withholding, our results reveal that market depth has not promoted access to private sector's credit in Botswana so far. To a larger extent, a negative impact of financial integration on growth is observed as there could be short-term risks associated with increased financial openness. Nonetheless, an indirect, significant and positive influence from financial integration through financial access to growth is also observed. This indirect transmission demonstrates that financial integration increases financial innovation which in turn fosters growth in the country. Financial innovation enhances service delivery and improves access to financial services. We observe a positive influence from macroeconomic and institutional variables implying prevalence of sound and prudent supervisory structure and the rule of law in Botswana. Policy wise, there is still need and scope for greater financial integration, financial development and financial access which can contribute to national development goals of sustainable economic growth, diversification, employment creation and poverty reduction in Botswana.

Sovereign Credit Ratings and the Transnationalization of Finance – Evidence from a Gravity Model of Portfolio Investment

Abstract It is a matter of debate in how far credit ratings contribute to allocative efficiency or to excessive volatility of asset prices and cross-border capital flows. Yet it is generally taken for granted that ratings play a significant role in the transnationalization of financial relations. This paper tests that hypothesis with data on sovereign credit ratings and foreign portfolio investment. A rating-related gravity model of finance is derived from the choicetheoretical framework of Okawa and van Wincoop (Gravity in International Finance, 2012) and estimated in three stages. At the first stage, the authors find that the introduction and evolution of sovereign ratings since the 1970s has affected inward portfolio investment in host countries. At the second stage, they examine to which extent sovereign ratings help to predict the degree of investors’ home bias, and whether they can account for the divergent dynamics before and after the global financial crisis. At the third stage, the authors look at the explanatory content of ratings for the determination of the size of bilateral portfolio investment. Evidence for a significant role of sovereign ratings is found at all three stages.

MACROPRUDENTIAL POLICIES AS BUFFER AGAINST VOLATILE CROSS-BORDER CAPITAL FLOWS

This paper investigates the effectiveness of macroprudential policies introduced by Turkey in late 2010. The unprecedented quantitative easing policies of advanced countries after the global financial crisis have presented serious financial stability concerns for most emerging countries including Turkey. To cope with these challenges, Turkey has devised new policy tools such as asymmetric interest rate corridor and reserve option mechanism. From the perspective of capital flows, the interest rate corridor works mainly through stabilizing supply of foreign funds, and the reserve option mechanism through decreasing the sensitivity of equilibrium exchange rate to shifts in the demand for foreign funds. Using a large panel of 46 countries and employing [Bruno and Shin (2013a). Capital flows, cross-border banking and Global liquidity. Working paper, Princeton university; Bruno and Shin (2013b). Assessing macroprudential policies: Case of Korea. Working paper, Princeton university] methodology, we investigate whether the new policy framework in Turkey has been successful in cushioning the economy from volatile cross-border capital flows from a comparative perspective. The results show that, after controlling for a set of domestic and external variables and relative to a group of advanced and emerging countries, cross-border capital flows to Turkey have been less sensitive to global factors after the implementation of macroprudential policies.

Financial Openness, Capital Flows and Risk Sharing in Africa

Empirical literature suggests that while there is low but improving risk sharing in developed countries, risk sharing in the developing countries is low and has remained low. We confirm this observation using panel data for the period 1986–2011. Overall we find weak evidence that an increase in capital account liberalization reduces the dependence of idiosyncratic consumption on idiosyncratic gross domestic product (GDP) in sub-Saharan Africa (SSA). An interaction of capital account liberalization proxy with capital flows produces a mixed effect on consumption risk sharing, calling for caution in capital account liberalization policy design. On the other hand, while we find no evidence that financial integration, as measured by cross-border capital flows in terms of the ratio of foreign assets to GDP, is helpful in consumption risk sharing in SSA, equity appears to hold the potential of precipitating a reduction in consumption risk while foreign direct investment (FDI) and debt are particularly noticeable to have a facilitative role in unhinging idiosyncratic consumption from idiosyncratic output in East African Community (EAC) and Southern African Development Cooperation (SADC) regional groupings, respectively. FDI liabilities in particular elicit a significantly positive enhancement of risk sharing in EAC and are economically meaningful in SADC. The impact of individual assets and liabilities is overall mixed, both in SSA and regional groupings, pointing to an underdeveloped capital markets scenario in need of urgent attention in terms of well-planned policies and strategies directed towards developing competitive capital markets in Africa for purposes of risk sharing.

Stock Market Co-Movement and Exchange Rate Flexibility: Experience of the Republic of Korea

This paper argues that for countries where equity investments dominate cross-border capital flows, the proper framework for analyzing the role of a flexible exchange rate system as a buffer against external shocks is the uncovered stock return parity condition, rather than the uncovered interest parity condition. Estimation of the stock return parity condition shows that it fails to hold in the Republic of Korea largely because of co-movement in the Republic of Korea and United States stock markets. Three global factors are largely responsible for the co-movement : global financial integration, which may be generating a global financial cycle; acceptance of insensitivity of exchange risk by global equity investors; and domestic investors imitating the trading behavior of foreign equity investors.

The Role of Sovereign Credit Ratings in the Transnationalization of Finance

It is a matter of debate in how far credit ratings contribute to allocative efficiency or to excessive volatility of asset prices and cross-border capital flows. Yet it is generally taken for granted that ratings play a significant role in the transnationalization of financial relations. That hypothesis is tested in this paper with regard to data on sovereign credit ratings and foreign portfolio investment. A rating-related gravity model of finance is derived from the choice-theoretical framework of Okawa and van Wincoop (2012) and estimated in three stages. At the first stage, we find that the introduction and evolution of sovereign ratings and their gradual improvement since the 1970s has increased inward portfolio investment stocks and flows in the host countries. At the second stage, we examine to which extent sovereign ratings help to predict the degree of investors’ home bias, as measured by the share of outward portfolio investment holdings in the home countries’ portfolios. At the third stage, we look at the explanatory content of ratings for the determination of the size of bilateral portfolio investment. Evidence for a significant role of sovereign ratings is found at all three stages.ZenTra Working Paper Series in Transnational Studies

La historia, el estado actual y las perspectivas del desarrollo del derecho financiero internacional

The article examines different concepts of international financial law, it role in maintaining order in the world financial system. The author examines the connection between international financial law and other regulators in the international financial system: private international law, national law. The international financial system as a complex phenomenon comprises various groups of interconnected social relations related to cross-border capital flow. The international inancial relations involve direct interrelations between public legal bodies, while the private bodies are involved only in terms of national jurisdictions where domestic law or international private law (if the foreign element appears in these relations) are enforced. The influence of international inancial law on private bodies is indirect and is enforced only through the influence on domestic law of States. Today, the concept of public inance is added up with the criterion of the public interest that dictates the necessity of State legal public regulation in such spheres as banking, securities market and insurance. The key qualification criterion of international inancial relations is the maintenance of public economic order aiming at secure functioning of national inancial systems and international inancial system as a whole through international cooperation.