Excessive Capital Inflows Research Articles

MACROPRUDENTIAL POLICIES CAPITAL FLOW MANAGEMENT

This article aims to present the legitimization process of macroprudential capital flow management policies as a tool for economic stability after 2009, when such policies started to have the support of multilateral institutions such as the IMF. To this end, we conducted extensive bibliographical research, bringing together several academic strands to present how this process of transformation and acceptance developed and the motivations, impacts, and effective results of these policies. As a result, we verified that the use and effectiveness of these management strategies must follow an arrangement in which their scope must involve several other policies of the fiscal, macroprudential, monetary, exchange rate, and capital control, mainly in emerging economies and in these cases, reduce financial fragility and maintain the macroeconomic stability of these countries in the face of adverse shocks to the balance of payments caused by excessive capital inflows or outflows, mitigating the resulting externalities in the process.Keywords: Macroprudential policies / Stability / Capital flow

Exchange rate misalignment and external imbalances: What is the optimal monetary policy response?

How should monetary policy respond to excessive capital inflows that appreciate the currency and widen the external deficit? Using the workhorse open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities attenuate ERPT. Excessive capital inflows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand.

Korea’s Macroprudential Policies for Capital Flows: Accomplishments and Road to Improvement

In 2010, Korea’s authorities announced foreign exchange-related macroprudential measures (MPMs) aimed at building resilience against external financial shocks. These measures have greatly contributed to limit systemic risk by curbing excessive capital inflows. Twelve years have passed since the global financial crisis started and ten years after the introduction of Korea’s FX-related macro-prudential policy measures. Accordingly, this study check the performance and effectiveness of these policies and discuss how to improve macroprudential measures in response to emerging external risks.

대외부문 거시건전성 정책 10년의 성과와 개선방안 (Korea's Macroprudential Policies for Cross-Border Capital Flows: Accomplishments and Road to Improvement)

2008년 글로벌 금융위기는 기존의 통화정책 및 미시건전성정책만으로는 대응할 수 없다는 한계점을 인식하게 되었다. 이에 따라 다수 국가들이 거시건전성 정책수단을 도입하게 되었다. 우리나라도 2010년 이후 대외부문 거시건전성 3종 세트(외환선물환포지션 한도 규제, 외환건전성 부담금 부과, 외국인 채권투자 과세)를 도입해 성공적으로 운용해왔다. 하지만 최근에는 과거와 다른 형태의 잠재 리스크가 금융안정을 위협하고 있음에 유의할 필요가 있다. 이에 따라 본고는 지난 10년간의 거시건전성 정책을 돌이켜 본 후 이를 바탕으로 대외부문 안정성 제고를 위한 정책적 시사점 도출하고자 하였다. Major advanced economies have taken policy measures to strengthen the resilience of the financial system since the 2008 global financial crisis. On that basis, the G20 Coherent Conclusions for the Management of Capital Flows Drawing on Country Experiences was established in 2011, followed by discussions among policy circles including the OECD and IMF. Emerging economies have also taken various policy measures to manage systemic risks associated with cross-border capital flows. In 2010, the Korean government and central bank announced foreign exchange-related macroprudential measures (MPMs) aimed at building resilience against external financial shocks. These measures have greatly contributed to limiting systemic risk by curbing excessive capital inflows. Twelve years have passed since the global financial crisis started, and ten years after the introduction of FX-related macroprudential policy measures in Korea. It is now an opportune time to check the performance and effectiveness of these policies. Given the newly heightened risky environment, it is urgent to discuss how to improve macroprudential measures in response to emerging external risks. (the rest omitted)

미국 통화정책이 국내 금융시장에 미치는 영향 및 자본유출입 안정화방안 (The US Monetary Policy Normalization: The Impact on Korean Financial Market and Capital Flows)

Korean Abstract: 본 연구는 글로벌 자본유출입 결정요인 및 미국 통화정책이 국내 금융시장에 미치는 영향을 분석하였다. 실증분석 결과 신흥국의 자본유출입은 주로 대외요인에 의해 영향을 받았으나, 국가별로 자본유출입 결정요인이 상당히 상이한 것으로 나타났다. 미 연준 통화정책 정상화가 국내 금융시장, 외환시장에 미치는 파급영향을 분석한 결과 미 정책금리, 기간프리미엄, 신용스프레드 등이 높아지면 국내 신용스프레드 확대 및 원/달러 환율 상승(원화 약세) 등을 초래하여다. 아울러 내국인 해외투자자금이 회수되면서 외국인 국내투자자금 이탈을 상쇄시키는 모습을 보였다. 그동안 내외금리 차 확대가 곧바로 자본유출로 이어진다는 우려가 컸다. 하지만 2014년 이후 '내국인 해외 증권투자자산 > 외국인 국내 증권투자' 구조 정착 및 내국인 해외투자자금의 환류 가능성 상승 등으로 '내외금리차 확대 → 자본유출 증가' 리스크가 과거보다 줄어들었다는 점을 시사한다. English Abstract: During the global financial crisis, the US monetary authority (Fed) reduced the benchmark interest rate to 0% and provided massive liquidity through three quantitative easing measures. As a result, the US Fed balance sheet expanded five times ($ 4.5 trillion) from September 2008 ($ 0.9 trillion). Much of the increased global liquidity flowed into emerging economies. The influx of capital contributed to the growth of emerging economies, leading to new credit increases such as bank loans. Emerging markets, which supported 63% of global GDP, served as an engine of the global economy at a time when the growth in the US and Europe were subdued. While capital inflows have a supporting role in contributing to economic growth, they have also been a potential prompting factors to systemic risk in emerging countries and Korea. Emerging economies actively responded to systemic risks from foreign capital inflows. With the introduction of macro-prudential policy measures, emerging economies have been striving to maintain an external balance by responding to the surge in domestic credit and restraining excessive capital inflows. In order for emerging countries to adopt measures to curb inflows of capital, persuasiveness and legitimacy are secured only if external influences are triggered by external factors. Most previous studies have shown that push factors have had a greater impact on capital outflows in emerging economies than in pull factors. Raghuram Rajan, former central bank governor of India, has pointed out that the monetary policy impact of the US Fed and the developed country central bank is a major external factor (push factor). Meanwhile, in May 2018, the US Federal Reserve Chairman Jerome Powell addressed the controversy over capital movements to emerging economies after the global financial crisis. Powell said the inflows of capital into emerging economies is unlikely to have been caused by the Fed’s interest rate policy. According to the study, the US Fed’s quantitative easing has had the effect of lowering the Fed base rate by a further 4%. This means that normalization of the quantitative easing policy will lead to a policy rate hike of 4 percentage points. This is the reason why the normalization of US monetary policy will have a negative impact on the global economy. At the same time, the squeezing on capital outflows in emerging economies is increasing. Powell’s speech contains “implied” warnings that the US monetary policy is not a triggering force of a capital outflow in emerging economies. That’s why Powell’s speech is adding to the difficulty of policy responses in emerging countries. This suggests that it is necessary to check the determinants of global capital flows. In addition, the impact of US monetary policy on Korea's financial markets and capital outflows needs to be analyzed in depth.

English

The study examined the optimal level of capital inflows for manufacturing exports and economic growth in Nigeria. Annual data from 1981-2017 on foreign direct investment (FDI), foreign portfolio investment (FPI), cross border borrowing CBB (components of capital inflows), financial sector development (FSD), real gross domestic product (RGDP) and manufacturing exports (MEX) were sourced from various issues of the Central Bank of Nigeria (CBN) Statistical Bulletin while data on gross capital formation (GCF) and human capital (HC) were sourced from World Bank Development Indicator (WDI) database. Data collected were analyzed using threshold regression econometric techniques. The results from the optimal level showed that capital inflows (CINF) threshold value of (25.55%) with coefficient of (9.94) annually is the optimal point of capital inflows for Nigeria and the threshold point for manufacturing exports indicates no capital inflows (CINF) threshold value for manufacturing exports in Nigeria. This study concludes that the optimal point of capital inflows for economic growth is 25.55%; any threshold level above this sustainable level, economic growth will be affected negatively in Nigeria but no capital inflows threshold point exist for manufacturing exports and therefore recommends that excessive capital inflows should be avoided in the country so that it does not make administration and management of monetary policy difficult, while the needed capital inflows should be well monitored and channeled into sectors (like manufacturing, agriculture, mining and quarrying etc...) that have absorptive capacity for them. Key words: Capital, inflows, export, growth, optimal, threshold.

Macroprudential policy debate, concepts and the Brazilian context

<div class="page" title="Page 1"><div class="layoutArea"><div class="column"><p><span>The economics literature related to the financial system seeks to define the concepts of financial stability, systemic risk and macroprudential instruments for the purpose of drafting a policy that essentially "leans against the wind", that is, a policy that monitors macroeconomic vulnerabilities and combats system instability. Such a policy should cover all financial institutions involved in credit intermediation (not just banks) and consider the pro-cyclical and intrinsic nature of risk in the financial system, and account for the spillovers effects of policies in other countries, that is, the global context. This article summarizes the main concepts related to macroprudential policy discussed in the economics literature after the crisis the 2008 financial crisis. In addition, we describe macroprudential policy in the context of the Brazilian financial system, specifically major policies implemented in the banking regulatory environment related to Basel III and non-bank regulations related to shadow banks. After the 2008 crisis, Brazil was one of the precursors countries in operating macroprudential instruments to curb excessive credit growth and strong capital inflows. The Brazilian financial system has a broad regulatory perimeter, adhering to international standards and covering the Shadow banking system. This system has a weak connection with the banking system and is small relative to the financial assets of the national and global systems. </span></p></div></div></div>

Effects of capital flow on the equity and housing markets in Hong Kong

AbstractThe revival of strong capital flows to emerging economies following the global financial crisis in 2008–2009 has rekindled the debate on effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross‐border fund movements. It is found that the official and illicit capital flow measures display a low level of comovement and exhibit differential effects on Hong Kong's equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of sector‐specific capital management policies.

Capital flow reversals during the taper tantrum in 2013: causes and consequences

ABSTRACTQuantitative easing (QE) conducted by the US Fed during 2009 Q1 to 2013 Q2 expanded capital flows into emerging economies. The possibility of tapering to reduce QE caused the taper tantrum in 2013 that was characterized by sudden capital reversals and drastic exchange rate depreciation in a subset of developing countries. In this paper we investigated factors that drove capital reversals and drastic exchange rate depreciation in the developing countries. We find that actual capital inflows during the QE periods were most responsible for capital reversals thereafter. However, we do not find evidence that capital flow reversals actually contributed to the drastic exchange rate depreciation during the taper tantrum or lowered real GDP growth afterwards. Consistent with previous studies Our findings suggest that pre-emptive measures to prevent excessive capital inflows are crucial to promote the resilience of the economy. The recent experience of Korea that introduced a series of macroprudential measures shows supporting evidence for this view.Abbreviations: EG: Eichengreen and Gupta (2015); IFS: International Financial Statistics; PRS: Park, Ramayandi, and Shin (2016); US Fed: U.S. Federal Reserve System

Estimating the effects of FX-related macroprudential policies in Korea

This paper provides an empirical assessment of the effects of FX-related macroprudential policies introduced in Korea since 2010. Our main findings are as follows. First, Korea's recent FX-related macroprudential measures have been effective in curbing excessive capital inflows. In particular, these measures have contributed to mitigating FX market vulnerability. Second, the leverage caps had a relatively larger dampening effects on short-term foreign borrowings of foreign bank branches compared to those of domestic banks. By contrast, macroprudential stability levy has worked as a device to limit foreign borrowings for domestic banks, but not for foreign bank branches.

Effects of Capital Flow on the Equity and Housing Markets in Hong Kong

The revival of strong capital flows to emerging economies in the aftermath of the Global Financial Crisis in 2008-09 has rekindled the debate on the adverse effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross-border fund movements. To illustrate the effects of different types of capital flows, we study official and illicit flows on Hong Kong’s equity and residential housing markets. It is found that the official and illicit capital flow measures reflect different facets of flow movements and exhibit differential effects on the equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of policies targeting specific sectors.

The Nexus of Official and Illicit Capital Flows The Case of Hong Kong

The revival of strong capital flows to emerging economies in the aftermath of the 2008-9 Global Financial Crisis has rekindled the debate on the adverse effects of excessive capital inflows. In this study, we study effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross-border fund movements and is susceptible to international capital flows. To illustrate the differential impacts of different types of capital flow, we study the effects of two measures of official flows and two measures of illicit flows on Hong Kong’s equity and residential housing markets.It is found that these official and illicit capital flow measures reflect different facets of flow movements and have different effects on the economy. Specifically, they exhibit differential effects on the equity and residential housing markets. The results highlight the complexity of managing capital flight, and the relevance of polices targeting specific sectors.Further, it is found that, compared with capital flows, economic variables tend to offer a relatively higher level of explanatory power. Anecdotal evidence suggests that Hong Kong manages the effects of capital flows using various macro-prudential policies, which are deemed to be effective. One interpretation is that an effective governance framework and prudential regulatory environment improve market confidence and reduce vulnerability to economic and financial risks. In other words, it is important to keep one’s house in order, practice pre-emptive macro-prudential policies, and have an efficient infrastructure to accommodate capital flows. Our results indicate that Hong Kong has done quite well in the last few decades in enhancing its market efficiency and conducting macro-prudential policies.

A taxa de câmbio no centro da teoria do desenvolvimento

Este artigo apresenta as principais ideias da macroeconomia estruturalista do desenvolvimento - a teoria por trás de novo-desenvolvimentismo. Seu foco é a taxa de câmbio que é pela primeira vez colocada no centro da economia do desenvolvimento. A teoria econômica geralmente vê a taxa de câmbio como um problema de curto prazo a ser discutido na macroeconomia. A macroeconomia estruturalista do desenvolvimento mostra que há, nos países em desenvolvimento, a tendência à sobreapreciação cíclica da taxa de câmbio causada pela falta de neutralização da doença holandesa e por entradas de capital excessivas. Em consequência, considera a taxa de câmbio cronicamente sobreapreciada e, por isso, um grande obstáculo ao crescimento econômico. No processo de desenvolvimento, a taxa de câmbio tem a função de um interruptor de luz que conecta ou desconecta as empresas nacionais que utilizam a tecnologia no estado da arte mundial dos mercados mundiais.

International capital flows and credit market imperfections: A tale of two frictions

The financial crisis of 2007–08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial imperfections, which have focused almost exclusively on the effects of limited pledgeability. In this paper, we fill this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economy's equilibrium interest rate, and; (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under international financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also extend our model to the more general case in which adverse selection and limited pledgeability coexist. We conclude that both frictions complement one another and show that limited pledgeability exacerbates the effects of adverse selection.

One-Size-Fits-One: Tailor-Made Fiscal Responses to Capital Flows

This paper surveys policy responses in recent years to capital inflows in a diverse group of countries that are represented by the Netherlands at the IMF Executive Board. Based on the findings from cross-country empirical literature, the paper distills some guiding principles for policy responses to excessive capital inflows, depending on country-specific circumstances and with a particular focus on fiscal policy. In addition to considering the conventional macroeconomic and structural policy tools, the paper also discusses the role of microfiscal policies in affecting the size and the composition of capital inflows. While conditions in these countries have changed very recently, the policy principles remain salient.

One-Size-Fits-One: Tailor-Made Fiscal Responses to Capital Flows

This paper surveys policy responses in recent years to capital inflows in a diverse group of countries that are represented by the Netherlands at the IMF Executive Board. Based on the findings from cross-country empirical literature, the paper distills some guiding principles for policy responses to excessive capital inflows, depending on country-specific circumstances and with a particular focus on fiscal policy. In addition to considering the conventional macroeconomic and structural policy tools, the paper also discusses the role of microfiscal policies in affecting the size and the composition of capital inflows. While conditions in these countries have changed very recently, the policy principles remain salient.

Impact of Monetary Policy on Banks' Growth Path

With the liberalization of balance of payments, the monetary policy scenario in India underwent a sea change. While the merits and demerits of capital account liberalization have been debated, it is still not clear as to what extent the Indian economy has integrated with the global economy. There are basically two choices: either integrating with the international economy at a measured and orderly pace, or letting the world integrate with us in a disorderly manner on terms dictated by the international economy. The objective of macroeconomic management is to tailor the policies so as to maximize the gains of global integration while minimizing the adverse features of globalization. This article captures the dilemmas and challenges of formulating a favourable monetary policy and studies and projects the implications of the changing dimensions of monetary policy on the different parameters determining the banks� growth path. In the absence of RBI�s intervention, persistent capital inflows into the country could result in an unrestrained monetary expansion and a real effective exchange rate (REER) appreciation which in turn is likely to end up in a crisis. RBI has used a combination of the market stabilization scheme (MSS), the reverse repo, and the cash reserve ratio (CRR) to tackle the problem of excess liquidity. As CRR is considered a blunt instrument, RBI is suggested to use incremental cash reserve ratio to immobilize the excess liquidity from where it is lodged. In an extreme situation of excessive capital inflows, the author suggests the use of unremunerated reserve requirements on fresh inflows by foreign institutional investors. For the banks, large capital outflows could lead to a more difficult situation as pumping in of created money to restore liquidity could trigger further capital outflows. Remedial measures such as raising of interest rates, tightening of liquidity, and depreciation of exchange rate will have to be implemented in a non-disruptive manner so as to ensure that the economy does not go into a state of panic. For formulating a viable monetary policy, what is most important is to set objectives in such a way that there is a clear agreement between the government and the RBI. The present structure of the banking system is not conducive to the development of a strong and vibrant financial structure. There have been repeated recommendations to reduce government holding in public sector banks because of the government�s inability or reluctance to provide more capital to these banks. In the overall rapidly changing globalized scenario, the banks cannot remain isolated; they too need to keep pace and should therefore join the bandwagon.

Monetary Policy and Exchange Rate Targeting in Open Economies

We develop an institutional framework for central banks that try to pursue a stability-oriented monetary policy in open-economies by directly targeting the exchange rate. Our main intention is to design a framework which avoids excessive capital inflows that can be regarded as a main cause of the crises in Asia, Latin America, Eastern and Central Europe and of the ERM I. In an open economy policy makers can target two interrelated variables: the interest rate and the exchange rate. These two operating target have to fulfil two different conditions. On the one hand they have to create monetary conditions that are consistent with the domestic economic situation. On the other hand they have to be compatible with a risk-premium adjusted uncovered interest parity condition (UIP). It is obvious that both conditions are difficult to met. In our view sustained violations of the second condition provide an important explanation for the problem of speculative capital inflows under a fixed nominal peg. We show that an adjustable nominal peg is in most cases a better solution to the dual requirement of UIP and adequate monetary conditions. This leads to a new solution for the inconsistency triangle: a central bank can combine an autonomous domestic interest rate policy with capital mobility and a floor for the target path of the exchange rate.

CAPITAL FLOWS AND ECONOMIC CRISIS IN THAILAND

HE economic crisis in Thailand, which started with the flotation of its currency in July 1997, has been attributed to several factors. In my own research on the subject (Medhi 1999a, 1999b, for example), I have listed a total of six factors that contributed to the crisis: namely, financial sector mismanagement, excessive current account deficit, high domestic interest rates and uncontrolled capital flows, a rigid exchange rate, lack of economic leadership on the part of politicians, and decline in export performance. Other scholars of course have different opinions on the relevant causes of the crisis. In the above mentioned article, I have pointed to uncontrolled capital inflows as one of the factors leading to the crisis, but the amount of attention given to that factor was not sufficient. Recently, many economists have focused upon the importance of excessive capital flows into Thailand as a major cause of currency problems that eventually led to the financial and economic crises. C. H. Kwan (1998), for example, lists rapid capital inflows into Thailand following the establishment of the Bangkok International Banking Facility (BIBF) as one of the three causes of its currency crisis. Bhanupong Nidhiprabha (1999) sounds the alarm of the adverse consequences of capital flows long before the crisis struck. Chawin Leenabanchong (1999) had singles out the overflow of capital into Thailand as a major sin of the past that caused the present economic crisis. Prakarn Arphasil (1999) mentions the Thai authority’s concern over the management of economic policies aiming toward stabilization, particularly impacts of foreign capital movements on the economy. In general, the adverse effects of excessive capital flows can be applied to other economies as well. For example, Taya Teizo of the Daiwa Institute of Research of Japan puts it very bluntly: it was neither loose fiscal policy nor excessive supply of central bank credit that precipitated the Asian crisis; it was excessive capital inflows and subsequent outflows (Taya 1999).

Pakistan and the World Economy (Distinguished Lecture)

This paper aims to explore Pakistan's geo-economic options in the difficult situation that confronts following the easing of sanctions, which added acute balance of payments pressures to its existing ailments of near-stagnant exports, a lower growth trend than in preceding decades, an unattractive climate for foreign investment, and weak social indicators. The first question explored is whether Pakistan has any opportunity of participating in a regional trade grouping. It is argued that the only conceivable way of achieving this would involve the development of SAARC, which would demand a profound transformation of Indo-Pakistani relations (though one no more profound than that realised in Franco-German relations since the founding of what is now known as the European Union). One benefit of achieving deep integration through SAARC is that this would create the possibility of Pakistan developing a serious engineering industry far more rapidly than will otherwise happen. In the absence of deep integration in SAARC, it is argued that Pakistan's best option would be a policy close to unilateral free trade, so as to place it in a position to take advantage of whatever the next generation of labour-intensive activities demanded by the world economy proves to be. Under either of those scenarios, the reestablishment of a dynamic industrial sector will require the maintenance of a competitive exchange rate, something that, it is argued, is not necessarily guaranteed by floating. The paper also discusses the role of inward direct investment in contributing to the export success of East Asia, and considers whether the expatriate Pakistani community might be capable of playing a role comparable to that played by the overseas Chinese in nurturing the Chinese export expansion of the last two decades. It is suggested that such a hope was set back by the extra-legal attempt to renegotiate power tariffs with the independent power producers in the course of 1998, and that Pakistan needs to become a country of laws rather than discretion if foreign investors, including expatriate Pakistanis, are ever to find the country an attractive export platform. While more inward direct investment would almost certainly be beneficial, the same is not true for inward financial investment, where too large an inflow can easily expose a country to very significant risks, as the East Asian crisis showed. In the long run, Pakistan needs to be prepared to repel excessive capital inflows if they materialise; but its immediate problem is still balance of payments pressure, and this seems to demand targeting a major and sustained improvement in the current account over the next several years.