International Capital Flows Research Articles

International capital flows in the process of longevity catch-up

Abstract Using a polynomial cointegration technique, this paper shows that the bilateral US current account balance with China has a U-shaped relationship with the life expectancy gap between the US and China. A narrowing gap initially increases the US deficit with China, but eventually, this increased US deficit falls with the further catching-up of Chinese life expectancy. The life expectancy gap between the two countries has been below the threshold level since 2013, and this demographic trend has the potential to improve the US deficit with China. This U-shaped relationship can be theoretically reproduced. A two-country overlapping generations model indicates that the effect of life expectancy is decomposed into four components: retirement savings, social security burden, the number of elderly workers, and the productivity of elderly workers. The total effect of foreign life expectancy on the home current account balance exhibits a sign change in the catching-up of foreign life expectancy.

International spillovers of unconventional monetary policy: A meta-analysis

AbstractThe impacts of the unconventional monetary policy measures adopted by central banks after the 2007 financial crisis have been the focus of an increasing number of empirical studies. While some studies have focused on the impacts on the domestic economy, others have examined the international spillover effects of the policies adopted by the major central banks. The latter studies have, however, reported heterogeneous results. In this paper, we develop a meta-analysis of the empirical literature that examines the spillover effects of unconventional monetary policy on international capital flows. We find that, while the global average effect is not statistically different from zero, there are specific effects that vary significantly according to the development level of the destination country, the nature of the capital flow, the Central Bank that adopts the UMP, and the type and year of implementation of the UMP measure.

Cryptocurrencies and capital flows: evidence from El Salvador’s adoption of Bitcoin

ABSTRACT This paper explores a monetary experiment, the adoption of Bitcoin as legal tender in El Salvador in 2021, to analyse the impact of digital currencies on international capital flows. Using a difference-in-differences approach, we find that, instead of making transfers easier, El Salvador’s official cross-border financial activity has decreased after the monetary change. This finding may reflect an increase in uncertainty. However, it is also in line with findings that link digital assets to illegal activity as previously officially recorded financial transfers may have been replaced by unrecorded activities.

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.

The threshold analysis of the Official Development Assistance (ODA), Foreign Direct Investment (FDI), and economic growth in selected African countries

There is a scarcity of research on the analysis of thresholds of official development assistance (ODA), foreign direct investment (FDI), and economic growth in Africa. Most of the studies focused on analysing the correlation between official development assistance (ODA) or foreign direct investment (FDI) and economic growth. This study stands out from others by adopting a comprehensive approach to analyse the threshold analysis of ODA, FDI, and economic growth in many countries on a continental scale. We examine the threshold for ODA, FDI, and economic growth by analysing annual data from 1980 to 2018 in 30 African countries. The primary method used for the estimation was the panel threshold regression approach. The threshold analysis test assessed the impact of ODA, FDI, and economic growth. The current study utilised threshold analysis and found a positive coefficient of 0.0620, indicating a favourable correlation between FDI and economic growth. On the contrary, the negative coefficient of 0.0683 shows a detrimental correlation between ODA and economic growth. Therefore, officials must enforce the level of ODA that is necessary to stimulate FDI and foster economic growth in Africa. Furthermore, it is crucial for authorities to implement a monitoring system to closely monitor these thresholds and adjust the policy accordingly in response to changing economic situations. The findings of this study will not only contribute to academic discourse, but will also provide vital perspectives for politicians, practitioners, enterprises, and foreign investors on how to effectively implement policies that stimulate economic growth and attract foreign investment in Africa. Furthermore, this study offers recommendations for further research in the domain of international capital flows.

Remittance outflow, financial development and macroeconomic indicators: evidence from the UK

Remittances have become a significant component of international capital flows, with millions of migrants sending billions of dollars back to their home countries annually. However, the way these outflows affect macroeconomic variables has not received sufficient attention in the literature, especially in the context of varying levels of financial development. Using time series data from 1987 to 2022 for the United Kingdom, this study examines the macroeconomic effects of remittance outflows and financial development. Our baseline estimation using the Autoregressive Distributed Lag model reveals heterogeneous impacts, as remittance outflows adversely affect economic growth but improve exchange rates. We find remittances do not have a significant effect on inflation or bank rates. The moderating effect of financial development analysis reveals a similar outcome. Our results suggest governments should consider stimulus policies that support investment in productive sectors to improve macroeconomic indicators and facilitate financial inclusion to enhance the adoption of growth strategies that promote remittances.

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.

Post-covid developments in capital flows: what has changed?

As the global economic environment changes so does the patterns of international capital flows. Since the beginning of globalization and particularly throughout the Great Moderation, capital flows have been recognized as an indispensable cornerstone for financial liberalization, deeper integration and economic growth

Inflation targeting and capital flows: A tale of two cycles in developing countries

Global factors have traditionally determined capital flows, but domestic policies also matter. Developing countries face the challenge of managing procyclical capital inflows that can destabilize their macroeconomic environment. Inflation targeting can help solve this problem by enhancing the credibility and predictability of monetary policy. In this paper, we explore how inflation targeting affects the cyclical behavior of capital inflows in developing countries. First, we complement the data on international capital flows from the IMF with locational and consolidated banking statistics from the BIS. Second, we address the self-selection associated with inflation targeting by using entropy balancing. We find that inflation targeting reduces the procyclicality of capital inflows in developing countries. Specifically, inflation-targeting countries receive more (less) capital inflows during recessions (booms) than non-targeting countries. Other investment debt from the private sector mainly drives this effect. Our results are robust to various sensitivity checks and alternative specifications and methodologies.

Should Developed Economies Manage International Capital Flows? An Empirical and Welfare Analysis*

The literature on the effects of country risk premium shocks has largely focused on emerging market economies. We empirically show that in developed economies, risk premium shocks explain a non‐trivial share of aggregate fluctuations and are key drivers of real activity during crises. Our empirical results and results from a two‐country New Keynesian model indicate that an increase in the risk premium leads to a reduction in aggregate output under monetary union, but not so in countries with flexible exchange rates and independent monetary policy. Model simulations suggest that managing international capital flows enhances welfare in countries under monetary union.

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.

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.

The impact of financial sanctions on financial risk of target countries

ABSTRACT By using panel data of 181 countries of which 83 countries have been subjected to financial sanctions from 1980 to 2020, this article employs a Time-Varying difference-in-differences (DID) model and explores the nexus between financial sanctions and financial risk. This article finds firstly that financial sanctions significantly increase the fin ancial risk of target countries. Second, we conclude that financial sanctions increase the financial risks of target countries by limiting international capital flows and foreign aids. Third, financial sanctions affect the risk for foreign debt, risk for debt service and risk for international liquidity significantly, however financial sanctions have no impact on risk for exchange rate stability and risk for current account. Last but not least, financial sanctions increase the financial risk significantly for countries with low political stability and financial development level, however the effect is not significant in countries with high level of political stability and financial development. In the light of this, our research should help policymakers in many nations develop valuable policies from the perspective of international politics and finance.

The spatial interlocking of commercial office real estate and advanced producer services: a central flow theory lens

ABSTRACT The paper extends geographical enquiry into the external urban relations described by central flow theory in an exploration of the roles of commercial office real estate (CORE) and advanced producer services (APS) as a conduit for inter-city flows of finance in corporate globalization. The analysis investigates and benchmarks the spatial overlap between these city-based service networks and uses this to consider how their respective servicing strategies influence international capital flows. We find that the networks are interlocked, as the connectivity in one network can significantly explain the connectivity in the other. Both CORE and APS services promote cross-border flows of finance. Cities providing multinational CORE and APS services are able to articulate direct as well as indirect inter-city capital flows and spillovers to non-service sectors.

Impact of Global Economic Trends on International Capital Flows: A Case of Selected Developing Countries

The dynamic link between foreign capital flows in emerging nations and global economic trends is examined in this study. Trade and foreign direct investment (FDI), two important dependent variables, are the main focus of the research, which also looks at how they interact with other independent variables such broad money, CO2 emissions, GDP constant, gross fixed capital creation, and labor force. The study uses data taken from the World Development Indicators for the years 2000–2022 and uses unit root tests to evaluate the stationarity of the variables at the level and first difference. According to our research, wide money, CO2 emissions, GDP constant, gross fixed capital creation, and labor force have a favorable and substantial influence on trade and foreign direct investment (FDI) in developing nations. The results of the unit root tests reinforce the validity of our research by showing that the chosen variables are stable at the level. The study sheds light on the variables impacting the economic dynamics of emerging countries and offers insightful information on the complex relationships between global economic trends and international capital flows. The ramifications of these discoveries extend to stakeholders, investors, and policymakers who must comprehend and maneuver through the intricacies of capital flows within the dynamic framework of worldwide economic patterns.

The Impact of Cross-Cultural Customary Transportation on International Capital Flows

Economic globalization promotes the development of cross-border investment, and cultural differences in transportation between different countries also play an important role in this process. Starting from cross-cultural customary transportation, analyze the impact of public transportation on international capital flow, and propose economic and legal suggestions from the perspective of transportation governance, for the sake of promoting the effectiveness of international capital flow. By combining theoretical analysis and interdisciplinary integration methods, the study suggests if the "left-hand" rule is applied to the driving direction, it can increase the traffic safety factor, promote the effective development of public transportation, promote exchange rates and international balance of payments, and improve the dispute resolution on international investment. Starting from the socio-cultural perspective, this study aims to explore interdisciplinary issues between law and economics, providing reference and inspiration for social governance and policy formulation.

Capital Control Taxes in an Emerging Market Economy

Historically, Emerging Markets (EMs) that own foreign debt and exhibit a high degree of dollarization have demonstrated vulnerability to a range of both real and financial shocks. Governments often use a range of capital control measures, particularly in nations burdened with external debt, with the aim of mitigating sudden swings in both inflows and outflows of capital. These policies are implemented to lessen exchange rate volatility and prevent dollarization. This study employs second moments analysis, impulse response functions and the welfare analysis to investigate the impact of a tax policy that restricts international capital flows on several macroeconomic variables in an emerging economy. A dynamic stochastic general equilibrium (DSGE) model is employed to examine the impact of the tax imposed on foreign borrowing on the economy, including both real shocks such as technology and growth, as well as financial shocks such as country risk premium. The findings of the study indicate that capital control taxes have a diminishing effect on the variability of significant macroeconomic variables, such as investment and consumption, when imposed at lower levels. Conversely, these taxes exhibit a stabilizing impact on the volatility of the trade balance-to-output ratio when implemented at higher levels. Moreover, quantitative evidence reveals that country risk premium shocks exert a substantial influence on variations in both the trade balance-to-output ratio and the level of investment, accounting for around 25% and 50% of the fluctuations, respectively. Finally, the existence of such a taxation enhances the intertemporal utility function at the steady state and reduces its volatility in the case of technology and growth shocks.

Financing sustainable development goals in Sub‐Saharan Africa: Does international capital flows matter?

AbstractThis study investigates the role of international capital flows in financing the Sustainable Development Goals (SDGs) in Sub‐Saharan Africa (SSA). Using data from 41 SSA countries from 2000 to 2018 and employing the System Generalized Method of Moments (System GMM), the research examines the impact of Foreign Direct Investment (FDI) and remittances on the SDGs across disaggregated levels (economic, social, and environmental sustainability) and the aggregated level (SDGI). The findings underscore the crucial significance of international capital flows as essential financing sources for SSA countries. FDI emerges as a contributor to economic and social sustainability at the disaggregated level, yet it exhibits negative effects on environmental sustainability. Conversely, remittances are shown to positively contribute to economic and social sustainability at the disaggregated level. However, the impact of international capital flows on the aggregate SDGI is found to be insignificantly positive. These results highlight the necessity for policymakers in SSA to devise strategies that maximize the benefits of FDI while addressing its adverse effects on environmental sustainability. Furthermore, they emphasize the importance of strengthening policies aimed at directing remittances towards sustainable investments, thereby advancing the achievement of the SDGs. Governments are urged to prioritize enhancing regulatory capacities in environmental matters through investments in modern technologies and appropriate standards, aiming to strike a balance between environmental protection and economic needs. Additionally, they should prioritize transparency, public participation, and robust enforcement mechanisms. Encouraging environmentally friendly foreign investments and promoting regional and international cooperation are also crucial steps towards effectively managing local environmental challenges.

Heterogeneous impacts of sudden stops of international capital flows on economic growth

AbstractThis paper empirically examines the heterogeneous impacts of sudden stops in international capital flows on economic growth. We identified 24 sudden stop episodes since 1990 and employed a counterfactual method with cross‐economy panel data to evaluate the impact of each episode on economic growth. The results indicate that 14 sudden stop episodes triggered significant economic decline, with varying magnitudes; 9 episodes were accompanied by insignificant economic downturn, and 1 episode was followed by economic growth. We further utilize the treatment effect derived from the counterfactual analysis to investigate the causes of these heterogeneous impacts of sudden stops on economic growth. Results obtained from the panel data model suggest that external debt, financial development, and real investment return are the main driving forces contributing to the observed heterogeneity.

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.