International Capital Flows Research Articles

International capital flow in a period of high inflation: The case of China

This study investigates the behavior of international capital flows by considering northbound capital flows into China’s A-share market—a market where northbound capital is widely viewed as synonymous with “smart money”. However, since the outbreak of COVID-19, the global economy has undergone a period of high inflation and stocks are considered overweight by international investors. We therefore explore whether the predictive power of northbound capital changes during high-inflation periods. Using a threshold regression model, we find that northbound capital only has predictive power when the global inflation level is low. We also explore the relationship between northbound capital and global risk and demonstrate that the weakened predictive power of northbound capital in our sample is independent of high global risk. Thus, overall, this study finds that the role of northbound capital in China’s A-share market is closely related to inflation and to the global economic environment.

Iraqi Economy and Renewable Energy Projects Between Economic Necessity and Investment Challenges

Purpose: Given Iraq's current excessive fossil fuel output, this article seeks to investigate the country's potential for future renewable energy sources. The report also endeavors to foresee Iraq's future position in clean energy production in Iraq and throughout the globe and the rate at which the global energy market will shift towards renewable energy sources.
 
 Theoretical framework: Iraq's reliance on oil earnings and the country's overburdened public sector poses serious economic issues. There is a domination of state-owned firms, stringent laws, a need for more access to finance, a shortage of competent labor, and poor infrastructure that limits the expansion of numerous industries. Growth in recent years has not led to decreased poverty since the economy has changed greatly since 2014.
 
 Design/Methodology/Approach: The study included both retrospective and prospective approaches. The most pressing problems in implementing and making use of renewable energy sources were described and analyzed descriptively. Future outcomes for the Iraqi economy were envisioned using a prospective approach in the form of development scenarios.
 
 Findings: A significant source of international capital flows and a key source of funding for economic growth, foreign direct investment (FDI) has mostly focused on the oil industry and certain tourism projects. As a result of the country's outdated energy grid, investors are interested in something other than investing in Iraq's electrical industry.
 
 Research, practical & social implications: We describe the current issues confronting Iraqi economic development, including the need for more diversity in the economy, structural imbalances between the main sectors, and the near-total dependence on crude oil export revenues, resulting in a decline in industrial production.
 
 Originality/Value: We describe the reality of the Iraqi economy, analyze the structure of Iraq's energy sector based on conventional energy, and then find out about the progress made in renewable energy and existing and future projects under fossil fuels.

Economic Growth in the Era of Economic Openness in Indonesia

The global economy has entered economic globalization, where with this economic globalization there is an escalation of the openness of a country's economy to international trade, foreign investment and international capital flows. Economic openness in both the financial sector and trade relations can be used as a driver of economic growth. Indonesia is one of the countries that continues to strive to become a developed nation. Indonesia has experienced significant development, particularly in the economic sector. This progress is evident through a relatively good economic growth. The objective of this research is to examine the impact of petroleum and natural gas exports, petroleum and natural gas imports, foreign direct investment (FDI), and foreign exchange reserves on the economic growth of Indonesia's Gross Domestic Product (GDP) from 1990 to 2022. In terms of methodology, this study employed quantitative descriptive approaches and utilized secondary data for analysis. The data collection method uses the documentation method or documentation study using multiple linear regression analysis methods. The findings indicated that the exportation of petroleum and natural gas had a notable adverse impact on the economic growth of Gross Domestic Product (GDP). While petroleum and natural gas imports, foreign direct investment (FDI) and foreign exchange reserves make a positive and significant contribution to Gross Domestic Product (GDP). The implication of this study underscores the significance of considering the roles played by petroleum and natural gas export, petroleum and natural gas import, foreign direct investment, and foreign exchange reserves in shaping economic policies in Indonesia.

International capital flows, liquidity risk, and monetary policy

In recent years, there has been a large amount of lending coming from the public sector of many developing countries. At the same time, the financial sectors in many advanced countries have issued a large share of portfolio debt to other countries. What are the implications of these events for the global financial system and overall economic activity? Do they have an impact on the transmission channels of monetary policy across countries at different stages of economic development? We investigate these important issues using a micro-founded model of money and banking so that the effects of monetary policy across countries can be meaningfully studied. Notably, the increase in capital outflows to the advanced economy renders monetary policy in developing countries to be less effective, while the effects of monetary policy in advanced economies are more pronounced. Yet, our results indicate that it can indeed be optimal for lower income countries to lend to the advanced world. Importantly, we find that the optimal amount of lending to advanced countries critically depends on the degree of liquidity risk — if it is sufficiently high, then public sector lending to advanced economies is not warranted. Consequently, our results indicate that governments in developing countries should carefully consider how much capital they send abroad to foreign countries.

Financial risk assessment management of cloud accounting SOEs based on spillover index

Abstract The international capital flows between the financial markets of state-owned enterprises are frequent and closely linked, and the difficulty of assessing and managing risks is deepening day by day. In order to be able to provide some useful references for corporate financial institutions in theory and practice, this paper is oriented to cloud accounting SOEs, modeling and calculating SOE returns and volatilities to obtain corporate financial spillover indices. The calculated spillover index is introduced into the basic assessment system to establish the financial risk assessment system. Based on the expert scoring results of the assessment indexes, a judgment matrix is constructed to obtain the fuzzy assessment weights of each index. Combined with the system assessment results, the risk matrix is used to classify risk levels and develop corresponding management strategies. It is experimentally verified that the intensity of the total risk spillover index and the probability of risk occurrence between different submarkets of corporate finance are higher during the unpracticed period, 76% and 83.48%, respectively. In contrast, the spillover index intensity and the probability of risk occurrence in the practice period are only 50% and 61.15%. This shows that the proposed method can carry out effective risk assessment management based on the spillover index, which meets the needs of the times and realistic needs of cloud accounting SOEs for financial risk assessment management and promotes the financial business development of SOEs.

The state of the global financial architecture: current trends and prospects for reform

Methods. The methodological basis of the research is a system of general scientific and specific methods, in particular, the method of logical analysis made it possible to build the logic of the research; the method of comparison – to assess the key parameters of the global financial architecture; analysis and synthesis – to generalize research results, the deduction method – to single out individual factors affecting the state of the modern world financial architecture. The graphic method made it possible to visualize the obtained research results. Results. The article is devoted to defining the trends of the world financial architecture. The structure of the modern world financial architecture, which includes global, regional and national levels, has been formed. The main problems of the global financial system have been identified, such as: the emergence of «bubbles» in some of its segments; increased volatility of international capital flows; volatility of exchange rates, etc. A list of global indicators influencing the global financial architecture has been determined. The need to reform the world financial architecture as a result of the global economic crisis of 2008–2009 is substantiated. The main directions of reforming the world financial architecture are identified: global financial management; banking sector; over-the-counter derivatives market and fight against offshore jurisdictions. New risks were identified, which caused the need to develop new mechanisms for reforming the global financial architecture at the end of 2018 – the beginning of 2020, the threat of new crises in countries with markets based on the principle of the «contagion effect». The impact of the pandemic on the world stock market was studied through the dynamics of the FTSE, Dow Jones Industrial Average and Nikkei indices. The article substantiates that an important aspect of the current state of the global financial architecture is the wide implementation of FinTech innovations. It has been proven that the war situation in Ukraine definitely affects the state of the financial architecture due to the strengthening of global inflation and the tightening of monetary policy by Ukraine's partner countries. Novelty. The originality and value of the research lies in the formation of a methodology for diagnosing the state of the world financial architecture. The main trends in the functioning of the world financial architecture have been determined. The importance of FinTech for achieving progressive changes in the global financial system and the development of the global financial architecture is determined. Practical value. There is substantiated the practical role of certain factors, which made it possible to determine the trends of the current state of the world financial architecture, which will become an analytical basis for assessing the degree of development of the financial architecture of the countries of the world.

Decrypting new age international capital flows

This paper employs high frequency transactions data on the world's two oldest and most extensive centralized peer-to-peer Bitcoin markets, enabling trade in the currencies of more than 160 countries. We develop an algorithm that allows us, with high probability, to detect “crypto vehicle transactions” in which crypto currency is used to move capital across borders, and/or to exchange one fiat currency for another. The data suggest that the use of Bitcoin has become an increasingly important channel to receive remittances and evade capital controls in emerging markets. Two event studies on Venezuela and Argentina provide supporting evidence.

Do foreign investors affect the volatility of local currency bond prices? Empirical evidence from China

How does the participation of foreign investors on local bond markets impact the volatility of bond prices and yields? An answer to this question is important for policy makers from emerging markets in their attempts to liberalize access to financial markets. However, empirical literature gives inconclusive answers to this question. Reasons are that studies analyze diverse types of bonds and apply their analyses to different samples of countries and for different phases in the opening up of markets. We add to existing knowledge by empirically investigating the impact of foreign investors' participation on the volatility of prices of two types of Chinese bonds, government bonds and policy bank bonds, as well as for three stages in the liberalization of the Chinese bond market. We find that foreign investors' participation does not exert significant effects on volatility until late in the opening of the bond market. In addition, we uncover that those bonds which are more influenced by government policies, policy bank bonds, are also more strongly affected by international capital flows. From a policy perspective, our results emphasize the importance of increasing the openness of China's local currency bond market, of stabilizing foreign investors' expectations and, in turn, international capital flows.

The Impact of Foreign Mergers and Acquisitions on ESG Performance of Chinese Listed Companies: Empirical Analysis Based on the PSM-DID Method

In recent years, green finance has led to increased focus on ESG performance, measuring corporate social responsibility. Meanwhile, mergers and acquisitions (M&A) play a crucial role in international capital flow, which have attracted widespread attention. Exploring the impact of foreign M&A on ESG performance of companies has become an important research topic. Based on the sample of foreign mergers and acquisitions of Chinese listed companies from 2017 to 2022, this paper innovatively examines the impact and mechanism of foreign M&A on Chinese listed companies' ESG performance using propensity score matching and multi-period difference-in-differences methods. Findings indicate: (1) Foreign M&A significantly improves corporate ESG performance; (2) The impact of foreign M&A varies across different types of enterprises. Regarding the acquiring companies, foreign companies have a greater impact on improving ESG performance compared to companies from Hong Kong, Macau, and Taiwan. On the target companies' side, large-scale companies are more effective in utilizing the opportunities provided by mergers and acquisitions (M&A) to leverage their advantages. (3) Foreign M&A is particularly effective in enhancing environmental indicators within the ESG framework; (4) The mechanism behind this improvement involves a significant green culture effect, which promotes the improvement of ESG performance by amplifying the influence of corporate green culture.

The impact of international capital flows on the economic growth in Algeria during the period 1990-20

This study examined the effect of international capital flows on economic growth in Algeria for the period, 1990 to 2018. This study relied on four core channels of international capital flows which includes foreign direct investment (FDI), official development assistance (ODA), personal remittances (REM), and external debt stock (EXTDS) into Algeria. We found that all channels of international capital flows were not statistically significant in the short and long-run except the foreign direct investment.We result from this study that Algeria needs deep reforms in order to attract more foreign capital, especially creating an appropriate environment In order for these flows to contribute substantially to economic growth.
 L'étude a examiné l'effet des entrées de capitaux internationaux sur la croissance économique de l'Algérie pour les périodes 1990 à 2018. L'étude a utilisé quatre principaux canaux d'entrées de capitaux internationaux, qui comprennent l'investissement direct étranger (IDE), l'aide publique au développement (APD), les envois de fonds personnels (REM) et le stock de dette extérieure (EXTDS) en Algérie.Nous avons constaté que tous les résultats n'étaient pas statistiquement significatifs à court et à long terme, à l'exception de l'investissement étranger direct.Nous avons appris de cette étude que l'Algérie a besoin de réformes profondes afin d'attirer plus de capitaux étrangers, en particulier en créant un environnement approprié pour que ces flux contribuent de manière substantielle à la croissance économique.

The International Monetary Fund and capital flows

AbstractControls on international capital flows were a central issue for the International Monetary Fund at Bretton Woods in 1944. But by the 1970s, mainstream thinking was encouraging open capital flows. A succession of damaging crises followed: Latin America in the 1980s, Mexico again in 1994, and Asia in 1997. Fund policies were tweaked, but the causes were seen as being largely in the recipient countries. Capital controls were specifically rejected.Nevertheless, the Fund’s view began to shift, probably encouraged by the 2008 global financial crisis. There was a growing recognition that the capital-flow surges at the heart of these crises were often externally driven, reflecting global factors. The appropriate response would include capital flow management (CFM). The Fund recognized this in its 2012 Institutional View, but CFM was at the bottom of the policy toolbox, surrounded by conditions and constraints, maintaining the stigma on CFM.Meanwhile many emerging economies were enhancing their ability to cope with excessive capital flows, although at some cost (slower growth, tighter fiscal policy, large foreign-exchange reserves). At the same time the flows were increasing, with a bigger component of flighty portfolio flows. CFM measures still have an important place in this new environment, but the Fund’s reluctance to embrace them means that a deep discussion on operationalizing effective CFMs is still lacking.

Longer-term structural transitions and short-term macroeconomic adjustment: quantitative implications for the global financial system

AbstractThis paper provides quantitative modelling of the effect of three longer-term global transitions: the global demographic transition involving a marked reduction in population growth; a long-term slowdown in productivity growth which may continue, or may conceivably be reversed; and the disruption in the global economy due to increasing climate shocks and the implementation of climate policies that will be needed to reach net-zero emissions by 2050. We study the global investment needs to which these transitions will lead. We demonstrate that these investment needs will be both asymmetric across countries and over time. This asymmetry will lead to potentially large changes in trade flows and significant financial capital flows across national borders, and also to substantial real exchange changes and interest rate movements. The resulting large movements in international capital flows will have significant implications for the global financial system, which we demonstrate at the country and regional level.

Capital Inflows and Working Children in Developing Countries: An Empirical Approach

International capital flows and the operation of multinational enterprises (MNEs) are influenced by several socioeconomic and political factors. Among them, low labor cost is listed among the determinants that attract foreign capital, primarily foreign direct investment (FDI) inflows, which in various cases is attributed to unskilled employees, including working children. Working children, mainly in developing countries, remain an important social issue which has attracted increasing research interest, as well as the coordinated efforts of international organizations. The present research aims to empirically investigate the interaction between FDI inflows and child labor in developing countries using panel data analysis. The paper includes an extensive literature review of related empirical research on the association between child labor and FDI inflows in developing countries. The novelty of the study is attributed to its effort to empirically investigate the causality between FDI and child labor in two geographic regions that present high rates of working children, namely sub-Saharan Africa and Latin America. A sample of 42 developing countries from a period ranging from 1980 to 2019 was used and Granger causality tests were applied. The study concludes that there is a unidirectional causal relationship from FDI inflows to child labor in these regions and no causality was observed from child labor on macroeconomic independent variables. Several policies and proposals that will reduce or prevent child labor in the subsidiaries of multinational companies are included.

The time-varying impact of foreign capital flows on house prices: evidence from South Africa

This study employs a time-varying parameter VAR with stochastic volatility (TVP-VAR) to investigate the time-varying impact of foreign capital flows on house prices in South Africa. The study also analyses the behaviour of the house price index using recursive unit root tests. The results of these tests show a statistically significant period of house price exuberance. The results of the TVP-VAR show a contemporaneous positive impact of foreign capital on house prices throughout the sample period, with the largest impact occurring during the period of house price exuberance. In addition, the international capital flows are found to aggravate the imbalances between demand and supply sides, thus enforcing the future house prices to comove with the housing supply.

International capital flow pressures and global factors

The risk sensitivity of international capital flow pressures is explored using a new Exchange Market Pressure index that combines pressures observed in exchange rate adjustments with model-based estimates of incipient pressures that are masked by foreign exchange interventions and policy rate adjustments. The sensitivity of capital flow pressures to risk sentiment evolves over time, varies significantly across countries, and differs between normal times and extreme stress events. Across countries, risk sensitivities and safe haven status are associated with self-fulfilling exchange rate expectations and carry trade funding currencies. In contrast, current indicators of a safe macroeconomic profile are only weakly associated with safe haven status.

International Capital Flows and Dynamic Changes in Pfizer Stock Prices: A Long-term Perspective

The stock and exchange rate markets play central roles in domestic and international trade. Since volatility of either one of them can bring significant impact to any business. It is essential to find how changes in exchange rate influence the stock market so that policymakers can build appropriate regulations to boost the national stock market, and investors may invest by taking the minimum risk. This paper selects the stock of a well-known multinational firm, Pfizer, and the US dollar index from October 27, 2005, to September 5, 2019. It applies the ADF test to validate the stationarity of the sample data, the VAR model with IRF to investigate whether the increasing exchange rate brings a positive effect on Pfizer's stock return or not, and the ARMA-GARCHX model to study whether the volatility of exchange rate is significant to changes of Pfizer's stock return in the long run. The study's findings indicate that the exchange rate volatility does not have a long-term relationship with Pfizer's stock price.

A Study on How International Portfolio Investment Flows Affect Macrofinancial Risks and Control Channels

In the current complex global economic background, international capital flows are becoming more frequent. Based on this, this paper takes international portfolio investment as the research object and empirically tests the causal relationship and control channel between international portfolio flows and macrofinancial risk in emerging economies. It selects the panel data of emerging economies from 2001 to 2020, constructs macrofinancial risk indicators by using contingent claim analysis and the entropy-based TOPSIS method, tests the effect of international portfolio flows on macrofinancial risk by using the panel distributed lag regression model, and explores the management effect of foreign exchange reserves and capital controls on the risk effect by using the panel threshold regression model. The results show that long-term international portfolio flows help reduce macrofinancial risk, but short-term capital flows appear to increase macrofinancial risk. In addition, both foreign exchange reserves and capital controls effectively reduce the risk effect of portfolio flows. However, when considering different types of portfolios, we find that foreign exchange reserves do not effectively control the risk effect of equity securities flows, while stricter capital controls do. This paper argues that emerging economies should be more open to international long-term portfolio flows, focus on the monitoring of short-term portfolio capital flows and equity securities flows, and coordinate the use of foreign exchange reserves and capital control instruments to manage the risk effects of portfolio flows. This paper verifies the risk effect of international portfolio investment flows through empirical analysis, tests the effectiveness of foreign exchange reserves and capital controls, and provides a decision-making reference for emerging economies to timely identify, effectively manage, and prevent the risk effect of international capital flows.

Research on the International Competitiveness of China’s Financial Services Trade

With the continuous development of benefits, China is slowly moving towards the era of service economy, and the service industry occupies an increasingly large position in our country's national economy, which also promotes the existence of weak industries in our country's international service trade competitiveness. As a kind of our country's service industry, financial service trade still has a big gap with other countries in terms of international competitiveness. Financial service trade is one of our country's comparative advantages, but with economic globalization, the connection between countries getting closer.In such an open era, factors such as the accelerated international capital flow, large capital flow, and fierce market competition have caused serious impacts to most countries in the world, and problems have arisen in the development of the domestic financial industry and the real economy industry. As a result, it will affect the overall competitiveness of the domestic financial industry, etc. These situations lead us to pay attention to some bad results brought about by financial services trade. It is necessary to analyze and study the reasons for these bad performances and give corresponding measures. This paper mainly conducts a relevant analysis from the research on the international competitiveness of China's financial services trade.

How ETFs Amplify the Global Financial Cycle in Emerging Markets

Abstract We study how the growth of exchange-traded funds (ETFs) affects the sensitivity of international capital flows to the global financial cycle. Using comprehensive fund-level data on investor flows, we show that their sensitivity to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. This higher sensitivity can be directly linked to ETFs underlying shorter-trading-horizon clientele that trades more often in response to shocks. Using country-level data, we find that where ETFs hold a larger share of financial assets, equity inflows and prices become more sensitive to global risk. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Schumpeter’s insights for monetary macroeconomics and the theory of financial crises

Abstract The purpose of this paper is to show that Schumpeter can offer important insights for macroeconomic theory today. This applies especially to his distinction between a “real analysis” and a “monetary analysis,” as he calls it, and its implications for monetary macroeconomics, especially the theories of financial crises at the national and the global levels. The main problem of the “real analysis” is the identity of the financial sphere with the real sphere. The consequence of this narrow view is the inability to understand the dynamics of a monetary economy, which is the main cause for financial crises. The flaws of the real analysis manifest themselves also at the global level. The Feldstein–Horioka puzzle and the Lucas paradox are obvious “anomalies” of this paradigm. Models based on the real analysis are unable to explain the extent and even direction of international capital flows. Thus, the economics profession was unable to see the risks that were accumulating in the international financial system before the outbreak of the Great Financial Crisis.