International Capital Movements Research Articles

Is Inflation Targeting Still on Target? The Recent Experience of Latin America

AbstractThis paper reviews the recent experience of a group of Latin American inflation‐targeting (IT) nations. We document repeated and large deviations from the standard IT framework: exchange market interventions have been widespread; the real exchange rate has often become a target of policy; and other non‐conventional policy tools, especially changes in reserve requirements, but occasionally also taxes and restrictions on international capital movements, have come into common use. As in developed nations, during the 2008–2009 crisis, issues of liquidity provision took centre stage. The emerging modified framework of monetary policy is found to have been generally effective during the crisis but raises several important policy questions.

Indian Capital Control Liberalization: Evidence from NDF Markets

The Indian government has taken a number of incremental measures to liberalize legal and administrative impediments to international capital movements in recent years. This paper analyzes the extent to which the effectiveness of capital controls in India, measured by the domestic less net foreign interest rate differential (deviations from covered interest rate parity) have changed over time. We utilize the 3-month offshore non-deliverable forward (NDF) market to measure the effective foreign interest rate (implied NDF yield). Using the self exciting threshold autoregression (SETAR) methodology, we estimate a no-arbitrage band width whose boundaries are determined by transactions costs and capital controls. Inside of the bands, small deviations from CIP follow a random walk process. Outside the bands, profitable arbitrage opportunities exist and we estimate an adjustment process back towards the boundaries. We allow for asymmetric boundaries and asymmetric speeds of adjustment (above and below the band thresholds), which may vary depending on how arbitrage activity is constrained by capital controls. We test for structural breaks, identify three distinct periods, and estimate these parameters over each sub-sample in order to capture the de facto effect of changes in capital controls over time. We find that de facto capital control barriers: (1) are asymmetric over inflows and outflows, (2) have changed over time from primarily restricting outflows to effectively restricting inflows (measured by band widths and positions); (3) arbitrage activity closes deviations from CIP when the threshold boundaries are exceeded in all sub-samples. In recent years, capital controls have been more symmetric over capital inflows and outflows and the deviations from CIP outside the boundaries are closed more quickly.

Multinational Retailers and Consumers in China: Transferring Organizational Practices from the United Kingdom and Japan

After the Lehman shock and the following global economic crisis, globalisation has come to be reconsidered. In the US, the ‘99% movement’ has been protesting economic inequality, while southern European countries have been struggling with the Euro crisis brought about partly because of freer movement of international capital. The situation in Asia is not more stable than other areas. Not only because of increased tension between Japan and China over territorial issues concerning the Senkaku or Diaoyus islands but also due to the high level of economic inequality in China, protesters against Japan violently attacked and robbed Japanese supermarkets in China in 2012. Although the situation stabilized after some weeks of protest, this reminds us that stability in East Asia is more fragile than expected. In addition, China with the largest population, the second largest Gross Domestic Product, and the highest growth in the world needs to shift from an export-driven economy to a domestic demand-driven economy. Under these conditions, it is worth examining the roles and impacts of multinational enterprises (MNEs) from various perspectives. Existing research tends to focus on the manufacturing sector more than any other, and this is especially true in the case of emerging economies. This book by Gamble makes a significant effort to fill this gap with the strengths of both unique method and new findings.

On International Short-Term Capital Movements and China’s Monetary Policy Independence: An Empirical Analysis

Against the backdrop of the increasing impact of international short-term capital movements in the global economy, China’s monetary policy independence has also been affected. This article outlines several important effects of international short-term capital movements on China’s monetary policy independence by analysing features of channels and mechanisms of short-term international capital movement. The relationship between international short-term capital movements and China’s monetary policy independence is studied econometrically using a value-at-risk model. The findings indicate that such capital influxes, especially those from abnormal channels in huge volumes, do adversely affect China’s monetary policy independence.

Capital Flows and Exchange Rate Management

International capital movements to the developing countries and their effects on them have attracted the attention of academicians and policy-makers. They have become all the more important in the contemporary environment of global financial instability and its effects on the developing economies. Policy-makers have to walk a tight rope between continuing the newly embraced liberal trade policies and the need to protect the domestic economy from external shocks. In this backdrop, the book provides a succinct discussion on capital flows and exchange rate management for these economies. It aims to present the reader with a quick recapitulation of the relevant theory as a toolkit helpful to untangle opinions from theoretical arguments.

Offshore Companies in the International Movement of Capital

In this article the author makes a brief quantitative and feature analysis of the role of offshores in the world economy. He gives the definition for offshores and considers the possibility to estimate the real scale of offshore activity. The author also points out the positive and negative consequences of use of offshores by economic agents.

Foreign direct investment and their characteristics in Bosnia and Herzegovina

Foreign investment is a key factor in the development of a modern economy, the trade, the most important means of enterprise business, the organization of production, supply of goods and services worldwide. Through foreign investment, companies organize production on a global scale, provide an efficient supply of raw materials, energy, labor, and then sell their products and services in the most important markets in a profitable way. Based on such a business, companies can optimally utilize its advantages in technology, knowledge, and economies of scale. Developing countries due to debt and unfavorable economic conditions are showing interest in foreign investment, especially when various loans and financial help stop arriving. Transition countries integrate into the world economic system, negative economic tendencies can be overcome by international capital movements. Developed countries faced to a financial crisis, are also interested in the sizeable input of foreign capital, where foreign investment becomes the most important element of development strategies. This work gives special attention to the input of foreign direct investments and their effects in Bosnia and Herzegovina.

The professionalisation efforts of accountants in the Orange Free State, 1907–1927: An exploration of their first twenty years

Professionalisation forms an important domain in the accounting history arena. The geographical spread of professional organisations occurred via the relay of empire and the movement of international capital. Outcomes of professionalisation endeavours are strongly connected to the social and political context in which they occur. The mineral discoveries towards the end of the 19th century established South Africa’s first industrial community. As the country’s economy expanded, the virtues of simple living and conduct of business passed and there was a growing need for the services of individuals who had knowledge of accounting and of commerce. Most of the skilled accountants who migrated were of British descent. These accountants contributed to the development of the profession in South Africa. The Transvaal, Cape Colony, Natal and Orange River Colony (ORC) each established accounting societies around this time in response to the new industries and business. The Society of Accountants in the Orange River Colony was established in November 1907, five years after the conclusion of the South African War, by seven English gentlemen practising as accountants in Bloemfontein. This was the smallest society in comparison to the other colonies in Southern Africa at the time, and had grown from merely 16 foundation members in 1907 to 60 in 1927 with the passing of the Chartered Accountants Designation Act. The Society of Accountants and Auditors in the Orange River Colony (SAAORC) was a voluntary body, unlike the Transvaal and Natal societies. Accountants in the ORC could conduct their business as accountants and auditors and advertise themselves as such, whether they were members of the SAAORC or not. This article investigates the formation years of the accountants’ society in the Free State and explains the difference between this development path and that of the earlier preceding societies. The article explains the establishment of a British profession in a former Boer Republic and the mechanisms of professional closure implemented to safeguard the status of the profession.

The International Regulatory Regime on Capital Flows

Capital controls and exchange restrictions are used to restrict international capital flows during economic crises. This paper looks at the legal implications of these restrictions and explores the current international regulatory framework applicable to international capital movements and current payments. It shows how international capital flows suffer from the lack of a comprehensive and coherent regulatory framework that would harmonize the patchwork of multilateral, regional, and bilateral treaties that currently regulate this issue. These treaties include the Articles of Agreement of the International Monetary Fund (IMF Articles), the General Agreement on Trade in Services (GATS), free-trade agreements, the European Union treaty, bilateral investment treaties, and the Organization for Economic Co-operation and Development (OECD) Code of Liberalization of Capital Movements (OECD Code of Capital Movement). Each of these instruments regulate differently capital movements with little coordination with other areas of law. This situation sometimes leads to regulatory overlaps and conflict between different sources of law. Given the strong links between capital movements and trade in services, this paper pays particular attention to the rules of the GATS on capital flows and discusses the policy space available in the GATS for restricting capital flows in times of crisis.

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Russia in International Capital Movement: Comparative Analysis

The article tries to reveal specific features of Russias participation in international capital movement in comparison with other emerging markets. Peculiarities of outflow and inflow of capital in Russia are considered as consequences of specifics of its economic model. Proposals on using international capital movement for the increase of accumulation rate in Russia are put forward.

International capital movements, speculation, and the ›conservation of saving‹ principle. A ›Harcourtian‹ interpretation of global imbalances and the global crisis

This paper is inspired by the contributions made by Geoff Harcourt concerning the macroeconomics of open economies, international capital movements and speculation (e.g. Harcourt 1994, Dalziel/Harcourt 1997). This conceptual framework is developed in a simple model, useful for validating some of Harcourt's policy proposals for open economies, as well as for interpreting global imbalances and the global crisis. More specifically, this paper describes the workings of two economies, Home and the Rest of the World (RoW), which are related through both trade and capital flows. On this basis, this article: (i) develops the relationship between income levels in a deficit country (Home) and in a partner country (RoW); (ii) studies the role of key parameters in the two countries' main macroeconomic functions; (iii) applies the main results to global imbalances and in particular to the US, which plays the role of Home in the present context; (v) suggests a possible link between global imbalances, speculation, and the international role of the dollar; (vi) proposes an enlarged version of Harcourt's ›modest proposal for taming speculators‹.

Comment on “Global Imbalances and the Financial Crisis: Reassessing the Role of International Finance”

Borio and Disyatat (2010) is at the heart of the ongoing debate on the cause(s) of the recent financial crisis. Many agree on the role played by the inability of the prudential authorities to contain the excessive speculation by US and European financial institutions in the credit market. Some of the existing regulations seem to have encouraged it. People disagree on the role played by monetary policy.Low interest rates are normally a precondition for serious imprudent behavior by financial institutions.During the 2004‐ 2007 period, however, the Fed raised its policy rate by more than 400 basis points. Yet, long-term Treasury bond rates responded little to the rise in short-term rates ‐ the so-called conundrum.Thus,Bernanke (2010) asserts that monetary policy played a minor role in the formation of the credit bubble. According to Bernanke, it was financial innovations that encouraged risky investment in securitized assets and capital inflows from current account surplus countries that contributed significantly to the bubble. Capital inflows must have contained the rise in long-term interest rates and added to the binge. Borio and Disyatat start by criticizing the theory of interest inherent in the view that emphasizes the role played by capital inflows.This view,the excess saving (ES) view,holds that saving and investment determine the rate of interest. Borio and Disyatat are skeptical of this approach, and are in favor of a perspective that looks at the role of gross capital flows. Now, there is a long debate on the theory of interest rate determination, for example, the loanable funds theory versus the liquidity preference theory. I do not think it would be useful for me to go into that debate. I would just like to point out that, although it is entirely possible to write down a model where saving and investment determine the rate of interest, in modern developed financial markets it is usually the supply of, and the demand for, the stock of assets that determine asset prices. Flow variables affect asset prices as they slowly change the levels of asset supplies. Such a perspective is, of course, close to looking at gross international capital flows. Borio and Disyatat then turn to the analysis of the pattern of international gross capital movements in the 2000s, and find that banks in the Euro area and the UK dominated in terms of gross capital inflows into, and outflows from, the USA. That is, in addition to US financial institutions, they were the ones most active in the credit market binge, not Asian investors. I must say that very few object to this view of the world.

Innovation, Imitation, and Intellectual Property Rights with International Capital Movement

This paper extends the established Helpman (1993) model by introducing international capital movement, and obtains new results concerning the welfare implications of tightening intellectual property rights (IPR) in the South. First, if separated capital markets in the North and the South are integrated, enforcement of IPR would have more desirable welfare effects in both regions. Second, when international capital movement is allowed, the North always gains from the tightening of IPR if the imitation rate is sufficiently high. This implies that the North's demand on the South to tighten IPR becomes stronger as the integration of international capital markets progresses.

Varieties of State in the International Political Economy of Developing Countries

This paper discusses varieties of state and their salience for prosperity by challenging the notions of decline of nation-states and demise of national diversity in international political economy. Despite the fact that increased international trade and capital movement raises the proportion of each economy exposed to world market pressures, domestic institutions have considerable resilience in the face of global constraints. State capacity and strength generally refers to an ability based on highly centralized authority to protect policy formulation and implementation apparatus from capture by particular private interests. Autonomous states do not damage public goods avoiding policy distortions which reduce total national welfare. However, this study contends that accountable engagement of state is also a crucial component of state capacity in addition to autonomous insulation. Furthermore, since the capacity level of states differs, the ability to exploit new opportunities appears much more marked in some countries than in others. Given the varieties and specificities of state, both parasitic and the Anglo-Saxon states fall into weak states. Yet, the former is because of low accountability level, whereas the latter is due to low insulation level. On the other hand, both the East Asian developmental and the Nordic states are categorized as strong states. However, the former holds higher insulation, and thus bargaining process is leaded by the interventionist state which only invites state-controlled business associations. The latter, in turn, possesses more widespread accountability, and therefore bargaining encompasses both business and labor peak organizations. The Nordic states, in fact, sustain complex but stable triangular industrial relations through institutionalized consultative mechanisms.

Enhancing the IMF's Regulatory Authority

In the wake of the financial crisis, the International Monetary Fund (the Fund) is considering changes to its regulatory authority that are designed to make it a more effective crisis-prevention body. Among the changes being contemplated is the integration of in-depth analysis of financial sector regulatory weaknesses into its annual assessment of each member's overall economic policies. In addition, given the important linkages among the economies of its members, consideration is being given to measures that will enhance the Fund's capacity to identify and address risks on a multilateral basis. Finally, in light of the important role of international capital movements, the Fund will be discussing options that are designed to give it a more robust role in this area. Oxford University Press 2010, all rights reserved, Oxford University Press.

The Lucas Paradox and the Quality of Institutions: Then and Now

In the first era of financial globalization (1880-1914), global capital market integration led to substantial net capital movements from rich to poor economies. The historical experience stands in contrast to the contemporary globalization where gross capital mobility is equally high, but did not incite a substantial transfer of savings from rich to poor economies. Using data for the historical and modern periods we extend Lucas’ (1990) original model and show that differences in institutional quality between rich and poor countries can account for the sharply divergent patterns of international capital movements.

The Promotion of Transfer-of-Funds Liberalization Across International Economic Law

This paper examines an important aspect of the ongoing hybridization of contemporary international monetary law. The formerly clear-cut body of international law on capital and exchange controls, once exclusively enshrined in the Articles of Agreement of the International Monetary Fund, has been replaced by a multi-faceted framework of rules emerging from all three traditional pillars of international economic law: international trade, investments, and money. As elaborated in this paper, the multilateral rules on capital and exchange controls as enshrined in the Fund’s Articles have been increasingly marginalized in that context. This phenomenon can be explained as follows:First, the dense network of bilateral investment treaties is strongly promoting the liberalization of international transfers of funds and states wishing to attract foreign capital have little choice but to agree to far-reaching transfer-of-funds provisions. Second, the WTO framework on trade in services in general, and trade in financial services in particular, constitutes a more recent, yet very powerful, driving force towards increased transfer-of-funds liberalization. Third, the two OECD codes on capital liberalization have also played a major role in promoting international capital movements to an extent that goes well beyond what would be required under the Fund’s Articles. Fourth, at a time of ever-stronger financial integration, states are facing various economic incentives to liberalize their capital accounts independent of any legal obligation to do so. In the light of these factors, the IMF rules on capital controls in IMF Article VI:3 give a false impression of regulatory freedom that most IMF members do no longer enjoy. As argued in this paper, the contemporary legal framework for international transfers of funds is not only an outstanding illustration of the ongoing hybridization of international monetary law, but also of the extent to which the formal separation between the three traditional pillars of international economic law has become artificial.Presented at the SIEL 2010 Conference in Barcelona.

Firm Heterogeneity Under Financial Imperfection: Impacts of Trade and Capital Movement

The paper examines the impacts of trade and capital movement between North and South, which differ in the quality of financial institution, on the productivity distribution and other characteristics of a financially-dependent industry. We find that financial imperfection causes firm heterogeneity and that trade and capital movement are complements in the sense that trade in goods affects the productivity distribution only when accompanied by international capital movement (trade induces capital outflow from South when capital has been internationally mobile). We also find that an international difference in financial development induces reciprocal foreign direct investment.

Market-driven economic integration in the 21st century: potential roles for APEC, WTO and the G20

Economic integration in the 21st century is driven largely by market signals, rather than by inter-governmental trading arrangements. It also means much more than “free trade.” Integration needs to consider all of the ways economies are connected in international markets, including trade in goods, services ideas and information, along with essential and complementary international movements of people and capital. Except for a small number of sensitive products, especially in agriculture, most goods and services face no, or very low, formal trade barriers. Reducing border protection of the remaining sensitive products will certainly require negotiations, but they are no longer the most strategic obstacles to economic integration. These days, the problems of most concern of those engaged in international commerce are logistics, communications, coping with security concerns and with different regulations in other economies. The effective constraint to designing and implementing cooperative arrangements to reduce such costs or risks of international commerce is the capacity to do so, rather than political resistance. Inter-governmental negotiations are not always necessary to deal with these practical issues. Therefore, it should be possible to have a logical division of effort between APEC and the WTO in the Asia Pacific with the WTO dealing with those issues that do need to be negotiated; and APEC dealing with the many other issues where negotiations are not needed. In the longer term, an efficient division of labour could also emerge between the G20 and the WTO.