Liberalization Of Capital Flows Research Articles

Integração financeira internacional e crescimento econômico: uma crítica à abordagem convencional

RESUMO A defesa de um desenho institucional para as economias domésticas que permita a livre circulação de capitais entre as fronteiras é fundamentada por modelos teóricos que sublinham um conjunto de canais por meio dos quais a Integração Financeira Internacional levaria à melhoria na eficiência da alocação de recursos, estimulando o crescimento econômico de longo prazo dos países. O objetivo do trabalho é realizar uma crítica a essa abordagem, mostrando as fragilidades das teorias que estabelecem essa relação, a ausência de evidências empíricas a corroborá-la e, tendo por base fundamentos de inspiração (pós) Keynesiana acerca do comportamento do mercado financeiro, esboçar uma abordagem alternativa.

Resurgent South Asia

This article analyses the performance of the South Asian economies in the context of the evolution of the world economy. Recent years have seen considerable liberalisation of trade and capital flows in practically all countries, particularly developing countries. Trade has, consequently, expanded and developing countries are relying more on private flows than on aid to finance their balance of payments deficits. The performance of most developing countries has suffered since the oil price rises in 1974–77. Asian countries are an exception to this as they have grown rapidly. Growth rates in South Asian countries, after lagging behind those in East Asia, now seem to be catching up. Savings and investment rates have been increasing, as also exports. India, among the South Asian countries, is most likely to maintain a rapid growth rate. Manufactured goods feature more prominently in its economic structure and exports, and manufactures tend to show more dynamism. Also, the rapid growth of exports of commercial services, which have been growing particularly rapidly in the world economy, augurs well for the future.

Return Volatility and International Portfolio Choice

Despite the liberalization of international capital flows during the last decades, typical investors continue to hold most of their wealth in domestic assets. International RBC models can explain that 'portfolio home bias', if consumption home bias is incorporated, i.e. the fact that the bulk of consumption consists of locally produced goods (Obstfeld (2006)). However RBC models fail to explain the high volatility of equity returns and real exchange rates, and predict excessive cross-country risk sharing. This paper develops a model that simultaneously generates realistic portfolio holdings and return volatilities, and imperfect risk pooling. In the structure here, there are supply shocks, aggregate demand shocks (variations in government purchases, taste shocks), and exogenous shocks to equity risk premia. There is trade in domestic and foreign stocks and bonds. Demand shocks and risk premium shocks generate realistic return volatility, and create a strong bias towards holding local equity. Intuitively, a country-specific demand increase raises the relative price of the locally produced good, if there is consumption home bias, and it thus raises the relative return on local equity; local equity thus has a high return, in states of the world in which the household wishes to consume a lot. By biasing their portfolios toward local equity, countries can also insulate their net foreign assets and consumption spending, from exogenous risk premium shocks. When taste shocks follow random walks, there are sunspot equilibria characterized by sizable departures from full risk sharing.

Capital Flows, Turbulences, and Distribution: The Case of Turkey

This paper presents the mechanism of the boom-bust cycles in the context of domestic and international financial liberalisation in the developing countries, and the effects of crises and exchange rate volatility on functional income distribution. It is based on the case of Turkey, which has experienced two severe crises in 1994 and 2001 after the liberalisation of capital flows, and which has also been hit the hardest during the May-June 2006 turbulences. The paper analyses the recent turbulences in the global economy and their consequences in the emerging markets as a case study to illustrate the endogenous formation of expectations. The recovery in Turkey after the turmoil is not based on a solution to the structural causes of the problem, since it has completely depended on the reversal of the capital outflows thanks to high interest rate, but the continuity of this game is far from clear.

Financial Globalization and the Governance of Domestic Financial Intermediaries

We model an economy in which domestic banks and firms face incentive constraints, as in Holmstrom and Tirole (1997). Firms borrow from banks and uninformed investors, and can collude with banks to reduce the intensity of monitoring. We study the general equilibrium effects of capital flows (portfolio investments and loans, FDI) on the governance of domestic banks. We find that liberalization of capital flows may deteriorate the governance of the domestic financial system by increasing firms' incentives to collude with banks, with negative effects on productivity. We also show that systemic bailout guarantees increase the risks of collusion.

Índice de controle de capitais: uma análise da legislação e seu impacto sobre o fluxo de capital no Brasil no período 1990-2000

Cardoso e Goldfajn (1997) constroem um índice de controle de capital para o Brasil para o período de 1988 a 1995, e estudam o efeito do índice sobre o fluxo de capitais. Este trabalho se propõe a construir o índice apresentado naquele trabalho para o período de 1990 a 2000, e estudar, em termos quantitativos, a influência deste índice sobre os fluxos de capitais. Foram analisados cerca de 200 principais normativos editados pelo Banco Central e Ministério da Fazenda, referentes a controle de capital no período 1990-2000. O período foi marcado pela liberalização do fluxo de capital, com alguns subperíodos nos quais houve restrição principalmente à saída de capital. Os resultados empíricos mostram que o índice de controle de capital, bem como desvios da paridade coberta de juros, o Plano Real e os efeitos provocados pelas crises mexicana, asiática e russa foram fatores determinantes para explicar o fluxo de capital total entre 1990 e 2000.

Domestic Implications of a Global Labor Market

Conventional thinking about labor markets has been slow to adjust to the reality of labor in a context of a global rather than a closed, national economy. Liberalization of international trade and capital flows has made substitution of foreign for domestic labor increasingly feasible. This has put downward pressure on reservation wages of unemployed workers. Also, the relatively easy substitution of foreign and domestic manufactured products relative to services has led to a dual economy in which manufacturing employment has been severely impacted by foreign competition while service employment has not. This has been amplified by the U.S.' comparative advantage in high education and skills, which tends to be more characteristic of services than of manufacturing. This implies that low-skilled workers will be increasingly left behind unless they upgrade their skills in an increasingly competitive global economy.

FDI Flows Towards CEECs: An Analysis on the Romania, Hungary and Slovenia's Performances

The transformation of the aforetime planned economies in market economies created the need of capitals financed early on transition period by funds out coming from privatization programs. But soon, the internal funding was revealed insufficient and was substituted by the foreign direct investments (FDI) in the context of the liberalization of capital flows. Nevertheless, the Central and Eastern European Countries' (CEECs') part of FDI attracted in the whole world is insignificant given the part of the region in terms of territories and population. During the last few years, the progress of the privatization process and the favorable politics of attracting FDI produced an increase of FDI in the CEECs. The principal objective of our study is to explain the relative small and different FDI flows among the CEECs (especially in Hungary, Slovenia and Romania) through the FDI regulation, the advantages/disadvantages in the competition with other destinations and the degree of European integration. The study engages panel methods to identify the factors that stimulated or discouraged, between 1997 and 2000, the FDI flows from the European Union of 15 and United States to Hungary, Slovenia and Romania. Drawing upon the theoretical literature (Dunning's paradigm, the new theory of FDI, the Markusen's knowledge-capital model), we accept the gravitational approach.

Macroeconomic aspects of financial liberalization

The positive and the negative macroeconomic aspects of the financial liberalization for the developing and emerging economies are well described in the present literature. But it is not easy to clearly summarize the final effects of the financial integration on the certain country. For instance the argument about the growth benefits of the capital account liberalization is likely to be inadequate considering the financial crises in the emerging markets at the end of the last century. On the other hand, many authors (especially in the financial literature) report that the equity market liberalizations help to significantly boost the economic growth. There are also some examples on the microeconomic level (firm level or industry level) when the international financial integration brings certain benefits to the integrated enterprises and the capital flows restriction leads to the distortionary effects. In the paper we analyze the macroeconomic effects of the capital flows liberalization.

Impact of Economic Reforms on External Sector

The impact of economic reforms on the external sector during the post reform period was extremely successful in meeting the balance of payments crisis of 1990s. These reforms improved the openness of the Indian economy vis-a-vis other emerging economies. Indian economy is more deeply integrated with the world economy today than it was in 1991 as a result of high growth rate of both exports and imports. Much, however, remains to be done. Indian economy is still relatively closed compared to its “peer competitors”. Further reduction to tariff protection and liberalisation of capital flows will enhance the efficiency of the economy and along with reforms of domestic policies will stimulate investment and growth.

The Imf and the Liberalization of Capital Flows

We evaluate the claim that the International Monetary Fund precipitated financial crises during the 1990s, by pressuring countries to liberalize their capital accounts prematurely. Using data from a panel of developing economies from 1982-98, we examine whether the changes in the regime governing capital flows took place during participation in IMF programs. We find evidence that IMF program participation is correlated with capital account liberalization episodes during the 1990s. We verify the robustness of our results using alternative indicators of capital account openness. To determine whether decontrol was premature, we compare the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently, and find some evidence of IMF-led premature liberalizations.

African capital markets and real sector investment

Many African capital markets find the lack of an efficiently organized capital market a serious obstacle to the efficient use of their savings, and thus to their overall economic development. To improve the situation, this paper suggests the following policy recommendations: removal of impediments to capital market development, improvement of the financial system infrastructure for efficient trading activities, sound economic policies that stabilize the exchange rate and prices to help attract foreign investors, increased integration of the local capital market with the world capital markets, encouragement of family-owned firms to go public and, most importantly, liberalization of international capital flows. The study also proposes ‘privatization’ and ‘currency union’ as enhancers of capital mobilization for real sector investment in Africa. Copyright © 2005 John Wiley & Sons, Ltd.

Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy and Gradual Reforms

Capital account liberalization in financially repressed economies often leads to a period of rapid capital inflows followed by financial crisis. This paper considers the vulnerability of the Indian economy to financial crises with international financial integration and the policy agenda for further liberalization of capital flows. The legacy of financial repression on fiscal and financial policies poses the primary challenge to stable integration of the domestic financial markets of India with international capital markets. Brief overviews of the theory and experience of liberalization elsewhere and of the recent liberalization by India frame the discussion of the risks of liberalization and sequencing of policy reforms.

International Tax Competition: A New Framework For Analysis

Spurred by the liberalisation of capital flows and the launching of the EU single market and monetary union, the last two decades have witnessed an intense European and international debate on the need for supranational tax co-ordination. In recent years there has been a clear shift in the dominant opinion in this long-standing debate. Only a few years ago the European Commission expressed concern that international tax competition seems to shift the tax burden from mobile capital onto unemploymentridden labour. The Commission therefore argued for improved co-ordination of capital taxation within the EU to prevent further shifts in the tax burden to the disadvantage of labour. However, more recently the Commission has expressed the view that “... a reasonable degree of tax competition within the EU is healthy and should be allowed to operate. Tax competition may strengthen fiscal discipline to the extent that it encourages member states to streamline their public expenditure, thus allowing a reduction in the overall tax burden.” (European Commission, 2001, p. 4).

What drives financial crises in emerging markets?

The study examines the causes of financial crises in 31 emerging market countries during 1980–2001. It estimates a probit model using 23 macroeconomic and financial sector variables. Traditional variables such as unemployment and inflation, as well as several indicators of indebtedness such as private sector liabilities and the foreign liabilities of banks explain currency crises rather well, and it appears currency crises occur in tandem with banking crises. Indeed, in emerging market countries the vulnerability to crisis is exacerbated by situations involving large liabilities that permit sudden capital outflows. Increases in indebtedness followed the liberalization of capital flows and domestic financial sectors.

Bank-Firm Relationships and Contagious Banking Crises

This paper shows that in an open economy a banking system with close bank-firm relationships may be easily subject to contagious banking crises, because it is difficult to distinguish between and main bank relationships. There is cronyism if banks renew loans to insolvent projects and, as a consequence, accumulate losses. On the other hand, banks could be only temporarily illiquid because they lend to projects in temporary difficulties that would be solvent in the long run (main bank relationship). I show that, if international investors cannot distinguish the bank type, the distinction between crony capitalism and main bank relationships becomes very fuzzy. In fact, incomplete information provokes a uniformly low equilibrium interest rate in the aftermath of the liberalization of capital flows, when the lending boom starts, and an apparently sudden increase in the cost of funds, which causes the defaults of insolvent banks. Even if illiquid banks do not default immediately, so revealing that they are not insolvent, the temporary increase in the interest rate burden may drive them to insolvency and make them default after a few periods. This model can explain sequences of bank defaults within a country, even if the insolvent banks were very few ex ante, as well as sequences of banking crises among countries that are equally rated by international investors, but indeed differ in the ex ante solvency of their banking system.

The trade-creating effects of capital flow liberalization

The trade-creating effects of capital flow liberalization

What Drives Financial Crises in Emerging Markets?

The study examines the reasons for financial crises in 31 emerging market countries during 1980-2001. It estimates a probit model using 23 macroeconomic and financial sector variables. Traditional variables such as unemployment and inflation, as well as several indicators of indebtedness such as private sector liabilities and the foreign liabilities of banks explain currency crises rather well, and it appears currency crises occur in tandem with banking crises. Indeed, in emerging market countries vulnerability to crisis is exacerbated by situations involving large liabilities that permit sudden capital outflows. Increases in indebtedness followed the liberalisation of capital flows and domestic financial sectors.

Stock returns and bond yields in Denmark, 1922–19991

This paper presents long time series of stock and bond returns for Denmark from 1922 to 1999. Average stock returns are low in an international context, but returns (and volatility) have increased sharply since 1983 which may be explained by major changes in economic policy and the liberalization of capital flows. On the other hand, Danish bond yields are high in general, and in particular from the late 1960s to the mid 1980s. Thus, there are several periods in which bonds have given higher returns than stocks. Over the entire sample, however, equity clearly outperforms bonds.

Stock Market Volatility in an Emerging Market: Further Evidence from the Athens Stock Exchange

We investigate the time series properties of the daily and weekly returns from the Athens Stock Exchange (ASE) index for the years 1987 to 1997. We investigate whether important time‐series characteristics have changed significantly over time. The Greek market has recently undergone major changes including complete capital flow liberalization, the implementation of computerized trading, as well as significant increases in market volume and capitalization; we thus contrast the 1987–90 and 1991–97 periods. Our findings suggest the dynamics of the ASE composite index returns have changed as the market has developed.