Private Capital Flows Research Articles

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 Determinants of Stock Market Development in Nepal

This research investigates the determinants of stock market development in Nepal from 2003 to 2022 using a quantitative approach. Utilizing time series data, the study employs Pearson correlation and Ordinary Least Square (OLS) methods to analyze the relationship between macroeconomic variables, including income level, banking sector development, gross domestic savings, macroeconomic stability, private capital flows and stock market liquidity and stock market development, specifically market capitalization. The results indicate that banking sector development and private capital flows significantly influence stock market development, suggesting a crucial role for financial institutions and foreign investment in shaping and fostering the growth of Nepal's stock market. However, no significant relationship has been found between income level, gross domestic savings, macroeconomic stability, stock market liquidity, and stock market development. These findings help to design policies to stabilize or stimulate the stock market in Nepal.

Enhancing private infrastructure financing through capturing spillover effect: Conceptual development and an empirical case study of Vietnam’s expressways

While infrastructure provides necessary public services and is vital for the socio-economic development of a nation, public funds alone cannot finance all infrastructure needs in society, especially after the COVID-19 pandemic, where many countries are facing budget deficits. Although private financing schemes, such as public-private partnerships (PPPs) and land value capture, have been considered intensively, they have yet to produce adequate private capital flows to infrastructure projects due to a lack of incentives for private investors. Against the background, this paper proposes a new financing mechanism in which governments might divert some of the increased tax revenue from the spillover effects of newly constructed infrastructures to fund the private sector through grants or subsidies. The empirical work in Vietnam shows a significant increase in tax revenues after completing two expressways, supporting our idea about spillover effects, which includes small- and medium-sized enterprise (SME) development. This study’s results suggest that spillover effects can bring new opportunities for governments and multilateral development banks (MDBs) to implement infrastructure projects with greater private sector involvement in the region. It also proposes some financial schemes, such as land capture and financing for business startups, including SMEs, to enhance the spillover effects of infrastructure.

Greasing the revolving door: foreign aid, governance, and private capital flows

<p class="MsoNormal" style="margin-top: 8pt; line-height: 14pt; text-align: justify;"><span lang="EN-US" style="font-family: 'Cambria',serif; mso-fareast-font-family: '等线 Light'; mso-fareast-theme-font: major-fareast; mso-bidi-font-family: 'Times New Roman'; color: black; mso-themecolor: text1;">There is a considerable amount of debate on the impact of capital liberalization on economic performance. Using Three-Stage Least Squares (3SLS) estimation technique introduced by Zellner and Theil (1962), we synthesize studies on the determinants of governance and capital flows. We find evidence of a revolving door relationship. Foreign aid has a negative impact on governance and, thereby reduces capital inflows since bad governance hinders capital inflows. The need to fill the gap created by private capital outflows encourages inflow of foreign aid, which in turn harms governance. Therefore, capital liberalization could grease a revolving door and undermine economic development in the aid receiving countries.</span></p>

Macroeconomic Factors of Stock Market Development (The Case of Saudi Arabia)

Most economists recognize that a healthy capital market can enhance economic growth. In 2016, Saudi Arabia launched Vision 2030, and the Financial Sector Development Program is part of the Vision. The program aims to achieve economic diversification, reduce oil dependence, and trigger economic growth. Capital market development has an integral part to play in achieving Vision 2030 goals. For this reason, it is essential to investigate the factors that could influence it. The literature on the impact of macroeconomic factors on the stock market development is inconclusive; thus, it is difficult to generalize the outcome of previous studies. This research investigates the macroeconomic and institutional determinants of stock market development in Saudi Arabia from 2008 to 2021 by using a multiple linear regression approach. Following previous research, our analysis explores the impact of several factors, including Global Trade Openness, Market Depth, Macroeconomic Stability, Control of Corruption, Income level, Private capital flows, Financial intermediary development, Economic Development, Domestic Savings and investment. Among the nine evaluated factors, only four were significant. We find that the determinants of stock market development in Saudi Arabia are Economic Development, Income level, Control of corruption, and Market Depth.

Independensi Kebijakan Moneter dalam Jangka Pendek: Kasus Indonesia

Using Capital Flow Model and Central Bank Reaction Function for the case of Indonesia before the current crisis, this paper found that during Indonesia implemented fixed exchange rate regime the monetary policy which was done by Bank of Indonesia has lost its independence. The regression results using Two Stage Least Square method show that the monetary policy during the period before the current crisis in Indonesia was very influenced by the behavior of private capital flows. To neutralize the liquidity effects of private capital inflows as a response to deregulation packages in financial and banking sector in the late of 1980s, Bank of Indonesia has actively implemented the sterilization policies. The regression results of the Central Bank Reaction Function indicate that Bank of Indonesia could not completely sterilize the liquidity effects of private capital inflows. This situation made the monetary policy undertaken by Bank of Indonesia lost its power to stabilize inflation in the economy. The phenomenon of high inflation which followed high economic growth (overheating economy) during the period before the current crisis has significantly reduced the index of competitiveness of Indonesian goods and services in the world market. This is one of the main factors that caused slower Indonesian export growth just before the crisis began in the mid of 1997. This situation made the level of supply of foreign exchange in domestic market dropped significantly, while on the other side the demand level increased as many big corporate businesses and government institutions needed foreign exchange to repay their foreign debt. Rupiah become unstable and public expectation for further devaluation widened. This was the beginning of the current crisis that until now put Indonesia into the deep trouble. Therefore, the most important contribution of this paper is its investigation to the linkage between deregulation and the current crisis. This paper recommends that one of the main factors that generate the Indonesian current crisis has showed up far before the crisis began. It was started when the monetary policy lost its power to stabilize inflation that was caused by behavior of private capital inflows as a response to the wrong sequence of deregulation policies in Indonesia.

Determinants of the Attractiveness of Private Capital in the Central African Economic and Monetary Community (CEMAC)

The objective of this paper is to identify the factors of attractiveness of private capital flow (foreign direct investment and portfolio investment) in CEMAC over the period 2005-2019. To do so, we used the generalized moment model (two-step system and the static CGM model). Our main results show that the selected variables have positive and negative impacts on capital inflows into CEMAC. This implies improving the business climate, easing administrative procedures, and encouraging and facilitating the creation of businesses in order to make the sub region more attractive.

Private capital flows and productivity in Sub-Saharan Africa: does the capital allocation puzzle matter?

ABSTRACT The puzzling relationship between foreign private capital flows and productivity remains unresolved. We attempt to resolve the puzzle by extending the literature to investigate the effects of the flows across heterogeneous recipient sectors, using a unique hand-collected database of 18 African countries for 2006–2015. We uncover a new interesting finding that the effects of the flows on productivity growth depend on recipient sectors. The results suggest that the negative relationship between foreign private capital flows and economic growth documented in the existing literature, particularly in developing countries, is related to the fact that most of the flows went into sectors, such as extractives and infrastructure, which have less potential for productivity growth. Overall, our findings suggest that the capital allocation puzzle is a sectoral capital allocation puzzle.

Global banking, financial spillovers and macroprudential policy coordination

AbstractThe transmission of financial shocks and the gains from international macroprudential policy coordination are studied in a two‐region, core–periphery model with a global bank, a two‐level financial structure and imperfect financial integration. The model replicates the stylized facts associated with global banking shocks, with respect to output, credit, house prices and real exchange rate fluctuations in recipient countries, as documented empirically. Numerical experiments, based on a parametrized version of the model, show that the gains from coordination increase with the degree of financial integration, which raises the scope for spillback effects from the periphery to the core, through trade and private capital flows. However, even when coordination is Pareto‐improving, the resulting gains may be highly asymmetric across regions.

Doing more with less: The catalytic function of IMF lending and the role of program size

Financial assistance provided by the International Monetary Fund (IMF) is supposed to unlock other financing, acting as a catalyst for private capital flows. The empirical evidence of the presence of such a catalytic effect has, however, been mixed. This paper shows that a possible explanation for the rather inconclusive empirical evidence to date is the neglect of the size of an IMF program. Applying a novel identification strategy to account for endogenous selection into (large) adjustment programs, and using a comprehensive data set spanning the years 1990-2018, we show that the catalytic effect of IMF financial assistance is weakened – and potentially reversed – if the size of a program exceeds a certain level. We argue that large IMF financial assistance coupled with the IMF’s preferred creditor status can lead to a crowding-out of private investors by increasing their loss in the event of default. Our findings add to the debate on the optimal size of Fund-supported programs and can also inform the broader policy discussions on the adequacy of IMF resources.

Stimulating Private Investment in Public Infrastructure Through Reform of the Nigerian Legal Environment

A massive infrastructure deficit seriously impedes business growth and economic progress in Nigeria. Given the current fiscal realities, it is apparent that the government cannot solely bankroll such infrastructure requirements. Therefore, the need for private sector involvement in infrastructure development cannot be over-emphasised. However, this paper contends that gaps in infrastructure-related laws are partly responsible for the failure to attract private sector investment into Nigeria’s infrastructure sector. In this regard, the paper seeks to investigate those legal impediments hobbling private sector participation in financing public infrastructure in Nigeria and what reforms, if any, should be made to stimulate private capital flows into the sector. Furthermore, it is argued that attracting private capital into the infrastructure sector requires, among other things, a favourable legal and regulatory environment that is rules-based, transparent, and predictable. It is therefore concluded that private resources could be unlocked by reviewing and improving appropriate infrastructure-related aspects of the country’s legal environment. This article adopts a doctrinal approach; hence, it is based on desktop and library-based or non-empirical research. As doctrinal research, it will rely on an analysis of existing literature on the subject under investigation.

Green Finance: A Key to Fight with Climate Change

Climate change (CC) is a burning issue in the contemporary situation. All nations should be concerned about this, and it must be addressed right away. Additionally, greater funding is required to discourse this issue. Green finance becomes a global issue in sustainable economic and financial growth. Green finance refers to the financial arrangements that are specifically used to fund ecologically viable plans or projects that incorporate the features of climate change. Member nations of the Kyoto Protocol, which was endorsed on December 11, 1997, gave it a top priority. These initiatives fall under the categories of "green financing," "waste processing and recycling," "biodiversity protection," "climate change adaptation," etc. In addition to helping India and poor nations to achieve the Sustainable Development Goals (SDGs), green financing may help them raise money to fulfill their Nationally Determined Contribution (NDC) obligations under the Paris Agreement. Greening the industry through finance will lead to eco-sound results, ultimately leading to the green growth of the nations. Different countries can adopt green financing in a variety of methods and with varying legislation. In India, CSR was deemed necessary for NBFCs and SCBs by 2007. NAPCC was established in 2008 to adopt and mitigate the climate change policy. In the Union Budget of 2022, Finance Minister has announced the issuance of sovereign green bonds during the upcoming fiscal year. SGBs could potentially mobilize additional financial resources to support India's commitment to achieving net-zero carbon emissions by 2070. The issuance of sovereign green bonds is a baby step toward directing private capital flows toward environmentally beneficial public projects. Other government programs aimed at preventing climate change and developing a low-carbon economy may receive funding from green financing.

Attracting private capital for development: Are poorer countries less efficient?

According to common measures of private capital mobilization, such as the shares of foreign direct and portfolio investment in GDP, many low-income countries perform poorly in attracting private capital flows. However, these indicators do not account for differences in economic characteristics across countries, and thus cannot provide insights on countries’ performance relative to their potential levels of private capital flows as determined by their domestic economic structure and constraints. This paper addresses this gap by using nonparametric data envelopment analysis (DEA) to empirically calculate the efficient frontier for private capital mobilization as a function of countries’ domestic enabling environment, and then assess each country’s performance relative to that of other countries featuring similar domestic conditions. Our results reveal that many low-income countries, particularly in Africa and South Asia, which do not rank high according to achieved levels of private capital flows, are in fact performing on or very close to the efficient frontier. This indicates that these countries are good performers given the limited resources available to them. Tracking the performance of countries and regions over time, we furthermore find that sub-Saharan Africa experienced the strongest increases in DEA efficiency scores between 2007 and 2018, indicating that various countries in this region were catching up with the frontier.

Monetary policy in an oil-dependent economy in the presence of multiple shocks

Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014. Both contributed to significant depreciation pressures on the ruble and led the central bank to give up its exchange rate management strategy. Against this background, this work estimates a small open economy model for Russia, featuring an oil price sector and extended by a specification of the foreign exchange market to correctly account for systematic central bank interventions. We find that shocks to the oil price and private capital flows substantially affect domestic variables such as inflation and output. Simulations for the estimated actual strategy and alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of inflation targeting. Strategies to target the nominal exchange rate or the ruble price of oil prove to be inferior.

Global financial conditions, capital flows and the exchange rate regime in emerging market economies

We examine if the sensitivity of private capital flows to global financial conditions varies across exchange rate regimes by focusing on 43 emerging market economies. We find that the flexible exchange rate regime stabilizes capital flows when the global risk aversion is low, particularly for gross liability flows; however, it fails to play such a role when the global risk aversion is high. We also show that larger covered interest parity deviations would amplify the impact of global risk aversion, which explains the failure of flexible exchange rate regimes during high global risk aversion periods.

Private capital inflows, institutions and economic growth in Africa

The study examines the relationship between private capital inflows (foreign direct investment and remittances), institutions and economic growth in a panel of 45 African countries from 2002 to 2018. Using the system generalized method of moments (SGMM), the study found that foreign direct investment inflows (FDI) have a significant and positive impact on economic growth in Africa. However, remittances exert no significant impact on economic growth. The study further analyzed the moderating role of institutions in the relationship between private capital inflows and economic growth by examining the impact of the interactions between private capital inflows and institutions on economic growth. The study concluded that the coefficient(s) of the interplay between FDI and institutional variables is negative and statistically significant presupposing that institutions in Africa do not complement FDI inflows in driving economic growth. In the same vein, the coefficient of the interactive variables between remittances and institutions (regulatory requirement) is negative and significant indicating that remittances and institutions are substitutes rather than complements. The implication of the study, therefore, lies in the fact that institutions in Africa are weak and as a result cannot play a supportive role in reaping the positive spillovers of private capital flows to Africa.

International Financial Integration and Stock Market in Developing Countries

Objective - This study examines the relation between stock market capitalization and international financial integration for 23 developing countries during 1996 - 2018. Methodology/Technique - By using recently developed econometric panel techniques. The present paper takes into consideration cross section and structural breaks. Findings - Our findings show several interesting results. First, the existence of a long run relationship between the stock market and financial integration, particularly when private capital flows are included. Second, with the presence of structural breaks the result shows that international financial integration has a negative impact on stock market, which means that financial integration loses its explanatory power over the crisis period. Novelty - There is no applied study on the verification of the volatility of international capital flows (foreign direct investments and remittances) in the analysis of the relationship between international financial integration and stock markets. Type of Paper - Empirical Keywords: Cointegration, Cross-Section, International Financial Integration, Panel Unit Root, Structural Breaks, Stock Market. JEL Classification: C23, C51, C58, F02, F21, F24, G01.

In search of lost time: Examining the duration of growth-reducing sudden stops

This paper investigates the duration of sub-par growth spells associated with sudden stops in private capital flows. Our key finding is that countries featuring floating exchange rate regimes experience shorter growth-reducing sudden stops than countries with more rigid regimes. The estimated effect is large: countries with flexible exchange rate regimes are at least 50 percent more likely to exit a growth-reducing sudden stop. Our results withstand a number of robustness checks, including: controlling for banking crises and initial levels of debt, and introducing unobserved heterogeneity. The paper revisits the heated policy debate of the 1990s on fixed vs. flexible exchange rate regimes from a different angle and uncovers another important shock absorber role of flexible exchange rates.

Sovereign credit ratings, relative risk ratings and private capital flows: evidence from emerging and frontier markets

PurposeRelative risk ratings measure the degree by which a country’s sovereign rating is better or worse than other countries (Basu et al., 2013). However, the literature on the impacts of sovereign ratings on capital flows has not covered the role of relative risk ratings. This paper aims to examine the effect of relative risk ratings on private capital flows to emerging and frontier market economies is filled. In the analysis, the effect of relative risk ratings to that of absolute sovereign ratings in influencing private capital flows are compared.Design/methodology/approachThis paper examines the influence of sovereign credit ratings and relative risk ratings on private capital flows to 26 emerging and frontier market economies using quarterly data for a 20-year period between 1998 and 2017. A dynamic panel regression model is used to estimate the relationship between ratings and capital flows after controlling for other factors that can influence capital flows such as growth and interest rate differentials and global risk conditions.FindingsThe analysis finds that while absolute sovereign credit ratings were an important determinant of net capital inflows prior to the global financial crisis in 2008, the influence of relative risk ratings increased in the post-crisis period. The post-crisis effect of relative ratings appears to be driven mostly by portfolio flows. The main results are robust to an alternate measure of capital flows (gross capital flows instead of net capital flows), to the use of fixed gross domestic product weights in calculating relative risk ratings and to the potential endogeneity of absolute and relative ratings.Originality/valueThis study advances the literature on being the first attempt to understand the impact of relative risk ratings on capital flows and also comparing the impact of absolute sovereign ratings and relative risk ratings on capital flows in the pre- and post-global financial crisis periods. The findings imply that emerging and frontier markets need to pay greater attention to their relative economic performance and not just their sovereign ratings.

Impact of Interest Rate Differential and Exchange Rate Movement on the Dynamics of Nigeria’s International Private Capital Flows

The study examines the impact of interest rate differential and exchange rate movement on the dynamics of Nigeria’s international private capital flows from 2010Q1 to 2019Q4. It uses the interest rate parity theory and the Markov Switching Time Varying Transition Probability Modelling approach. Findings show that interest rate differential does not explain the dynamics of aggregate capital and Foreign Direct Investment (FDI) flows, but significantly explains Foreign Portfolio Investment (FPI) flows. Also, Movement in real exchange rate is significant in explaining outflows and inflows in FPI, and inflows in FDI, but neutral to aggregate capital flows. The study concludes that deviations from interest rate parity provides opportunities for interest rate and currency arbitrage in Nigeria but using aggregate capital flows mask this evidence. The study therefore recommends that the CBN should focus on exchange rate stabilization policies, so as not only to discourage FPI reversal but to also enhance FDI inflow. This can be done by putting in place foreign reserve accretion measures to boost the ability of the CBN to defend the Naira. The new policy initiative on remittances is a right step in the right direction as it could boost external reserve.