Capital Flows And Economic Fluctuations

This paper uses a general equilibrium model to examine the central role played by commercial banks in intermediating and amplifying the capital flow shocks to the local economy in the 1997 Asia financial crisis. It finds that a sudden stop of capital inflows affects the equilibrium credit supply through two channels: first, the plunge of foreign financing decreases the loanable funds directly; and second the sudden stop drives up the cost of providing banking services, thereby additionally reducing the available bank credit to firms through a "deposit run". Empirical results from a VAR model broadly support the theoretical implications.

Inhaltsangabe:Abstract: This paper deals with three highly controversial aspects in the international finance literature: the degree of international financial integration, the economic impact of capital mobility, and the potential role of capital controls in the emerging international financial architecture. Regarding the first aspect, many observers have been influenced by the recent hype about globalisation and in fact take it for granted that capital markets have become almost fully integrated into a world financial marketplace. This paper, reviews evidence that challenges this conventional wisdom, though confirming that the degree of international financial integration is rising. With respect to the second aspect, it is demonstrated that there are circumstances under which the free flow of international capital could negatively impact upon economic performance and/or otherwise welfare-enhancing domestic policies. This finding conflicts with traditional theory and provides an economic rationale for the judicious introduction of capital controls. With this assertion in mind, the final aspect, the role of capital controls, is investigated. The specific question explored is how far restrictions on international capital flows are able to avert a costly economic imbalance arising from fluctuations in the balance of payments. Although the international consensus seems to have shifted in recent years towards promoting Chilean-style capital controls as a potential new building block in the international financial landscape, this paper cautions against such a generalisation of the Chilean experience. Rather, a review of the empirical literature suggests that much of Chile s economic success story in the last decade can be explained by factors other than its control regime. The rising degree of international financial integration enhances the need for small countries to resolve their dilemma of being dependent on external funding and, at the same time, most vulnerable to sudden reversals of international capital flows. Yet, simple solutions of how to counterbalance the potential threats of capital mobility in a second-best equilibrium, are not found to be easily forthcoming. In particular, this paper argues that capital controls are no panacea even less so, if they delay necessary macro- and microeconomic reforms. A worrying feature of the international financial system, partly due to continued innovations in financial engineering, is that [...]

This paper documents the evolution of gross and net capital flows to emerging market economies and surveys the large literature on the potential drivers. While the capital flow landscape has been shaped by the evolution of both global and country-specific factors, the relative importance of these factors has varied over time and differs depending on the type of capital flows. The findings from the survey of the literature thus underscores the importance of policies in both source and recipient countries in shaping capital flows.

The currency crises that engulfed East Asian economies in 1997 and Mexico in 1994 - and their high development costs - raise a serious concern about the net benefits for developing countries of large flows of potentially reversible short-term international capital. Written by senior policy-makers and academics, the contributions to this volume examine in depth the macroeconomic and other policy dilemmas confronting public authorities in the emerging economies as they deal with short-term capital movements, especially in the period before the outbreak of these crises. The studies are based on comparative case studies of key emerging economies. Valuable insights are also derived from contrasts between the East Asian, Latin American, African, and European experiences, between the financial and real effects of financial flows, and between private and public responsibilities in managing financial markets. The great value of the chapters in this volume is that they analytically identify the weaknesses in both domestic and international capital market regimes. The recommendations derived from this analysis apply to the development of financial markets in developing countries, the monitoring and regulation of mutual funds in source countries, and the future development of international capital markets. They will make an important contribution both to the discussion of national policies and of a new international financial architechture.

Capital flow volatility is a concern for macroeconomic and financial stability. Nonetheless, literature is scarce in this topic. Our paper sheds light on this issue in two dimensions. First, using quarterly data for 65 countries over the period 1970Q1-2016Q1, we construct three measures of volatility, for total capital flows and key instruments. Second, we perform panel regressions to understand the determinants of volatility. The measures show that the volatility of all instruments is prone to bouts, rising sharply during global shocks like the taper tantrum episode. Capital flow volatility thus remains a challenge for policy makers. The regression results suggest that push factors can be more important than pull factors in explaining volatility, illustrating that the characteristics of volatility can be different from those of the flows levels.

The volatility of capital flows to emerging markets continues to pose challenges to policymakers. In this paper, we propose a new framework to answer critical policy questions: What policies and policy frameworks are most effective in dampening sharp capital flow movements in response to global shocks? What are the near- versus medium-term trade-offs of different policies? We tackle these questions using a quantile regression framework to predict the entire future probability distribution of capital flows to emerging markets, based on current domestic structural characteristics, policies, and global financial conditions. This new approach allows policymakers to quantify capital flows risks and evaluate policy tools to mitigate them, thus building the foundation of a risk management framework for capital flows.

An analysis of the connections between capital flows and financial crises as well as between capital flows and economic growth.