International Financial Flows in Low‐Income Countries

For a sample of low‐income countries, we analyse the behaviour of international financial flows during three periods: (i) the 2003–2007 global boom; (ii) the 2008–2009 crisis; and (iii) the 2010–2012 recovery phase. In particular, we examine aid‐adjusted net financial inflows, debt inflows, foreign direct investment inflows and official reserve outflows. We highlight the role of country characteristics in explaining the cross‐country variation in international financial flows during these different phases.     

China's Capital and ‘Hot’ Money Flows: An Empirical Investigation

We examine time‐series characteristics of China's capital flows during 1998–2014. More specifically, we employ Kalman filtering state‐space models to gauge the relative importance of permanent and transitory components in China's overall foreign direct investment (FDI), equity, bond, other investment and bank credit flows. Our results show that only in the case of FDI are both gross inflow and net flow dominated by a permanent stochastic level, suggesting that this source of capital is largely permanent. Incorporating covariates into the state‐space models, we find that a larger difference between onshore and offshore renminbi interest rates encourages capital inflows that are dominated by a transitory component. Greater global risk perception, proxied by S&P 500's volatility index, in contrast, discourages them. These covariates imply that capital control may not be effective in stemming volatile and speculative flows. Our results on bilateral capital flows between China and the USA also suggest that these flows are less persistent and more volatile during 1998–2014 than previously found based on 1988–1997 data. Our results bear important policy implications as China engages in further reforms in its domestic financial system and greater integration with the world financial system.     

Effects of capital flow on the equity and housing markets in Hong Kong

The revival of strong capital flows to emerging economies following the global financial crisis in 2008–2009 has rekindled the debate on effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross‐border fund movements. It is found that the official and illicit capital flow measures display a low level of comovement and exhibit differential effects on Hong Kong's equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of sector‐specific capital management policies.     

Capital Inflows to Hungary in 1995–96 and the Accompanying Policy Responses

In order to analyze the composition and effects of, and the policy responses to, capital inflows to Hungary during 1995–96, we present an analytical framework that emphasizes the distinction between net capital flows to the private and public sectors (the latter includes the government and the central bank). This distinction is essential in Hungary's case, because figures for overall net inflows conceal the fact that huge net capital inflows to the private sector were accompanied by large repayments of foreign public debt, covered by significant privatization revenues. We present indicators of the domestic monetary impact of net capital inflows in order to analyze the magnitude, costs, and effects of sterilization. We note that extensive sterilization and the use of privatization revenues for public debt repayment largely explain why capital inflows to Hungary did not have significant effects on the real economy or on domestic monetary aggregates in the period reviewed.     

Do capital flows drive credit growth and consumption in Central and Eastern Europe?

Domestic credit expansion in CEE economies, fuelled in part by foreign capital inflows, helped increase household welfare before the 2008 financial crisis caused a contraction across the region. How strong are the linkages between the current account, domestic credit and consumer spending? This study compiles a quarterly dataset of domestic credit as a share of GDP for 11 CEE European Union members and isolates structural breaks in the series’ growth rates that often align with the 2008 crisis. Vector autoregressive methods, particularly impulse response functions, show that increased current-account deficits lead to increased consumption in six of the 11 countries and increased credit growth in three, and that shocks to credit growth increase consumption in six countries. Capital inflows significantly increase consumption through domestic credit in Slovenia, while the Baltics show a large share of significant effects.     

Pros and cons of official dollarization in Eastern Europe

The balance of payments barrier is the biggest obstacle to growth in Eastern Europe. This problem stems from the existence of individual national currencies which dynamically increases the risk associated with capital inflows. Capital inflow leads to both domestic growth and domestic currency real appreciation, reducing net exports to a level insufficient to service international debt obligations stemming from capital inflow. To avoid losses when capital flows are reversed, high domestic interest rates are required to stem capital outflow. Result is the decline of domestic economic activity. Adoption of foreign currency eliminates the need for net exports as the source of revenue needed to service debt obligation, hence it renders the balance of payments as an obstacle to sustained capital flows and economic growth irrelevant.     

SAILING THROUGH THIS STORM? CAPITAL FLOWS IN ASIA DURING THE CRISIS

The 2007–2009 crisis has led to an unprecedented collapse in international capital flows. Asian economies were, however, relatively unaffected: the contraction in their capital flows was limited to the most acute phase of the crisis in late 2008, followed by a rapid rebound. We show that this reflects both Asia's structural characteristics, such as limited reliance on international banking, and Asian specificities in the form of a limited impact of international bank exposure on capital flows. We also find evidence of a connection between the use of reserves and variations in net private capital inflows.     

Exchange rate volatility and capital inflows: role of financial development

There is vast literature examining the impact of exchange rate volatility on various macroeconomic aggregates such as economic growth, trade flows, domestic investment, and more recently capital flows. However, these studies have ignored the role of financial development while examining the impact of exchange rate volatility on capital flows. This study aims to analyze the impact of exchange rate volatility on capital inflows towards developing countries by incorporating the role of financial development over the time period 1980–2013. In this regard, the behavior of two types of capital flows is examined: physical capital inflows measured as foreign direct investment, and financial inflows quantified through remittance inflows. The empirical investigation comprises the direct as well as indirect effect of exchange rate volatility on capital inflows. The study employs dynamic system GMM estimation technique to empirically estimate the effect of exchange rate volatility on capital inflows. The empirical results of the study identify that exchange rate volatility dampens both physical and financial inflows towards developing countries. The indirect impact of exchange rate volatility through financial development, however, turns out positive and statistically significant. This finding reflects that financial development helps in reducing the harmful impact of exchange rate volatility on capital inflows. Hence, the study concludes that a developed financial system is an important channel through which developing countries may improve capital inflows in the long run.     

Differential Impacts of Foreign Capital and Remittance Inflows on Domestic Savings in Developing Countries: A Dynamic Heterogeneous Panel Analysis

The study examines the role of foreign capital and remittance inflows in the domestic savings of 63 developing countries for 1971–2010, paying attention to likely differential effects of FDI, portfolio investment, foreign aid and remittances. The conventional homogeneous panel estimates suggest that foreign aid and remittance flows have a significant negative impact on domestic savings. However, these techniques ignore cross‐section dependence and parameter heterogeneity properties and hence yield biased and inconsistent estimates. When we allow for parameter heterogeneity and cross‐sectional dependence by employing Pesaran's ( 2006 ) Common Correlated Effects Mean Group estimator technique, only remittances crowd out savings.     

Financial reforms and capital flows to emerging Europe

Analysis of 18 emerging European economies finds domestic financial reforms to be positively associated with net capital inflows. Controlling for standard determinants of capital flows, we find banking sector reforms in particular to be consistent with higher net financial inflows, whereas no such correlation is found for security market reforms or for indicators of financial depth. Additional net inflows are reaped by the EU accession countries. Countries with more reformed banking sectors receive significantly higher FDI and “other” investment net inflows; this is also found for gross financial inflows, but not for gross outflows.     

Financial Inflows to Poland, 1990–96

Foreign exchange flows in Poland in the 1990s, especially during 1994–96, resulted from two developments. First, there was a current account surplus, as growth revived due to efficiency improvements, while macroeconomic policy limited domestic demand. Second, Poland had rejoined international capital markets and regained favorable credit ratings, triggering investment inflows. We can classify the effects of these inflows into three groups: changes in the institutional framework; changes in the stabilization path; and changes in the real economy. The crawling band introduced in May 1995, rapid development of the money market, and improvement of the central bank's capacity to intervene on that market are in the first group. As to the second, relative currency appreciation and import competition, constraining domestic price increases, contributed to the strong disinflationary push which began in 1995. Under the third heading, foreign direct investment and portfolio inflows helped to maintain rapid growth of investment and output.     

Foreign Capital in a Growth Model

Within the mechanism of endogenous growth, this paper empirically investigates the impact of financial capital on economic growth for a panel of 60 developing countries, through the channel of domestic capital formation. By estimating the model for different income groups, it is found that while private FDI flows exert beneficial complementarity effects on the domestic capital formation across all income‐group countries, the official financial flows contribute to increasing investment in the middle income economies, but not in the low income countries. The latter appears to demonstrate that the aid‐growth nexus is supported in the middle income countries, whereas the misallocation of official inflows is more likely to exist in the low income countries, suggesting that aid effectiveness remains conditional on the domestic policy environment.     

Patterns of International Capital Flows and Productivity Growth: New Evidence

Recent evidence from developing and emerging economies shows a negative correlation between growth and net capital inflows, a contradiction to neoclassical growth theory. I provide updated and disaggregated evidence on the origins of this puzzle. An analysis of the components of capital flows and of gross portfolio positions shows that foreign direct investment is directed towards countries with the highest growth rates, but that portfolio investment outflows exceed these inflows. Liberalized capital accounts further exacerbate this pattern. My results suggest a desire for international portfolio diversification in liquid assets by fast‐growing countries lies at the heart of the puzzle.     

A dynamic general equilibrium analysis of migration and capital formation: the case of Canada

A dynamic general equilibrium model is constructed to examine the impact of mass immigration on capital accumulation in life-cycle economies. The model is calibrated to match Canadian demographic characteristics over 1861–1913. This was a period when Canada experienced a dramatic shift in migration patterns, with increasing immigration flows, and a surge in domestic savings and capital inflows. Model results suggest that up to three-quarters of the increase in the capital formation rate and the foreign capital inflow rate, and all of the increase in the domestic savings rate, in the Canadian economy over 1899–1911, can be attributed to the dramatic inflow of migrants over this period.     

The Short‐term Determinants of Capital Flows for a Small Open Economy: The Case of Greece

This paper presents the factors driving capital flows inwards and outwards of a small open economy such as Greece during the period 1983–2009. Apart from the determinants of capital flows the possibility of speculative attacks is also considered. Applying the ordinary least squares (OLS) method it is found that variables linked to external factors such as the differential of domestic and foreign interest rates and financial crises, such as the Asian and Russian financial turmoil of 1997 and 1998 respectively, are the main factors influencing capital inflows and outflows in Greece during the period 1983–2009. Additionally the results of probit analysis support that the same factors are significant in determining the probability of speculative attacks to the Greek economy.     

Do Borders Matter? Evidence from Japanese Regional Net Capital Flows

Are international borders barriers to capital flows? We use evidence on net capital flows among regions within a country as a benchmark. For this purpose we develop a data set of saving and investment rates of Japanese prefectures. We find that the correlation between saving and investment rates is higher for OECD countries than for Japanese regions in both time‐series and cross‐sectional data. After controlling for factors that are expected to contribute to a positive correlation in the absence of barriers to capital flows, we conclude that primarily long‐term capital flows are hindered by national borders, as reflected in the cross‐sectional evidence.     

Net foreign assets,productivity and real exchange rates in constrained economies

Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an overlapping generations two-sector exogenous growth model in which RER determination may depend on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the RER only depends on the productivity spread between sectors (Balassa–Samuelson effect). If the constraint is too tight and/or domestic savings too low, the RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, the RER is mainly driven by productivity and net foreign assets in constrained countries and by productivity in unconstrained countries.     

Global capital markets,housing prices,and partisan fiscal policies

In recent years, global imbalances have channeled the excess savings of surplus countries toward the real estate markets of deficit countries. By consequence, the deficit countries that attracted lots of foreign capital experienced large run‐ups in house prices, whereas most surplus countries that exported capital exhibited flat or slow house price growth. We first use new house price data and a novel instrumental variable design to show the causal relationship between housing prices and capital inflows, particularly through debt bonanzas. We then argue that international capital flows affect the fiscal policy preferences of both voters and political parties by way of their impact on housing prices. Where capital inflows are large and housing prices are rising, we expect voters to respond by demanding both lower taxes and less publicly‐provided social insurance because rising house prices allow homeowners to self‐insure against income loss. In contrast, declining house prices produce greater demands for social insurance, particularly among those most exposed to housing market risk. We present evidence from two cross‐national surveys that supports these claims, as well as a “before and after” analysis of the housing crash in Eastern Europe. We also show that the connection between house prices and social policy also manifests itself in government spending outcomes, mediated by partisan control.     

Institutional Efficiency,Monitoring Costs and the Investment Share of FDI*

This paper models and tests the implications of institutional efficiency on the pattern of FDI. We posit that domestic agents have a comparative advantage over foreign agents in overcoming some of the obstacles associated with corruption and weak institutions. Under these circumstances, FDI is more sensitive to increases in enforcement costs. We then test this prediction, comparing institutional efficiency levels for a large cross‐section of countries in 1989 to subsequent FDI flows through the period of 1990–99, finding that institutional efficiency is positively associated with the ratio of subsequent foreign direct investment flows to both gross fixed capital formation and to private investment.     

Are the FDI inflow spillover effects on Malaysia's economic growth input driven?

This paper inspects the influence of human capital, labour force, and absorptive capacity, physical capital as a control variable, foreign direct investment (FDI) inflows and gross domestic product (GDP) on Malaysia's productivity growth. A time series quarterly data from the period of 1999 to 2008 was used. The effects of FDI inflows on human capital, labour force, absorptive capacity and physical capital were investigated. The Ordinary Least Squares (OLS) regression was applied to estimate the data in the first step and in the second step productivity indicators were calculated. The results show that the FDI inflows and inputs used are negatively contributed to total factor productivity (TFP). Meanwhile, FDI plays a significant role in achieving economic growth through input driven as indicated by the contribution of the TFP. In this regard, a significant positive relationship between human capital, labour force and absorptive capacity which determines the spillover effect on Malaysian economic growth (GDP) was found and the physical capital has shown negative relationship.