Macroeconomic stability or financial stability: How are capital controls used? Insights from a new database

While the traditional objectives of capital controls were to address macroeconomic stability risks, a new “externalities view” has emerged prescribing their use to contain financial stability risks. In this context, our understanding of whether capital controls are used in practice to mitigate macroeconomic or financial stability remains limited. Using a novel database on high-frequency capital account regulations for 47 advanced and emerging economies from 2008 to 2020, this paper empirically assesses this question. Our main findings are that: (a) in emerging markets there is a strong association of capital controls on inflows to mitigate risks to macro stability but not financial stability risks; (b) in advanced economies there is a robust association between capital controls on inflows to lean against the buildup of financial stability but not macro stability risks; (c) banking sector flows, but not aggregate capital flows, are strongly associated with tightening capital controls on inflows in emerging markets; and (d) pooling advanced and emerging economies attenuates regression estimates and would lead to concluding that capital controls have weak association with both financial and macro stability motives. Our results can be rationalized by the greater capital flows, more volatile business cycles and stronger interaction between business and financial cycles in emerging markets, and the deeper asset markets found in advanced economies.     

人民币跨境流动与金融失衡——基于VAR和门限模型的经验分析

基于2010~2014年月度数据,从汇率波动、资本流动以及资产价格波动等渠道,利用 VAR 模型和门限模型研究人民币跨境流动对金融失衡的影响机制。研究表明：从冲击效应看,人民币国际化背景下,金融失衡对汇率波动、资本流动和资产价格波动的反应程度显著,其中,对资产价格的反应程度最强;人民币跨境流动程度和汇率波动程度对金融失衡存在显著的门限效应。因此,为推动人民币跨境流动,应强调在推进汇率市场化改革和加强国际资本流动监管的基础上,加大稳定国内资产价格的力度,防范金融失衡。     

Capital market integration

This special issue is dedicated to a topic of great interest in international financial economics — Capital Market Integration. The topic remains live and vigorously examined, as evidenced by the nine papers presented here. These papers divide into three themes: integration and markets, integration and policy, and integration and crisis. Collectively, the papers highlight the importance of market- and policy-induced phenomena for understanding the nature and consequences of capital market integration.     

Interjurisdictional Tax Competition in a Federal System of Overlapping Revenue Maximizing Governments

Academic literature in public finance has focused on interjurisdictional tax competition—namely among similar types of local governments—but has leaved vertical externalities arising from interactions between two overlapping governments sharing the same tax base aside. The purpose of this paper is to provide a simple model within which interjurisdictional tax competition and vertical interactions between two overlapping governments that share the same tax base can be analyzed simultaneously. We find that interjurisdictional tax competition reduces the global tax rate set by both overlapping governments (federal and local) but is unable to solve completely the distortion arising from vertical externalities. The model is also extended to allow for government subsidies to industrial capital. We give sufficient conditions for capital subsidies to be more efficient to attract capital when they are granted at a federal level rather than at a local level.     

Exchange market pressure in OECD and emerging economies: Domestic vs. external factors and capital flows in the old and new normal

We study the ways domestic and external global factors (such as risk appetite, global liquidity, U.S. monetary policy, and commodity prices) affected the exchange market pressure before and after the global financial crisis, as well as the role of these factors during the Federal Reserve's tapering episode. Utilizing a comprehensive database on capital controls, we investigate whether control measures have a significant impact on mitigating exchange market pressure associated with capital flows [net and gross]. Using quarterly data over the 2000–2014 period and a dynamic panel model estimation, we find that external factors played a significant role in driving exchange market pressure for both OECD countries and emerging market countries, with a larger impact on the latter. While the effect of net capital flows on exchange market pressure is muted, short-term gross portfolio inflows and outflows comprise important factors that account for exchange market pressure. Short-term portfolio flows and long-term foreign direct investment flows have a significant impact on exchange market pressure for emerging market economies and no significant effect for OECD countries. Capital controls seem to significantly reduce the exchange market pressure, although the economic size of this impact is highly dependent on the institutional quality.     

Financial control, managerial control and accountability: evidence from the British Cotton Industry, 1700–2000

The paper seeks to identify the underlying and long run historical determinants of accounting practices. These practices include the nature and relative importance of management and financial accounting techniques, together with the mediating roles of corporate finance and especially financial markets. To explain historical variation in the application of these techniques the paper introduces an analytical model. The model is based on the principles of historical materialism and hence comprises objective and subjective elements. Definitional categories are borrowed from Marx’s analysis of the workings of capitalism, and extended to include contexts where there is extensive socialization of capital, as manifested by the pooling of investments in liquid financial markets. To examine the detailed implications for accounting change, the model is then applied to a longitudinal case study of the British cotton textile industry. The paper shows that techniques of financial and managerial control and mechanisms of accountability can be explained by the dynamic interaction of capital centralization and capital socialization.     

The Relationship between Changes in Fixed Plant Investment and the Likelihood of Emergence from Corporate Financial Distress

Companies experiencing financial distress can attempt to mitigate financial distress through changing the investment in the fixed asset base. Management may choose to expand the asset base in hopes of increasing sales. Alternatively, management may choose to contract the asset base in order to eliminate and/or reduce investment in unprofitable or risky ventures, improve liquidity, reduce earnings volatility, and reduce the need for operating capital.In this study, we examined how observed changes in the investment base affect the likelihood of emergence from a financially distressed condition. We find that, when management chooses to contract the investment in property, plant, and equipment, the likelihood of emergence from financial distress is significantly improved. On the other hand, when management chooses to expand property, plant, and equipment in the face of distress, the distress is only intensified. Our explanation is that companies that choose to contract their fixed asset base in times of trouble are taking steps that will most likely improve their financial condition—they are less likely to need working capital, and can better tolerate increased levels of long-term debt. Conversely, increasing the fixed asset base amplifies the need for working capital, and borrowing money to facilitate the expansion simply increases the necessary uses of that working capital because the debt must be serviced. As a result, companies descend even deeper into financial distress and decrease the likelihood that they will emerge therefrom.     

金融支持促进高技术产业技术创新成效的区域性差异研究

基于随机效应面板泊松回归模型,考量不同类型的金融支持措施对我国东、中、西区域高技术产业技术创新活动的影响。结果表明：政府的资金支持促进了东、中、西各区域高技术产业的技术创新,资本市场的金融支持只对东、中部区域的高技术产业的技术创新有促进作用,金融机构的金融支持只对西部区域的高技术产业技术创新有促进作用,金融支持对高技术产业技术创新的作用存在显著的区域性差异。通过加大政府支持的力度和体现区域差异、建设西部地区资本市场发展的共享机制、提升金融机构风险管理技术水平等措施可以提升金融支持促进高技术产业技术创新的效果。     

The value of bank capital buffers in maintaining financial system resilience

There is a current controversy concerning the appropriate size of banks’ capital requirements, and the trade-off between the costs and benefits of implementing higher capital requirements. We quantify the size of capital buffers required to reduce system-wide losses using confidential regulatory data for Australian banks from 2002 to 2014 and annual public accounts from 1978 to 2014. We find that a moderate increase in bank capital buffers is sufficient to maintain financial system resilience, even after taking economic downturns into consideration. Furthermore, while banks benefit from paying a lower cost of debt when they have a higher capital buffer, lending volumes are lower indicating that credit supply may be hampered if bank capital levels are too high within a financial system.     

Electronic Finance: Reshaping the Financial Landscape Around the World

In recent years, the emergence of electronic finance—especially online banking and brokerage services, and new trading systems—has reshaped the financial landscape around the world. This paper reviews these developments and finds that they are greatly impacting the structure of and competition in financial services industries and will have a large impact on incumbents. Its assessment of how e-finance, and globalization more generally, affects countries highlights the need for changes in four financial sector policy areas—safety and soundness, competition policy, consumer and investor protection, and global public policies—to mitigate risks and reap as much as possible the potential benefits of e-finance.     

Optimal capital controls and real exchange rate policies: A pecuniary externality perspective

A new literature studies the use of capital controls to prevent financial crises. Within this new framework, we show that when exchange rate policy is costless, there is no need for capital controls. However, if exchange rate policy entails efficiency costs, capital controls become part of the optimal policy mix. When exchange rate policy is costly, the optimal mix combines prudential capital controls in tranquil times with policies that limit exchange rate depreciation in crisis times. The optimal mix yields more borrowing, fewer and less severe financial crises, and much higher welfare than with capital controls alone.     

Trade in Financial Services and Capital Movements

International financial liberalization may alter saving–investment imbalances and patterns of capital flows across countries. Using a panel of OECD countries for 1990–1996, I examine how the liberalization of capital movements and financial services trade affects net private capital flows. Capital inflows tend to fall (rise) with the liberalization of commercial presence in banking and securities (insurance) services, possibly reflecting an increase (decrease) in saving. I find that capital account liberalization stimulates capital inflows, suggesting that better access to external financing helps sustain larger current account deficits. When cross-border trade is liberalized, capital inflows change insignificantly.     

Modelling portfolio capital flows in a global framework: Multilateral implications of capital controls

In the aftermath of the global financial crisis, many emerging market countries resorted to capital controls to tackle the excessive surge of capital inflows. A number of recent research papers have suggested that the imposition of controls may have imposed negative externalities on other countries by deflecting flows. Our aim in the research reported in this paper is to assess the efficacy of capital controls and potential deflection effects on other countries by constructing a comprehensive global econometric model which captures the dynamic interactions of capital flows with domestic and global fundamentals. The results suggest that capital controls are effective for some countries in the short run, but have no lasting effects. Moreover, there is only limited evidence of deflection effects for a small number of emerging market countries.     

Domestic currency appreciation and foreign capital inflows: What comes first? (Chile, 1977–1982)

The purpose of this paper is to find (Granger) causality relations between the real exchange rate, the inflow of foreign capital, interest rate arbitrage, and the terms of trade, in a representative indebted, developing country Chilé. This is done for a time period in which Chile went from an unprecedented expansion (1977–1981) to a severe recession (1982). The paper confronts two competing hypotheses that purport to explain such behavior. Hypothesis one claims that causality went from the real exchange rate (affected by nominal exchange rate policy) to capital inflows, in what could be termed a current-account–deficit-induced demand for foreign funds. Hypothesis two posits a causality that ran the other way—from capital inflows to the real exchange rate—in which case the ‘exogenous’ inflows of foreign money implied a current account deficit. Special attention is paid to the role played by two other related factors, interest rate arbitrage and terms of trade variations. By applying innovation accounting techniques based on estimated vector autoregressions, support is found for the second of these hypotheses. Thus, the real issue—in Chile and in many other currently indebted Latin American countries—should be the timing and extent of the capital account liberalization process carried out during the period.     

An empirical and institutional examination of post-crisis capital flows—Thailand case

In this paper, we developed and estimated a model of the Thai firm during the crisis. Our results indicate that firms with the highest debt-equity ratios suffered the steepest declines in earnings per share during the crisis from the financial distressed costs. We take this result as strong evidence for the credit channel. Surprisingly, firms with the largest market capitalizations suffered more than the smaller firms owing to their capital structure and financial leverage effect. We also witness asymmetric impact between the industries—exporters, importers and intermediate. We take this as evidence of different scale-effects on different industries, a feature that we do not explicitly model. In other words, the production effect is more pronouncing in import related industries than the export-oriented one. Note that firms that import intermediate goods also suffered greatly from the crisis from both credit and production channels. Taken together, our overall results indicate that the crisis damaged the earnings per share of firms more on credit channels than the production channels. There exists a peculiar tradeoff between benefits from currency devaluation to promote exports and severe adverse impact on both credit channel and asymmetric impact on production channel.     

The scope for national monetary policy in the face of globalised financial markets

Conclusion Experience has shown that German monetary policy is far from impotent There is consequently no call for passive resignation. The monetary authorities must send clear signals if the current turbulence on the currency markets is to be kept in check. The Bundesbank itself has clearly shown — during the period following German Unification — that an autonomous monetary policy is possible in spite of the high degree of integration on international financial markets. It is hard to see why this should not be the case today simply because it is no longer interest rate hikes but base rate cuts that are called for.If interest rates are not reduced, the interest rate on the German capital market will continue to follow the lead set by American monetary policy. But is it right that the American central bank, on the basis of data on the state of the US economy, indirectly helps to determine whether new jobs are created in Germany and whether existing jobs are made more secure? What is required in the medium term is greater independence on the part of German monetary policy. The globalisation of financial markets does not stand in the way of such a strategy.     

Systemic risk: A new trade-off for monetary policy?

We introduce time-varying systemic risk (à la He and Krishnamurthy, 2014) in an otherwise standard New-Keynesian model to study whether simple leaning-against-the-wind interest rate rules can reduce systemic risk and improve welfare. We find that while financial sector leverage contains additional information about the state of the economy that is not captured in inflation and output leaning against financial variables can only marginally improve welfare because rules are detrimental in the presence of falling asset prices. An optimal macroprudential policy, similar to a counter cyclical capital requirement, can eliminate systemic risk raising welfare by about 1.5%. Also, a surprise monetary policy tightening does not necessarily reduce systemic risk, especially during bad times. Finally, a volatility paradox a la Brunnermeier and Sannikov (2014) arises when monetary policy tries to excessively stabilize output.     

International market segmentation and Eurodebt issues

Implications of capital market segmentation for international capital structure (ICS)—capital structure consisting of equity issued in one country and debt issued in another—are examined. Necessary conditions for the emergence of ICS are analyzed under two options for debt issues (foreign debt and Eurodebt) and comparisons are made. It is shown that in cases where the project cannot support an ICS including foreign debt Eurobonds can be issued and would be profitable.     

The Information Environment of China''s A and B Shares: Can We Make Sense of the Numbers?

In 1990, three stock exchanges were opened in Shanghai, Shenzhen and Beijing. Partial privatization of China's enterprises began with offering two types of shares: A shares are sold only domestically to locals and are denominated in local currency; B shares are denominated in dollars and are sold only to foreign investors. All listed firms offer A shares, but to qualify for offering B shares, the firm must prepare financial statements in accordance with International Accounting Standards and also meet other requirements. Firms issuing A shares only adopt domestic accounting regulations.As a way of generating capital funds, market segmentation has been a success. Both types of shares, however, have two different information environments. The environment of A shares appears to be dominated by local regulations and customs at the time of offering or trading. The information environment of A shares appears to be relatively unstructured and is affected by informal communication between various groups. Other than the roles played by state officials and appointed managers, external monitoring of A shares appears to be limited. Independence and social acceptance of auditing appear to be making slow progress, especially when the majority of domestic CPA firms are government owned. In contrast, the information environment for the B shares is more structured because (1) financial reporting adheres to International Accounting Standards, (2) financial statements are audited by CPA firms with international practice; and (3) foreign investors — mainly large financial institutions — also act as external monitors.We elaborate on the differences between these two information environments and suggest that accounting earnings and A share prices are not correlated, but earnings and share prices are correlated for B shares. In an event-study approach, we find results inconsistent with both hypotheses — for 1994 and 1995 we find that earnings and unexpected returns are correlated for A shares but not for B shares. The high price volatility, the significant and continuing dominance of government officials, and the thinness of trade in B shares are offered as possible explanation for these results.     

基于知识的企业性质与收益分配模式

本文从知识视角重新审视了新经济下的企业性质及由此决定的收益分配模式.分析认为,新经济下企业是财务资本所有者与人力资本所有者订立的特别契约,企业拥有或控制的财务资本和技术性、管理性等知识以及聚合财务资本与各种知识的能力决定着企业的效率边界;股票期权制不仅仅是一种激励制度,而是企业所有权范式基于知识的转换,进而导致收益分配制度变迁的必然结果.文章最后对以净利润为基础的收益分配模式进行了澄清,提出新经济下的企业收益分配应以EVA为基础,以真正体现人力资本价值的大小及其创值能力的高低.