The composition of capital inflows when emerging market firms face financing constraints

The composition of capital inflows to emerging market economies tends to follow a predictable dynamic pattern across the business cycle. In most emerging market economies, total inflows are pro-cyclical, with debt and portfolio equity flowing in first, followed later in the expansion by foreign direct investment (FDI). To understand the dynamic composition of these flows, we use a small open economy (SOE) framework to model the composition of capital inflows as the equilibrium outcome of emerging market firms' financing decisions. We show how costly external financing and FDI search costs generate a state contingent cost of financing such that the cheapest source of financing depends on the phase of the business cycle. In this manner, the financial frictions are able to explain the interaction between the types of flows and deliver a time-varying composition of flows, as well as other standard features of emerging market business cycles. If, as this work suggests, flows are an equilibrium outcome of firms' financing decisions, then volatility of capital inflows is not necessarily bad for an economy. Furthermore, using capital controls to shut down one type of flow and encourage another is certain to have both short- and long-run welfare implications.     

The relative importance of capital inflows: some evidence from emerging market economies

This article examines the relative importance of the main components of capital inflows for a sample of emerging market economies. Does composition matter? Is there a nexus between capital inflow components? We assess, firstly, how each capital inflow component reacts to important macro and policy variables, and secondly, how the components themselves interact. We find that bank inflows appear the most sensitive to macro factors, institutions matter more for Latin America and external financial factors matter more for Asia. Further, for Latin America, capital inflows interact largely as complements, while for Asia, any expansion of bank inflows might crowd out FDI and portfolio flows.     

The population crisis in sub-Saharan Africa

The authors argue that sub-Saharan Africa, given its present institutions and endowments of capital and technology, is already dangerously close to overpopulation. Specifically, they suggest that projected rapid population growth will have disastrous effects on the region's ability to increase exports and provide people with goods.     

Inequality of opportunity in sub-Saharan Africa

Inequality of opportunity is defined as the difference in individuals’ outcome systematically correlated with morally irrelevant pre-determined circumstances, such as ethnicity, socio-economic background, area of birth. This definition has been extensively studied by economists on the assumption that, in addition to being normatively undesirable, it can be related to low potentials for growth. However, empirical estimations of inequality of opportunity require accessing rich data sources, rarely available in poorer countries. In this paper, we exploit 13 consumption household surveys to evaluate inequality of opportunity in 10 Sub-Saharan African countries. According to our results, the portion of total inequality that can be attributed to exogenous circumstances is between 40% and 56% for the generality of countries. Our estimates are significantly higher than what has been found by previous studies. We detect a positive association between total consumption inequality and inequality of opportunity, and we study the different sources of unequal opportunities. The place of birth and the education of the father appear to exert the most relevant role in shaping inequality of opportunity in the region.     

Financing enterprise development in sub-Saharan Africa

This paper examines some critical gaps in the financial infrastructurein sub-Saharan Africa, which have contributed to the poor performanceof productive investment by private agents. It first analysesthe performance of financial systems, encompassing both formaland informal financial sectors, in relation to the changingpolicy environment, and key features of the financial marketstructure. It then identifies those gaps in financial servicesthat have been particularly detrimental to private investment,enterprise growth and transformation. Finally, the paper considerspolicy implications drawn from East Asian experiences with respectto financial policies, institutional arrangements and marketintegration measures for financing enterprise development.     

Regional development and national identity in sub-Saharan Africa

We study how regional development affects identification with the nation state using a sample of 192 African regions in 16 countries. We measure national identification with survey data from the fourth wave of the Afrobarometer and proxy regional development with night lights data. To account for the endogeneity of regional development, we employ an instrumental variables approach and use a proxy for mineral resource wealth as our main instrument. Our results show that inhabitants of more prosperous regions are more likely to identify with their nation rather than their ethnic group. Regarding transmission channels, we find suggestive evidence consistent with the interpretation that national identification is higher in richer regions because of different cultural beliefs and a lower reliance on traditional ethnic networks. Overall, our research implies that African governments can foster national identification by ensuring that all parts of a country participate equitably in economic development.     

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.     

Taxation and the stock market valuation of capital gains and dividends: Theory and emphirical results

Dividends seem to be more heavily taxed than capital gains. Why then do corporations pay dividends rather than repurchasing shares or retaining earnings? Either corporations are not acting in the interests of shareholders, or else shareholders desire dividends sufficiently for nontax reasons to offset the tax effect.In this paper, we measure the relative valuation of dividends and capital gains in the stock market, using a variant of the capital asset pricing model. We find that dividends are not valued differently systematically from capital gains. This finding is consistent with share price maximization by firms but inconsistent with the fact that most shareholderspay a heavier tax on dividends.We also show that the relative value of dividends provides an indirect measure of a marginal Tobin's q. The measured value of dividends relative to capital gains tends to be higher during prosperous periods, as is consistent with this interpretation. We hope that this time series on a marginal Tobin's q will prove to be useful in forecasting the rate of investment.     

Labour market effects of public capital stock: evidence for the Spanish private sector

This paper provides a new rationale for the positive effect of public capital stock on employment and wages. We show that higher levels of public capital reduce wages along the wage equation and enhance employment due to the resulting larger elasticity of labour demand with respect to wages. The estimation of a structural model for the Spanish private sector reveals that this wage channel is empirically relevant. We use the estimated parameters to simulate the recent incidence of the ratio of public to private capital stock on the private sector economic performance. We find (i) sizeable effects on employment, capital stock and gross domestic product, and (ii) that the wage channel is particularly important for employment.     

Stock market cycles and stock market development in Spain

In this paper we use Spanish stock market data to identify the bull and bear phases of the market and to analyze its characteristics during the period 1941-2002. We compare these characteristics with those of the US and of two other European countries (Germany and the UK). Our sample is divided in two subperiods in order to account for differences induced by the process of development undergone by Spanish capital markets in the late 1980s and early 1990s. We find that the Spanish stock market has become increasingly more similar to those of the more developed countries, although some differences still persist. Additionally, we show that concordance of the Spanish stock market with other developed markets has increased quite significantly.JEL Classification: C22, G15An earlier version of the paper circulated under the title Bulls and bears: lessons from some European countries. Comments from seminar participants at the Universidad de Navarra, at the IX Meeting of the Spanish Finance Association (Pamplona 2001) and at the Royal Econonomic Society Conference (Warwick 2002) are gratefully acknowledged. We are very grateful to J.M. Campa, G. Llorente and two anonymous referees for helpful comments and suggestions. We also thank D. Garcia and the Research Department of the Madrid Stock Exchange for generously providing the data of the Spanish case. Financial assistance from the Spanish Ministry of Science and Technology (SEC2002-01839) is gratefully acknowledged. The usual disclaimer applies.     

Agriculture and economic development in sub-Saharan Africa and Asia

This paper is a comparative study of the role of agriculturein economic development in sub-Saharan Africa and Asia. Popularnotions of economic duality and agricultural squeeze in sub-SaharanAfrica are re-examined, and new explanations in terms of agrarianstructures and resource availabilities are put forward to accountfor the apparent economic duality in that continent. Comparisonwith surplus labour economies of Asia highlights the constraintsposed by the prevailing agrarian structures for capital accumulationand industrialisation in post-colonial sub-Saharan Africa. Policyconclusions from this new perspective are contrasted with theconventional policies focusing on price reform and market liberalisation.     

Endogenous inflows of speculative capital and the optimal currency appreciation path

Abstract This paper examines the optimal appreciation path of an undervalued currency in the presence of speculative capital inflows that are endogenously affected by the appreciation path. A central bank decides its appreciation policy based on three costs: (i) misalignment costs associated with the gap between the actual and long‐run equilibrium exchange rates, (ii) short‐term adjustment costs due to resource reallocation, and (iii) capital losses due to speculative capital inflows. Our model finds (1) when speculators face no liquidity shocks, the central bank tends to appreciate the currency quickly to discourage speculative capital; (2) when speculators face liquidity shocks, the central bank optimally pre‐commits to a slower appreciation path, and the appreciation takes the longest time when the probability of liquidity shocks takes intermediate values; (3) the central bank tends to appreciate the currency more quickly when it conducts discretionary policy.     

Daily variation,capital market efficiency and predicting stock returns for the Hong Kong and Tokyo exchanges

Studying capital market efficiency is important because result may infer that there are predictable properties of the time series of prices of traded securities on organized markets. We examine the weak form of the efficient markets hypothesis to indicate its usefulness in terms of the results of this study. Furthermore, this study of individual securities prices of traded securities on the organized markets of Hong Kong and Japan corroborate previous findings of studies of individual stocks and market indexes both in Asian nations, the United States and other stock exchanges in the United Kingdom and Europe. Daily patterns are present in the times series of securities prices. You will note also, that the models identified reflect the returns on individual firms listed on the two of the three largest Asian Stock Exchanges.     

Equity market and foreign capital

Abstract .  I present a model that demonstrates that the market mechanism is not always effective in stabilizing an open equity market. Foreign capital inflows create multiple equilibria in the equity market, which may simultaneously trigger a currency crisis as well as an equity market crash even if the equity market is well developed.     

Movements of relative agricultural prices in sub-Saharan Africa

Movements of relative agricultural prices in 20 countries insub-Saharan Africa between 1973 and 1999-95 are investigated.Changes in the net barter terms of trade of the agriculturalsector are compared with international terms of trade movements.Movements in prices received by cocoa, coffee, cotton and teafarmers are compared with unit export prices and with indicatorsof production costs. World price movements for the same commoditiesare compared with unit export prices of major exporting countries.A similar analysis is undertaken for cereals, where producerprices are compared with unit import prices and with cost indicators.Possible factors which affect these relative price movementsare discussed with special emphasis on the role of alternativepolicy regimes. Empirical findings suggest that conventionalviews on the anti-farmer bias of African policies till the 1980sare questionable and the recent liberalisation of agriculturalmarkets in Africa have not generated farmer-friendly outcomes.     

Cointegration for market forecast in the Spanish stock market

This study is interested in empirically testing the existence of a long-run relationship between the Spanish stock market and its fundamentals, and in checking to which extent this relationship helps in forecasting. This study is concerned with the behaviour of the aggregate Madrid Stock Exchange in a macroeconomic context. It also identifies as macroeconomic fundamentals: industrial production as a proxy for real activity, inflation and interest rates. This study tests the existence of cointegration by Johansen's procedure. The long-run relationships among the variables implied by the existence of cointegration do not allow inference to the interrelations among the variables. To get some insight into the short-run interactions among the variables, an impulse response analysis was performed. This study compares the forecasting ability of its model with respect to alternative multivariate specifications in terms of RMSE. Also measured is the value of the forecast for the financial agents assessing the extent to which it helps improve asset allocation.     

Institutions,capital stock and wage setting in Spain

This article confronts two distinct perspectives of the labour market: the institutionalist view?–?highlighting equilibrium and labour market institutions?–?and the Chain Reaction Theory?–?emphasizing dynamics and the growth drivers’ role in labour market performance. We consider the ratio of public to private capital stock as a growth driver relevant to the labour market; provide different economic rationales for this ratio to exert a negative influence in wage setting; and explore its empirical relevance in the context of a wage setting curve for Spain comprising the standard variables. There are two main results. First, several institutional variables taken to be critical to explain unemployment in the mainstream literature are not relevant for the Spanish wage setting curve. Second, there is a negative and significant influence of the ratio of public to private capital stock, which is robust to different specifications of the wage setting equation.     

Published stock recommendations as investor sentiment in the near-term stock market

This paper investigates the role of published stock recommendations in print and online media as investor sentiment in the near-term German stock market. In line with extant literature on other sentiment measures, vector autoregressions reveal that past stock returns drive today’s sentiment, but not the other way around, and that sentiment is a powerful predictor of itself. In particular, sentiment based on printed analyst recommendations follows reversals, that is, when analysts face a stock market downturn, they see a buying opportunity and become optimistic.