International capital flows under asymmetric information and costly monitoring: implications of debt and equity financing

Abstract.  The impact of increased equity trade on a small open economy is examined. Stochastic second‐period output depends on first‐period investment. Owing to information asymmetries, domestic agents cannot reveal credibly the level of first‐period investment to international financiers. Consistent with recent proposals to strengthen the international financial system, domestic firms choose to incur self‐monitoring costs to increase capital inflows. As an alternative to borrowing, domestic agents may sell ownership claims to second‐period output. When equity claims convey information, equity trade is preferred to international borrowing, consistent with developing economies' observed reliance on international equity relative to debt in recent years. JEL Classification: F41, G15     

International Reserves and the Composition of Foreign Equity Investment

This paper studies the effect of central banks' international reserve hoardings on the composition of foreign equity investment. Specifically, it examines whether reserves affect the share of foreign portfolio equity investment (PEI) in total foreign equity investment, which includes both PEI and foreign direct investment (FDI). Foreign investors' decisions regarding the location and the type of equity capital investment might be influenced by a country's level of international reserves. In a simple theoretical model, it is shown that higher reserves, thanks to their ability to lower exchange rate risk, reduce the risk premium of PEI. Hence, higher reserves are expected to increase the inflow of PEI relative to FDI. This hypothesis is tested for a sample of 76 developing countries during the period 1980–2010 using different estimation methods, model specifications and data samples. The results suggest that higher levels of reserves are associated with a larger share of PEI relative to FDI. This result points to a collateral benefit of reserves that has been neglected so far. Reserves may contribute to develop domestic financial markets and facilitate domestic firms' access to foreign portfolio equity financing. In addition, this paper finds a strong negative effect of the global financial crisis beginning in 2008 on the share of PEI, which confirms the hypothesis that PEI is more crisis‐dependent than FDI.     

The OECD's new global model

This paper provides a summary of the OECD's new global macroeconometric model, including an overview of model structure and a selection of simulations illustrating its main properties. Compared with its predecessors, the new model is more compact and regionally aggregated, but gives more weight to the focus of policy interests in global trade and financial linkages. The country model structures typically combine short-term Keynesian-type dynamics with a consistent long-run neo-classical supply-side. While retaining a conventional treatment of international trade and payments linkages, the model has a greater degree of stock-flow consistency, with explicit modelling of domestic and international assets, liabilities and associated income streams. Account is also taken of the influence of financial and housing market developments on asset valuation and domestic expenditures via house and equity prices, interest rates and exchange rates. As a result, the model gives more prominence to wealth and wealth effects in determining longer-term outcomes and the role of asset prices in the transmission of international shocks both to goods and financial markets.     

COMMON STOCHASTIC TRENDS AMONG THE CYPRUS STOCK EXCHANGE AND THE ASE,LSE AND NYSE

Common stochastic trends among major international stock price indices have been an intensively analysed issue mainly as a result of the 1987 stock market crash and the need for policy coordination in financial markets. This paper investigates the existence of common stochastic trends among an emerging equity market, the Cyprus Stock Exchange, and three mature equity markets, namely the Athens Stock Exchange (ASE), the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE).     

How does global demand for financial services promote domestic growth in Luxembourg? A dynamic general equilibrium analysis

This paper studies the transmission of a change in the global demand for financial services on the domestic growth of an international financial center. To capture most of the possible interactions, we develop a dynamic general equilibrium model that we calibrate on Luxembourg data. Results show that the financial multiplier (ratio of a change in output to a change in the financial sector value added) is above 2 in the medium run and largely above 1 in the long run. The main transmission channels are net exports (expenditure approach) or capital income (income approach) in the medium run and investment in the long run. Moreover, the global demand for financial services has substantial implications for public finances. These findings also mean that a sudden loss of confidence towards a specific international financial center might have dramatic consequences for its whole economy.     

Infrastructure,Multinational Affiliate Production,and the Pattern of Trade

In a two-country general equilibrium model with endogenously determined domestic and multinational firms, it is shown that public infrastructure development can have diverging implications for horizontal multinational affiliate firm production and trade, depending on the type of infrastructure invested in. Infrastructure investments with strong productive or local transport effects (i.e. schools or local roads) lead to greater domestic firm production and exports, fewer imports, and more foreign multinational affiliate firm production in the country making the investment. On the other hand, infrastructure projects that lower international trade and transaction costs (i.e. shipping ports or airports) lead to more domestic firms in both countries, a greater volume of bilateral exports in both directions, and less multinational affiliate production. Further, the effect of different types of infrastructure investment on income and welfare of the open economies is explored.     

我国经济结构调整对国际收支差额的影响——基于消费、投资与外贸结构的分析

笔者利用SVAR与VEC模型研究发现,通过投资、消费、外贸结构调整对我国国际收支进行调节,在短期与长期存在差异性。短期结构调整的重点应放在提高城镇居民消费占比,适当扩大政府消费占比,有效抑制进出口增长速度等方面;长期调整的重点应集中于有效提高城镇与农村居民的消费占比上。由于我国消费和外贸结构调整对国际收支调节的作用突出,因此,需要通过显著提高居民收入水平,不断增强国内消费需求来改变消费、投资和外贸结构,以促进我国国际收支基本平衡的实现。     

External liabilities,domestic institutions and banking crises in developing economies

We investigate the impact of foreign equity and debt on the occurrence of banking crises in 61 lower income and middle income economies during the 1984 to 2010 period. We also focus on the effects of domestic institutions on banking crises and whether they mitigate or exacerbate the impact of the external liabilities. We find that FDI liabilities lower the probability of a crisis, while debt liabilities increase their incidence. However, institutions that lower financial or political risk partially offset the impact of debt liabilities, as does government stability. A decrease in investment risk directly reduces the incidence of banking crises.     

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.     

Financialization and the macroeconomy. Theory and empirical evidence

This paper sheds light on the macroeconomic impact of financialization in the banking sector. We develop a new stock-flow consistent model, which reveals that excessive leverage increases financial fragility, lowers wages, and slows down real sector investment and GDP growth. Using a panel of 29 high income countries, we then construct indicators of banking financialization and investigate the impact of the latter on the wage share, gross capital formation and GDP growth, using a Bayesian structural VAR framework, as well as a set of fixed effect regressions. Our results highlight that financialization has had a detrimental impact on real sector growth. Finally, we discuss the implications of our results to propose reforms to the international financial system.     

REINVESTED EARNINGS IN THE NATIONAL ACCOUNTS

The paper raises three questions. Firstly, is it warranted that a significant part of primary (property) income is not shown in the national accounts as being distributed to the owners of the assets to which it accrues but ends up as capital gains in the revaluation account? Secondly, why has the SNA chosen not to record reinvested earnings of corporations as flows of property income with the exception of foreign direct investment, and thirdly why the asymmetrical recording of stock investments constituting more than 10 percent of equity capital depending on whether domestic or foreign transactions are concerned? Reinvested earnings on domestic equity investment above 10 percent of a corporation are not recorded as property income in the system. The paper looks at these three questions from the perspective of the analytical uses of national accounts. The consequences for the analysis of income distribution both between nations and within nations are examined.     

Can foreign equity funds outperform their benchmarks? New evidence from fund-holding data for China

We investigate whether foreign institutional investors can outperform domestic benchmarks. Using portfolio holding-based approaches for the Chinese Qualified Foreign Institutional Investors (QFIIs), we identify fund’s active manager opinions and information on the future value of stocks. We find stocks actively traded by QFIIs, and stocks with higher deviation from benchmarks (DFB) outperform their benchmarks in the subsequent one to three quarters. Such “hot hand” phenomenon is driven by foreign institutions’ investment skill in incorporating stale information rather than fresh information into asset pricing. Our findings shed new light on the roles of foreign equity funds in eliminating mispricing in emerging markets, and provide evidence on rethinking the role of financial intermediation in a capital-controlled economy.     

The impact of macroprudential policies on the transmission of shocks across financially integrated countries

We study the implications of macroprudential policies across countries on the transmission of shocks when international investment activities are allowed. In a two-country dynamic stochastic general equilibrium (DSGE) model in which international investors are borrowing constrained and pledge international assets, we introduce a time-varying loan-to-value (LTV) ratio that adjusts to the variation of three different financial vulnerability indicators. We examine the effect of these policies on negative productivity and borrowing capacity shocks. Although time-varying LTV ratios reduce the international propagation of the productivity shock, their response to the shock depends on the financial vulnerability indicator with which the LTV ratio changes. With a productivity shock, the adjustment of the LTV ratio to the deviation of credit or asset price helps to reverse the negative impact of the shock. With a financial shock, LTV ratios varying with a deviation of credit-to-GDP ratio or aggregate credit can mitigate the impact of a negative financial shock. Adjustment of the LTV ratios reduces the fluctuation of international investors' balance sheets, investment, and productivity. We find that countries improve their welfare when time-varying LTV ratios are in place. The magnitude of the welfare gain differs with both the financial vulnerability indicator and the shock.     

How trade and capital restrictions affect the probability of a balance of trade disturbance

Free market economists argue that national authorities avoid restrictions on the free movement of goods, services and financial capital between countries. Yet, countries continually choose to restrict the flow of capital both into and out of the country. Why is this done? Is it done to protect the domestic banking system, to control the domestic money supply, to manage the exchange rate, to provide stability for internal markets or to avoid wide swings in the availability of capital? Are these controls effective in precluding wide swings in a country's international trade balance? This article uses panel data in a logit model to analyse policy choice with respect to an international trade and/or investment regime. The goal is to identify choices effective in reducing the likelihood of a severe Balance of Trade Disturbance (BTD) and determine if the appropriate choice is related to per capita income (pci).     

International portfolio reallocation: Diversification benefits and European monetary union

We investigate the determinants of bilateral international equity and bond portfolio reallocation across a large cross-section of countries spanning over two sample periods: 1997-2001 and 1997-2005. We find that the strongest drivers are the marginal diversification benefits arising from the pure asset component and the initial degree of underweight. This evidence suggests that global portfolio reallocations over the asset boom and bust period were determined by optimal diversification considerations. We also find that due to economic and monetary union (EMU) the weight assigned by euro area investors to investment in euro area countries increased significantly in equity and fixed income portfolios, with a trade diverting effect against the British bond market.     

Where Do Australians Invest?

In this article, we analyse the geography of Australia's international portfolio investment using the International Monetary Fund's Co‐ordinated Portfolio Investment Survey dataset. Preliminary results suggest that Australia's external holdings of equity and debt as a percentage of national income almost doubled between 1997 and 2001. However, Australia's international investment position as a percentage of national income is one of the lowest amongst the major OECD countries. In 2001 approximately two‐thirds of Australia's total investments were in the United States and the United Kingdom. By contrast Australia's trade share (exports plus imports as a percentage of Australia's total world trade) with these countries was approximately 20 per cent in the same year. The major determinants of Australia's geographical allocation of portfolio investment indicate a broad correspondence between stock market capitalisation of destination countries and the allocation of Australian financial investments but with some deviations from that baseline, where the deviations are correlated with Australian trade patterns.     

国际投资组合选择理论研究进展

国际投资组合选择理论研究的是在一定的假设条件下,当经济实现均衡时,投资者所应持有的本国与外国金融资产的比例。它的发展有5个特征:从追求金融市场的局部均衡到追求经济的一般均衡;从不考虑投资者的存在到考虑投资者个人效用的最大化;从单纯的理论模型构建到结合现实数据进行实证检验;从假设金融市场完全到考虑金融市场不完全的情况;从假设金融市场一体化到考虑金融市场存在分割的情况。     

How the Machinery of International Finance Runs with Sand in its Wheels

The dramatic swings in international capital movements in recent years have renewed interest in restrictions on capital flows. This paper provides a model of international asset flows and domestic equity price formation incorporating three restrictions on capital flows. A transaction tax introduces significant asymmetries in the reaction of asset prices to financial and real shocks but has no long-lived effects. Policies targeted to the level of net foreign debt by imposing a tax or outright controls do influence the steady-state levels of the real exchange rate and relative equity prices.     

A macroeconometric analysis of the effects of taxation on financing and real investment in equipment in Canada

This paper analyses the impact of taxation on corporate financing and corporate investment in machinery and equipment in Canada. A coherent macroeconometric model of the firm's real and financial decision process is theoretically developed and empirically tested on Canadian data. Estimates of the impact of taxation in general and of the 1987 Canadian government's White Paper in particular, are analysed. The estimates suggest that income taxation has a negative but relatively small impact on equipment investment in Canada, and that models that ignore the link between the real and financial decisions overestimate the impact of taxation on real investment. With respect to tax reform, the White Paper reduces the incentive to save and invest in equity capital, and is expected to decrease real capital investment in the long run.     

论金融风险的传导性

金融风险的传导是金融危机研究中的一个重要问题。我们观察风险的各个层面,无论是风险的潜伏阶段还是爆发阶段以及恢复阶段都是通过传导来实现的。没有传导,金融风险则不会发展成为金融危机。金融风险的传导又分为国内传导和国际传导,其中国际传导是国际金融风险的传统特征,也是金融全球化态势下金融危机研究的崭新课题。