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1. Analysis of Determinants of Foreign Capital Flow: Focused on Interest Rate and Exchange

Author:
Deok Ryong Yoon, Wongho Song, and Jinhee Lee
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
As the linkage between domestic and foreign financial markets grows stronger, concerns have been raised about the inflow and outflow of foreign investment capital as a source of financial instability whenever the financial market becomes unstable. Considering that opening the capital market is not an option, it becomes essential to examine the determinants of foreign investment to maximize the benefits of foreign capital inflows and outflows for sound growth in the real sector as well as the financial sector. Accordingly, this study attempts to produce evidence-based policy implications by empirically analyzing the determinants of the inflow and outflow of foreign investment funds.
Topic:
Foreign Exchange, Markets, Capital Flows, Investment, and Interest Rates
Political Geography:
Global Focus

2. New Productivity Drivers: Revisiting the Role of Digital Capital, FDI and Integration at Aggregate and Sectoral Levels

Author:
Amat Adarov and Robert Stehrer
Publication Date:
04-2020
Content Type:
Working Paper
Institution:
The Vienna Institute for International Economic Studies (WIIW)
Abstract:
The paper studies the drivers of productivity at country and sectoral levels over the period 2000-2017 with the focus on the impact of capital accumulation and structure. The analysis confirms an especially important role of ICT and intangible digital capital for productivity growth, particularly in the manufacturing sectors. While backward global value chain participation and EU integration are also found to be instrumental for accelerating productivity growth, the impact of inward foreign direct investment is not robustly detected when the data is purged from the effects of special purpose entities and outlier countries.
Topic:
Economics, Foreign Direct Investment, European Union, Digital Economy, Capital Flows, and Trade
Political Geography:
Europe and Global Focus

3. Volume 69 Issue 1

Author:
Muhittin Kaplan
Publication Date:
01-2019
Content Type:
Journal Article
Journal:
Istanbul Journal of Economics
Institution:
Istanbul University Faculty of Economics
Abstract:
Istanbul Journal of Economics-İstanbul İktisat Dergisi is an open access, peer-reviewed, scholarly journal published two times a year in June and December. It has been an official publication of Istanbul University Faculty of Economics since 1939. The manuscripts submitted for publication in the journal must be scientific and original work in Turkish or English. Being one of the earliest peer-reviewed academic journals in Turkey in the area of economics, Istanbul Journal of Economics-İstanbul İktisat Dergisi aims to provide a forum for exploring issues in basicly economics and publish both disciplinary and multidisciplinary articles. Economics is the main scope of the journal. However, multidisciplinary and comparative approaches are encouraged as well and articles from various social science areas such as sociology of economics, history, social policy, international relations, financial studies are welcomed in this regard. The target group of the journal consists of academicians, researchers, professionals, students, related professional and academic bodies and institutions.
Topic:
Economics, International Political Economy, Economic Growth, Political Science, and Capital Flows
Political Geography:
Russia, Turkey, and Global Focus

4. Push vs. Pull Factors of Capital Flows Revisited: A Cross-country Analysis

Author:
Tae Soo Kang and Kyunghun Kim
Publication Date:
02-2019
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Capital market integration contributes to economic growth and it can be more beneficial for emerging market economies (EMEs, hereafter) at their early stages of development where the capital is relatively insufficient. An open capital market also enables investor to share the country-specific risks by holding foreign assets. However, there are also some negative side effects of capital market integration. Financial shocks originating in the center coun-try can be quickly propagated through the integrated financial market. The Global Financial Crisis (GFC, hereafter) is a good example of the contagion of the financial crisis. Volatile cross-border capital inflows and outflows nega-tively affect financial stability, which eventually lowers economic growth by causing financial crises. Despite of these negative side effects, capital market integration has been an inevitable long-term trend for many EMEs over the past few decades (Aizenman et al. 2010). There have been continuous capital flows to EMEs, which started even before GFC and this trend has been more pronounced during the U.S. zero-interest rate period (Ahmed and Zlate 2014). Though some monetary authorities in EMEs tried to moderate the procyclicality of credit flows by implementing policy instruments such as capital controls or macro-prudential policy measures after GFC (Kim and Mehrotra 2018), the common factors in the global financial market still play a crucial role in de-termining capital inflows to EMEs. The relationship between the global financial condition and its impact on capital inflows to EMEs, has been a long-debated issue. This issue concerns whether push or pull factors are the major determinant of capital flows. The push factor represents the common factor that exists in the global financial market or center countries, which influences capital inflows to peripheral countries. These factors are interest rates and GDP growth rates of advanced economies (AEs, hereafter), global risk factors such as VIX (S&P 500 Volatili-ty Index), and the commodity price index. The pull factor denotes domestic factors that attract funds from the global financial market to domestic finan-cial markets. These factors are domestic interest rates, domestic GDP growth rates, and other country-specific characteristics such as exchange rate regime, degree of the capital account openness, institutional quality, and stages of economic development. In previous literature, many scholars have found strong evidence for push factors being the major determinant of capital movement. The interest rates of mature economies and VIX are significant determinants of capital inflows to EMEs. However, there is only some evidence that higher domestic interest rates and higher domestic GDP growth rates pull capital from the center countries to individual EMEs (Koepke 2015). Related to this long-debated issue in academia, the Chairman of the Federal Reserve, Jerome H. Powell recently stated, "... I will argue that, while global factors play an important role in influencing domestic financial conditions, the role of U.S. monetary policy is often exaggerated." With this statement, he also pointed out that the slowdown in capital inflows to EMEs which has been happening ever since 2011 has been mainly due to the narrowing of GDP gaps between AEs and EMEs, i.e., the recent decrease in capital in-flows to EMEs can be attributed to the decline in EMEs' GDP growth rates given the fact that the U.S. GDP growth rate has picked up. In this paper, we revisit this issue of push and pull factors of capital inflows. To this end, we consider the heterogeneity that exists in EMEs by dividing them into four subgroups. We investigate which is the main driver of capital inflows between push and pull factors across country groups. Categorizing subgroups is important for two reasons. First, EMEs are so heterogeneous that we make subgroups which share similar economic fundamentals by re-gions. Second, making subgroups across EMEs is an effective way to indi-rectly consider the regional contagion effect. With this cross-country analysis, we can figure out the differing effects of push and pull factors across country groups, and this can eventually lead to the development and implementation of appropriate policy instruments. Our empirical finding shows that the push and pull factors play a different role in determining capital inflows to AEs and EMEs. The major drivers of capital inflows to AEs are both push and pull factors, but push factors turn out to be the main determinant of capital inflows to EMEs. When EMEs are divided into four subgroups, we find sizable heterogeneity across subgroups. In Asian countries, both push and pull factors are significant, which is similar to AEs, but only U.S. interest rate plays a major role in Eastern Europe. Some pull factors are important in Latin American countries and other EMEs, but these are not robust to alternative empirical models and measures.
Topic:
Capital Flows, Economic Policy, Push Factor, and Pull Factor
Political Geography:
Global Focus

5. Capital Controls and International Trade: An Industry Financial Vulnerability Perspective

Author:
Kevin Lai, Tao Wang, and David Xu
Publication Date:
12-2019
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Capital controls—or measures that governments take to restrict the amount of money that flows into and out of countries—pose significant challenges for firms that rely heavily on foreign financing to conduct business. This paper empirically evaluates effects of capital controls on trade across industries with varying levels of dependence on foreign capital. Mobilizing data on 99 countries from 1995 to 2014 across 27 industries, the authors find that industries more reliant on foreign capital tend to export much less in response to tightening of capital controls by exporting countries. Exports decline uniformly across all industries in response to tightening of capital controls by importing countries. The negative effects of capital controls on trade are less pronounced in countries with more advanced financial systems.
Topic:
Government, International Trade and Finance, Capital Flows, and Capital Controls
Political Geography:
Global Focus

6. The Cost of Holding Foreign Exchange Reserves

Author:
Eduardo Levy Yeyati and Eduardo Gómez
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effects empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate.
Topic:
Financial Crisis, Exchange Rate Policy, International Reserves, and Capital Flows
Political Geography:
Global Focus and United States of America

7. How ETFs Amplify the Global Financial Cycle in Emerging Markets

Author:
Nathan Converse, Eduardo Levy Yeyati, and Tomas Williams
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
Since the early 2000s exchange-traded funds (ETFs) have grown to become an important in- vestment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive fund- level data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For dedicated emerging mar- ket funds, we find that the sensitivity of investor flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. In turn, we show that in countries where ETFs hold a larger share of financial assets, total cross-border equity flows and prices are significantly more sensitive to global financial conditions. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the global financial cycle in emerging markets.
Topic:
Emerging Markets, International Trade and Finance, Global Political Economy, Capital Flows, and Mutual Funds
Political Geography:
Global Focus and Global Markets

8. Trends in Private Capital Flows to Low-Income Countries: Good and Not-So-Good News

Author:
Nancy Lee and Asad Sami
Publication Date:
07-2019
Content Type:
Policy Brief
Institution:
Center for Global Development (CGD)
Abstract:
Interest in mobilizing private finance for SDG investments is surging in a world of stagnating aid, limited fiscal space, and rising LIC debt. But is more reliance on private finance realistic for LICs? This paper explores the performance since the global financial crisis of one source of private finance for LICs: cross-border private capital inflows. Much of the evidence is encouraging, and some of it flies in the face of conventional wisdom. For LICs, private capital inflows are an important and growing source of finance. For the median LIC, private capital inflows are now as large as ODA as a share of GDP. And the FDI component—most of LIC inflows—has been stable and resilient throughout the post-crisis period. Importantly, inflows are not all captured by resource-rich LICs. In 2017, more than half of capital inflows to LICs went to non-resource-rich LICs. Increasingly, policies, not just resource endowments, shape LIC destinations for foreign capital. The relation between median capital inflows/GDP and median regulatory quality is significantly positive for non-resource-rich LICs. And sources of FDI are diversifying. In 2016, China’s stock of FDI in Africa was almost as large as that of the traditional investors: the US, UK, and France. But there is also not-so-good news. Median private capital inflow/GDP ratios are not positively correlated with median private domestic investment/GDP in LICs. Nor is there a significant relationship with median public investment/GDP. The apparent lack of complementarity between foreign and domestic investment may point to problems related to investment enclaves and/or the role of the state in LIC economies. As in other countries, non-FDI inflows to LICs are volatile and sensitive to global commodity prices and interest rates. We find no relation between median country per capita income levels and private inflows/GDP, highlighting the need for caution in IDA graduation policies.
Topic:
Development, Capital Flows, Interest Rates, Private Sector, and Capital
Political Geography:
Global Focus

9. Global Growth Projections for The Conference Board Global Economic Outlook 2019

Author:
Abdul Erumban and Klaas de Vries
Publication Date:
12-2018
Content Type:
Special Report
Institution:
The Conference Board
Abstract:
This paper presents the methodology for The Conference Board Global Economic Outlook 2019, which includes growth projections for 11 major regions and individual estimates for 33 mature and 36 emerging market economies for 2019-2023 and 2024-2028. The projections are based on a supply-side growth accounting model that estimates the contributions of the use of factor inputs—labor and capital—and total factor productivity growth to the growth of real gross domestic product (GDP). While labor input growth rates are estimated using data on demographic changes and participation rates—including an estimation to adjust for the change in the composition (or quality) of the workforce—capital input and total factor productivity growth are econometrically estimated using a wide range of related variables during past periods. The obtained trend growth rates for the period 2019-2023 are adjusted for possible deviations between actual and potential output in the short run.
Topic:
Labor Issues, Economy, and Capital Flows
Political Geography:
Global Focus

10. Large Capital Inflows, Sectoral Allocation, and Economic Performance

Author:
Gianluca Benigno, Nathan Converse, and Luca Fornaro
Publication Date:
03-2015
Content Type:
Commentary and Analysis
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper describes the stylized facts characterizing periods of exceptionally large capital inflows in a sample of 70 middle- and high-income countries over the last 35 years. We identify 155 episodes of large capital inflows and find that these events are typically accompanied by an economic boom and followed by a slump. Moreover, during episodes of large capital inflows capital and labor shift out of the manufacturing sector, especially if the inflows begin during a period of low international interest rates. However, accumulating reserves during the period in which capital inflows are unusually large appears to limit the extent of labor reallocation. Larger credit booms and capital inflows during the episodes we identify increase the probability of a sudden stop occurring during or immediately after the episode. In addition, the severity of the post-inflows recession is significantly related to the extent of labor reallocation during the boom, with a stronger shift of labor out of manufacturing during the inflows episode associated with a sharper contraction in the aftermath of the episode.
Topic:
Industrial Policy, Labor Issues, Capital Flows, Manufacturing, and Capital
Political Geography:
Global Focus