Bilge Erten, Anton Korinek, José Antonio Ocampo, 11 August 2020

Recent market volatility has underlined how fickle international capital flows can be, and how important it is for emerging economies to have an adequate system of macroprudential policies in place. Capital controls that protect recipient countries from excessively risky types of flows are a crucial ingredient of such a system. This column motivates capital controls theoretically based on the existence of externalities from capital flows, describes recent empirical evidence on their use, and summarises the surrounding policy debate.

Giancarlo Corsetti, Emile Marin, 03 April 2020

In crises, the dollar tends to appreciate – especially against emerging market currencies – and dollar liquidity becomes scarce. This column shows that today’s events are following the historical pattern. Forex market turmoil is preceded by an inversion of the US yield curve as investors, anticipating tough times ahead, require relatively high short-term yields and an appreciation of relatively risky currencies until the disaster occurs. Then, the dollar appreciates sharply. Then, emerging markets suffer massive capital flight. What’s new about the COVID-19 crisis is its scale and speed.

Gaston Gelos, Lucyna Gornicka, Robin Koepke, Ratna Sahay, Silvia Sgherri, 04 February 2020

Capital flows to emerging markets have continued to be highly volatile since the Global Crisis. This column uses a new framework to show that country characteristics and policy responses matter for risks to future capital flows. It finds that good institutions support stable capital flows over the medium horizon, and while foreign exchange interventions seem to help mitigate downside risks to inflows caused by worsening global conditions, a tightening of capital flow measures in response to an adverse global shock is found to be counterproductive.

Eric Golson, 11 November 2019

Neutrality has long been viewed as impartiality in war. This column, part of the Vox debate on World War II, asserts that neutral states in the war were realist in approaching their defence to ensure their survival. Neutrals such as Portugal, Spain, Sweden, and Switzerland maintained independence by offering economic concessions to the belligerents to make up for their relative military weakness. Economic concessions took the form of merchandise trade, services, labour, and capital flows. Depending on their position and the changing fortunes of war, neutral countries could also extract concessions from the belligerents, if their situation permitted.

Maurizio Michael Habib, Fabrizio Venditti, 05 July 2019

There is a global cycle in capital flows that is intimately connected to global risk. This column argues that, contrary to common wisdom, US monetary policy is not the only factor, or even the main factor, behind global risk and this global cycle. Financial shocks matter more than US monetary policy. Domestic policies may still mitigate the cycle of global capital flows at the country level.

Linda Goldberg, 26 February 2019

Linda Goldberg of the Federal Reserve of New York talks about her work with Signe Krogstrup on a combined exchange market pressure index, which they use to look at the importance of the global factor in international flows.

Charles Calomiris, Mauricio Larrain, Sergio Schmukler, 24 December 2018

In emerging economies, studies of the relationship between foreign investor participation in public equity markets and aggregate economic activity find strong effects on productivity, investment, economic growth, and the price of publicly traded stocks. But it is not clear why. The column shows that equity capital inflows increase the supply of funding available to firms in emerging market economies, encouraging firms to obtain more equity financing to invest and expand. Large firms benefit most from those inflows. 

John D. Burger, Francis Warnock, Veronica Cacdac Warnock, 26 September 2018

Analyses of capital flows often compare flows in a recent period to flows in some past period. But what level of capital flows should be characterised as ‘normal’? This column suggests there is a natural rate of portfolio flows, a longer-term baseline path around which actual flows fluctuate. The natural rate of portfolio flows allows observers to distinguish between movements toward the benchmark (back to ‘normal’) and movements away from the benchmark, which should be short-lived.

Linda Goldberg, Signe Krogstrup, 05 March 2018

The role of the global financial factor in the international monetary system has been well discussed, with some economists suggesting its role may in fact be overstated. This column argues that some of the empirical evidence on the role of global factors in driving capital flows and exchange rates across countries may be inaccurate because it has ignored key features of the operation of central banks. The authors propose a new metric – a recast exchange market pressure index which captures country-specific capital flow pressures in a way that is comparable across countries with different exchange rate regimes.

Yusuf Soner Baskaya, Julian di Giovanni, Sebnem Kalemli-Ozcan, Mehmet Fatih Ulu, 01 September 2017

Most models assume capital flows are endogenous to the business cycle, and that inflows increase during an economy’s ‘boom’ periods. This column shows that the international no-arbitrage condition in fact does not hold, and that capital flows are pushed into an economy due to high global risk appetite. Controlling for domestic monetary policy responses to capital flows and changes in the exchange rate, exogenous capital inflows lower real borrowing costs and fuel credit expansion.

Andrew Rose, 14 August 2017

Policymakers in small countries fear the ‘global financial cycle’ that is apparently driven by US fundamentals. This column argues, in contrast, that 25 years of financial data show that the global financial cycle has explained at most a quarter of the variation in capital flows in these countries. This result gives more wiggle room for small-economy policymakers, but it also means they cannot realistically blame the global financial cycle for domestic economic problems.

Glenn Hoggarth, Carsten Jung, Dennis Reinhardt, 07 July 2017

Partly as a result of the Global Crisis, assessments of capital inflows and their impact on market efficiency and technology transfer have begun to take into account their association with financial crises. This column argues that the riskiness of inflows depends on the type of lender and its currency denomination. It finds that equity flows are more stable than debt flows, non-banks more stable than banks, and local currency more stable than foreign. Macroprudential policies can support the stabilisation of inflows.

Emine Boz, Luis Cubeddu, Maurice Obstfeld, 09 March 2017

After intensifying through the 2000s until the Global Crisis, the ‘uphill’ flow of capital from poor to rich countries decelerated and has recently reversed. This column documents that saving shifts by China, commodity-exporting emerging and developing economies, and advanced economies played key roles in accounting for the apparently puzzling pattern in the pre-crisis decade. Ongoing policy uncertainties in advanced economies mean large and persistent downhill flows of capital are unlikely in the near term. Going forward, capital flows to emerging and developing economies will need to be supported by policies that enhance the benefits of inflows, temper capital flow volatility, and improve the resilience and depth of domestic financial markets.

Stefan Avdjiev, Bryan Hardy, Sebnem Kalemli-Ozcan, Luis Servén, 24 February 2017

Capital flows play a key role in the transmission of real and financial shocks across countries, but empirical work on flows by sector is scarce.  This column uses a newly constructed dataset of capital inflows for 85 countries, broken down by borrowing sector, to show that private debt flows are negatively correlated with global risk appetite, while borrowing by sovereigns is positively correlated with risk appetite. This and other results discussed show the importance of splitting capital inflows into their borrowing sectors when designing policy to manage macrofinancial risk.

Barry Eichengreen, Poonam Gupta, Oliver Masetti, 24 February 2017

According to conventional wisdom, capital flows are fickle. Focusing on emerging markets, this column argues that despite recent structural and regulatory changes, much of this wisdom still holds today. Foreign direct investment inflows are more stable than non-FDI inflows. Within non-FDI inflows, portfolio debt and bank-intermediated flows are most volatile. Meanwhile, FDI and bank-related outflows from emerging markets have grown and become increasingly volatile. This finding underscores the need for greater attention from analysts and policymakers to the capital outflow side.

Minouche Shafik, 22 November 2016

The spread of financial shocks globally has caused some to argue that capital accounts should be more closed, thereby shrinking the opportunities available to global savers and borrowers alike. That would put further downward pressure on interest rates in surplus economies, and upward pressure on borrowing costs in economies where the greatest opportunities lie. This column argues that by acting in their local interest, domestic macroprudential policymakers can safeguard against the risk of financial instability spilling across borders, while continuing to allow capital to flow to where it is of most use.

Holger Görg, Christiane Krieger-Boden, Peter Nunnenkamp, 23 August 2016

In theory, firms in developing countries benefit from viable, well-used, stable, and efficient local financial markets as a source of investment for local firms. Financial markets in the home countries of multinationals can also act as a source of FDI to the developing world when local financial markets are weak. This column discusses recent empirical data that support both arguments, and argues that advocates of tighter regulation for financial markets should consider the wider impact on developing country economies.

Gaston Gelos, Jay Surti, 19 August 2016

International financial spillovers from emerging markets have increased significantly over the last 20 years. This column argues that growing financial integration of emerging economies is more important than their rising share in global trade in driving this trend, that firms with lower liquidity and higher borrowing are more subject to spillovers, and that mutual funds are amplifying spillover effects. Policymakers in developed economies should pay increased attention to future spillovers from emerging markets, particularly from China.

Claudio Raddatz, Sergio Schmukler, Tomás Williams, 12 August 2016

The categorisation of countries into relevant international benchmark indices affects the allocation of capital across borders. The reallocation of countries from one index to another affects not only capital flows into and out of that country, but also the countries it shares indices with. This column explains the channels through which international equity and bond market indices affect asset allocations, capital flows, and asset prices across countries. An understanding of these channels is important in preventing a widening share of capital flows being impacted by benchmark effects.

Ron Kaniel, Robert Parham, 06 March 2016

Correlations between media attention and capital flows to investment vehicles are well established. However, the question arises of whether this is due to new information conveyed or if it is just an artefact of the attention itself. This column employs fund rankings from the Wall Street Journal to investigate the issue. It shows that media attention does drive these investment decisions, even if no new information is conveyed. It further argues that financial intermediaries are aware of this effect and exploit it.



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