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Financial integration, capital mobility, and income convergence
Abstract
Recent studies have found that capital moves ‘uphill’ from poor to rich countries, and brings little or no growth dividend when it does flow into poor economies. We show that Europe does not conform to this paradigm. In the European experience of financial integration, capital has flown from rich to poor countries, and such inflows have been associated with significant acceleration of income convergence. Analysing broader samples of countries, we find that ‘downhill’ capital flows tend to be observed above certain thresholds in institutional quality and financial integration. But Europe remains different even when allowing for such threshold effects, and its experience is similar to that of interstate flows within the United States. Our findings are consistent with the notion that financial diversification reduces countries’ incentives to save in order to self-insure against specific shocks.
—Abdul Abiad, Daniel Leigh and Ashoka Mody
... Moreover, the reason for addressing this research issue is that FI plays a pivotal role in an economy's growth as it is considered to be one of the vital indicators for economic growth via sharing the risk between countries. Also, deepening FI helps particularly developing countries' economic growth through capital flight (Abiad et al., 2009). As a result, the gap in per capita income between rich and developing countries has come down. ...
... A study by Yuhn (1997) and Bai and Zhang (2012) shows that FI leads to the efficient allocation of capital and capital accumulation at the regional level, thereby boosting the growth and productivity of the economy in a real sense. According to a study by Abiad et al. (2009), capital has moved from high-to low-income countries, which has expedited income convergence and enhanced growth in developing nations. Pritchett (2003) further argued that the country's FI varies because of profound historical and geographical reasons. ...
... Pritchett (2003) further argued that the country's FI varies because of profound historical and geographical reasons. A few studies also examine "does FI leads to income convergence" (see, for instance, Abiad et al., 2009;Kaijage and Nzioka, 2012;. Abiad et al. (2009) has investigated that FI is helping low-income countries as capital is flying from developed to developing countries using the sample period from 1974 to 2004. ...
Purpose
The purpose of this study is to examine the club convergence of Financial integration (FI) in the case of 60 countries from 1970 to 2015. FI plays a vital role in economic growth through sharing the risk between countries, cross-border capital association, investment and financial information. It also leads to the efficient allocation of capital and capital accumulation, thereby improving the systematic growth and productivity of the economy. Literature on examining the convergence hypothesis of FI is scarce.
Design/methodology/approach
This study applies the clustering algorithm to identify club convergence, advanced by the Phillips and Sul test, which enables the identification of multiple steady states or club convergence, unlike beta and sigma convergences.
Findings
The findings indicate the non-convergence when all 60 countries were taken together. This highlights that the selected countries' have unique transition paths in terms of FI. Hence, the authors implement the clustering algorithm, and the estimation shows that 56 countries are categorised into three different clubs. However, for the rest of four countries, the results are sort of ambiguous, favouring neither convergence nor divergence.
Practical implications
On the basis of three country clubs, Club 1 presents the model countries such as the Netherlands, Singapore and Switzerland. The Club 2 and Club 3 countries can start making moves towards the model countries by making policy adaptations for trade, finance and business facilitation.
Originality/value
The existing literature provides a plethora of studies investigating the convergence of stock markets, exchange rates and equity markets, but studies on the convergence of FI, particularly across the countries, are scarce. This study contributes by bridging this gap. The study is unique in its type as it takes into account the multiple steady states or club convergence. This study also contributes in policymaking by suggesting Club 1 countries (the Netherlands, Singapore and Switzerland) as the model ones for the FI.
... Moreover, financial integration in transition economies has also been seen as problematic for two reasons. First, foreign financing and/or the presence of foreign banks seemed to play a role in the accumulation of a large share of foreign currency indexed lending in transition economies (EBRD, 2009;Abiad, et al., 2009). Second, high concentration of loans in some industries (e.g. in construction industry), has been registered. ...
... and cross sector approaches. By applying the methodology proposed by Rajan and Zingales (1998) 14 EBRD (2009) and Abiad and al. (2009) Finally, Gourinchas and Jeanne (2007) have observed, using a large sample of non-OECD countries, the negative correlation between productivity growth and net capital inflows over the period 1980-2000. The last is known as the "allocation puzzle", again contradicting the In a large cross country study by Abiad, et al., 2009, this link was particularly highlighted. ...
... By applying the methodology proposed by Rajan and Zingales (1998) 14 EBRD (2009) and Abiad and al. (2009) Finally, Gourinchas and Jeanne (2007) have observed, using a large sample of non-OECD countries, the negative correlation between productivity growth and net capital inflows over the period 1980-2000. The last is known as the "allocation puzzle", again contradicting the In a large cross country study by Abiad, et al., 2009, this link was particularly highlighted. By estimating the determinants of current account deficits (as difference between national savings and investments) across Europe on a large cross country database, the authors explained the increased dispersion of the current account deficit in Europe by financial integration while the direction of that relationship depended on the country's income. ...
The main idea in this thesis is to analyze the macroeconomic implication of the micro-level failures of financial markets resulting from economic transformation of countries in Central and Eastern Europe. After first chapter which overviews the overall process of financial sector transition, financial integration and crisis transmission to the region of the Emerging Europe, the following three chapters cover the separate issues based on micro level data empirical analysis. The chapter 2 investigates the liberalized credit market resulting in its segmentation according to risk and transparency of borrowers on the case of Serbia. The empirical research is based on banks field survey and panel data estimation on database consisting of individual banks financial data. The Chapter 3 analyses the role of credit in the newly established monetary policy framework based on generalized method of moments estimation on Serbian banking sector data and points out to weak evidence on the role of credit in monetary policy transmission. The Chapter 4 examines the determinants of financing obstacle using probit estimation on the EBRD database (Business Environment and Enterprise Performance Survey) for 18 European transition economies and demonstrates that firms in productive sectors (manufacturing industry) have had relatively more problem in access to finance. The general conclusion resulting from the thesis is that the regulatory environment and specific policies related to financial sector in new market economies should encompass institutions to deal with information asymmetries and specific market failures that may lead to macroeconomic imbalances and propagation of external shocks.
... Owing to increased risk aversion, capital flows became less sensitive to interest rates in the aftermath of the 2007 financial crisis. Abiad et al. (2009) showed for a sample of 23 EU member countries and data from 1975 to 2004 (five-year, non-overlapping observations for each country) that-in contrast to recent literature-the EU sees the so-called downhill capital flows from richer to poorer countries bringing forward two advantages. First, rich countries build savings in countries that offer higher marginal products (owing to their lower capital-labor ratio) and poorer countries are able to catch up faster. ...
... show that only a low degree of capital mobility can be observed in Europe. Abiad et al. (2009) found evidence for only downhill capital mobility (from richer to poorer countries). discuss the trade-off between free capital mobility and financial stability within eleven EA members. ...
In this chapter, we conduct our quantitative analysis on labor mobility. Given data limitation, some of our research questions are analyzed using descriptive statistics and graphical analysis, while others make use of panel regression models. The chapter points to an increase of intra-EU migration over the sample period, suggesting an endogenous development of the region toward an OCA over time. Migration flows react to unemployment in the EA as well as work as an indirect redistribution tool from richer to poorer countries. EA membership even intensifies EU intra-migration.KeywordsOptimal Currency AreasDeterminants of migrationEconomic stabilizationEA migrationEndogenous development
... European capital flows from richer to poorer countries, but this pattern is different from what is happening in the rest of the world (e.g., Abiad, Leigh, and Mody 2009;Gill and Raiser 2012). Part of the explanation comes from the reassuring effect, which is based on Mundell's intuition and the endogenous optimum currency area theory (Warin, Wunnava, and Janicki 2009). ...
... The negative association between both variables cannot reveal whether accelerated growth rates contribute to widening imports and subsequent external imbalances or whether the large inflows of foreign capital stimulate economic growth. Some studies even find bidirectional causality between external imbalances and economic growth (e.g., Abiad, Leigh and Mody 2009). A current account deficit caused by high economic growth is less problematic to the extent that external funds are used for investment, but again, the effect can only be isolated with a multivariate statistical analysis. ...
The sizable and persistent external imbalances of European transition countries have attracted surprisingly little empirical attention. Although increasing external account deficits may be accompanied by accelerated growth rates, they also come with substantial risks. This article identifies and compares the main determinants of the widening and persistent external current account deficits of fifteen European transition countries vis-à-vis the EU-15 countries. It assesses the validity of the intertemporal approach of current account determination through bias-corrected least-squares dummy variable models (using three dynamic panel techniques) and data for thirty European countries during the 1994–2013 period. It concludes that the external accounts of European transition countries have been counter-cyclical and largely driven by faster growth of government consumption and investment as compared to their trading partners. After the outbreak of the global economic crisis, their external accounts improved due to lower private consumption and a significant rise in precautionary savings.
... Technological progress is vital in fostering synergies among energy diversification, economic growth and financial development, potentially enhancing all these areas. The low cost of technology adoption (Barro and Sala-i-Martin, 1997), globalization (Harger et al., 2017), trade liberalization (Ben- David and Kimhi, 2004), foreign investment (Zhao and Serieux, 2019) and financial integration (Abiad et al., 2009) have been observed to drive technological progress in less developed economies, guiding them towards convergence. ...
This study tests convergence in energy diversification, per-capita income and financial development and explores their interrelationships. Design/methodology/approach-Club convergence tests, Granger tests and panel regressions are employed on 134 countries from 1995 to 2019.
Findings-While overall convergence is absent across the entire sample, countries have converged within specific clubs. Low and lower-middle-income countries show convergence in energy diversification and per-capita income. Positive bidirectional relationships are found between energy diversification, per-capita income, and financial development and per-capita income. A U-shaped relationship between oil prices and energy diversification is identified.
Research limitations/implications findings suggest that achieving a shared equilibrium in energy diversification, economic prosperity and financial development is feasible through technological progress within convergence clubs. Investments in human capital and technology are crucial prerequisites for sustainable development. Originality/value study pioneers testing energy diversification, per-capita income and financial development convergence, investigating the tri-directional relationship between them, and exploring the U-shaped relationship between oil prices and energy diversification.
... Significant co-movement and spill overs between and within asset classes have become common phenomena in the era of globalisation of the economy and the financial sector (Athari & Hung 2022;Sahabuddin et al. 2022). Global financial integration has seen prominent levels of capital mobility (Abiad, Leigh & Mody 2009), making national borders significantly less relevant and exchange-rate controls by states extremely limited in effectiveness. According to Chinn (1989), as equity markets get more integrated into the global economy, they become more interconnected and experience significant international financial flows. ...
Background: Although numerous researchers have discovered a negative association between stock-market returns and changes in exchange rates, the literature does not address how external shocks may alter these correlations. Aim: This article investigates the risk synchronisation between stock returns, exchange-rate returns, geopolitical risk (GPR), and global economic policy uncertainty (GEPU) concerning countries within the Southern African Development Community (SADC). Setting: The SADC countries over the period February 2005–August 2021. Methods: The wavelet techniques were used to address the study’s objectives. Results: The bivariate results show that there was a positive interdependence between the stock market and the currency market in Botswana and Mauritius from 2007 to 2012. In South Africa, there is always significant co-movement between the two markets. The partial wavelet shows that, while both increasing GPR and GEPU influence the correlation between stock returns and exchange-rate returns, GPR has a greater impact than GEPU. Finally, the wavelet multiple correlations analysis reveals that the Botswana exchange-rate reaction to shocks is indeterminate, with the ability to lead or lag in terms of how the SADC economies respond to shocks across all-time scales. Conclusion: The findings from the study imply that investors should watch for changes in the GEPU, particularly the GPR, if they are concerned about the stock markets in Botswana, Mauritius, and South Africa. Contribution: This is the first study to evaluate the conditional effect of external shocks on the co-movement of currency returns and stock returns in SADC countries using wavelet techniques.
... In conducting a panel regression analysis for 63 advanced and developing economies, Mohammadi (2004) finds that if an increase in government spending is bond-financed, the impact on increasing the current account deficit is larger than if the spending was tax-financed. Abiad et al. (2009) find that across 135 countries, improvements in budget balances as a share of GDP by 1% correspond to improvements in the current account by 0.3% of GDP. Kennedy and Sløk (2005) and Piersanti (2000) focus on OECD countries and conclude a similar relationship between improving government budget balances and the current account. ...
Following the European Debt Crisis, there was a significant push for greater fiscal discipline across the EU member states. This began with the revitalization of the Stability and Growth Pact in 2011 and continued with the adoption of the Fiscal Stability Treaty of 2013. The measures were designed to maintain or achieve both government debt-to-GDP ratios of below 60% and government budget deficits of below 3%. This paper investigates whether the fiscal discipline measures had an impact on the relationship between fiscal and current account balances. Using the synthetic control method, we examine current account balances in each EU member state that implemented the fiscal provisions in the treaty (Title III), compared to a synthetic counterfactual economy. We find that countries most impacted by the European Debt Crisis experienced the greatest improvement in their current account deficits from the fiscal discipline measures. Several other EU member states also experienced stabilization in their current account balances compared to their synthetic counterfactuals.
... Given the exogenously given 1 , then it leads to higher growth. This is also the transmission channel that the empirical strategy tries to capture in Abiad et al. (2009). ...
This note presents a simple setup of credit liberalization. We find that the effect is not uniform but depends on the level of GDP. In other words, the model predicts that richer countries benefit more than poor countries from opening up their capital account. This finding has important policy implications, as it suggests that developing economies should be cautious when it comes to the liberalization of their capital account.
... After BG was published, the tendency for capital to flow "downhill" in this way was confirmed by several empirical studies. Abiad et al. (2009) shows that Europe has been unusual in seeing this "downhill" flow 3 A full review of the literature on LCP and PCP and their effects on the real income and competitiveness channels is beyond the scope of this paper. For an early paper that is relevant to the debate on monetary union, see Engel (2000). ...
This thesis is an inter-disciplinary analysis of the fundamental causes of the decade-long crisis of monetary union and why it has proved so persistent despite major reforms. The consensus narrative of economists has been that the crisis was caused by policy failures and weaknesses in the policy architecture, notably a lack of crisis management and allowing imbalances to get so large. The first two papers reconsider these failures and weaknesses. Paper 1 challenges the consensus view that the fragility of euro-area sovereign bond markets stems from strategic default risk and a failure of policy to coordinate investor beliefs on a ‘good’ equilibrium in the heat of the crisis. Instead, it argues that interaction between the euro area’s legacy bond market structure with a complex policy risk premium created a structural vulnerability that is still to be addressed. Paper 2 finds that imbalances were predominantly caused by credit supply shocks and that, while macroprudential policies may have been helpful in attenuating them, the emergence of imbalances prior to the crisis should not be viewed as a policy failure but as a fact of life in a diverse monetary union. Finally, building on the insights of the previous two papers, Paper 3 formulates a political-financial trilemma founded on the policy goals embodied in the Maastricht compromise. It concludes that euro-area policymakers have been circling around the trilemma over the past decade and that only a multi-faceted approach that anticipates how sovereign bond market structures might change is likely to lead to a stable outcome. The overarching conclusion of the thesis is that the contribution of policy failures and weaknesses in the policy architecture to the crisis has been exaggerated and that greater emphasis should be placed on understanding the structure of sovereign bond markets and their associated vulnerabilities.
... On the other hand, the Stolper-Samuelson theory (Samuelson, 1971) suggests that where factor mobility is perfect, international trade affects the owners of each domestic factor in the same way, regardless of the industries their factors are utilised in. That is, inter-industry factor mobility can eliminate sectoral imbalances, just like domestic geographical factor mobility adjusts regional imbalances within a country or an economic union (Abiad, Leigh, & Mody, 2009;Begg, 1995). As a result, the owners of a relatively abundant factor will benefit due to the comparative gains from international trade (Rogowski, 1987). ...
Free trade agreements (FTAs) can ignite domestic conflicts between export‐ and import‐competing industries over trade gains. However, if the factors of production, such as capital and labour, move freely across industries, the returns to factor owners will quickly converge. Then, sectoral conflicts over FTAs will be less likely to arise. We analyse the case of South Korea's FTAs to measure (a) sectoral FTA gains and (b) interindustry factor mobility and to examine (c) the role of interindustry factor mobility in mitigating sectoral conflicts over trade policies. South Korea is an ideal case study due to the low barriers to domestic geographic mobility and high trade dependence. Based on data on its trade with 252 countries and factor returns between 2002 and 2017, we find that export industries did not gain much from the FTAs, while the import‐competing agricultural sector was the winner. Sectoral conflicts greatly decreased over 2008–2010. Interindustry capital mobility plays a significant role in weakening the sectoral conflicts, while the impact of interindustry labour mobility is limited.
... However, authors concluded that risk of the appreciation of the exchange rate still exists. Abiad et al. (2009) concluded that this transition, enabled by rapid financial integration, was self-limiting because it enables further separation between domestic savings and investments. Financial integration leads to the capital movement from rich countries to the poor ones, which accelerates income convergence. ...
Foreign direct investment generates a number of benefits, especially for developing and transition countries, and, therefore, it is a major factor in economic development. Some of the advantages of foreign direct investments are technology and knowledge spillover, increased employment and competition and improved balance of payments. The aim of this research is examining the effect of foreign direct investment on income convergence of Central European transition countries. Regression analysis is used to test this effect. The results indicate that Central European transition countries with a higher inflow of foreign capital achieve more propulsive convergence towards the average income of developed countries of the European Union. The results of the research can be useful for the economic policy makers of transition countries.
... However, authors concluded that risk of the appreciation of the exchange rate still exists. Abiad et al. (2009) concluded that this transition, enabled by rapid financial integration, was self-limiting because it enables further separation between domestic savings and investments. Financial integration leads to the capital movement from rich countries to the poor ones, which accelerates income convergence. ...
In recent times, firms or businesses in the Hotel and Tourism industry
across the globe have suffered setback financially in terms of patronage and
turnover. This is out rightly attributed to the emergence of the invincible enemy
– the COVID-19 pandemic. The upper echelon of organization, thus have a
role to play in reviving this sector. Against this backdrop, this study examined
the impact CEO gender and educational background on the financial
performance of hotels in Nigeria. This study sampled three listed hotel in the
Nigeria Stock Exchange from 2017 to 2020. Ordinary least squares regression
was employed to empirically ascertain the relationship between variables of
the study. The study found that CEO gender has no significant impact on the
financial performance of Hotels in Nigeria. Secondly, the study found that
CEO educational background has positive and significant impact on the
financial performance of Hotels in Nigeria. The study recommends that CEO
with hotel and tourism educational background should be appointed in hotels
in Nigeria to improve the financial performance.
... As expanding private capital flows is necessary to stimulate economic growth in developing countries, empirical studies have attempted to identify reasons why neoclassical theory diverges from economic reality. Prior studies have identified determinants such as capital market imperfections [27][28][29][30], information asymmetries [31,32], lack of financial development [33][34][35][36] and sovereign risk [37,38], with recent studies explaining the Lucas Paradox in light of institutional quality [26,[39][40][41][42]. Studies have then prescribed ways to expand private investment toward developing countries based on the results of applying this determinant to FDI and portfolio equity investment. ...
In recent years, the global development community has been emphasizing blended finance approaches for economic development without taking into consideration practical implications of the Lucas Paradox, or the observation that capital does not flow from rich to poor countries. To prevent misuse of official development funds as catalysts for private flows, it is crucial to consider the direction of blended finance approaches in light of the Lucas Paradox. To fill this important gap in the literature, this paper investigates determinants of capital flows in recipient countries where a blended finance strategy is applied in light of the Lucas Paradox, with a focus on foreign direct investment and portfolio equity investment. For the analysis, this paper utilizes a cross-sectional sample of 157 countries between 2002 and 2018, including ODA recipients and OECD DAC members, by conducting a regression analysis based on the ordinary least squares (OLS). Our findings suggest that the Lucas Paradox strongly exists in all recipient countries that can utilize ODA as a catalyst, which is the core of the blended finance strategy. Institutional quality, human capital and asymmetric information improvement appear to mitigate the Lucas Paradox, although the paradox does not disappear entirely. In addition, total ODA, institutional and human capital appear to be determinants of the paradox in the multiple regression model.
... In panel regressions, mixed results emerge too: the hypothesis is confirmed with tax shocks (Boileau and Normandin, 2012); there is no relationship (Cerrato et al., 2015); the relationship holds only in the long term (Gossé and Serranito, 2014); the relationship is stronger in EMEs and LICs than in AEs and weaker when the external debt-to-GDP ratio in developing economies is above 45%, which is the median sample (Abbas et al., 2011); it vanishes in a sub-sample of 23 European Union (EU) countries (Abiad et al., 2009); there is reverse causality for some countries (Xie and Chen, 2014). 11 For EA countries with large internal and external imbalances (among which Greece, Ireland, Italy, Portugal, and Spain), evidence of twin deficits is mixed too: the hypothesis is rejected (Algieri, 2013), confirmed (Gaysset et al., 2019), or confirmed only for Greece, Portugal and Spain (Litsios and Pilbeam, 2017;Trachanas and Katrakilidis, 2013). ...
We revisit the twin-deficits relationship for a sample of 65 countries with fiscal rules over the period 1985-2015, using a panel data estimation methods. Our analysis accounts for the role of various types of fiscal rules and institutions: expenditure rules, revenue rules, budget balance rules, debt rules, fiscal councils, and supporting procedures. We find that the twin-deficits hypothesis is confirmed. The impact of the budget balance on the current account balance is increased when fiscal rules are considered, except with revenue rules and debt rules. Well-designed fiscal rules, fiscal councils and features that reinforce compliance with rules improve the current account balance. Our findings highlight the role of fiscal factors in explaining sustained global current account imbalances. They also contribute to the ongoing discussion about the improvement of macroeconomic and budgetary surveillance in the European context.
... Ghosh, Qureshi, Kim ve Zalduendo (2014), net sermaye akımları ile çeken ve iten faktörler arasındaki ilişkinin, akımların büyüklüğüne bağlı olduğunu göstermektedir. Kaldı ki sermaye akımlarının bazı makroekonomik ve finansal etkileri, sadece akımlar belirli bir düzeye ulaştıktan sonra ortaya çıkabilmektedir (Abiad, Leigh, & Mody, 2009). Öyleyse sermaye akımlarındaki aşırı artışların, normal akımlardan farklı davranış sergiledikleri söylenebilir (Li, Haan, & Scholtens, 2018). ...
ÖZ Bu makalede Türkiye ekonomisinin 1997:12-2019:12 dönemine ait aylık verileri kullanılarak, brüt ve net toplam sermaye girişleri ile bunların bileşenlerindeki aşırı artışların belirleyicileri araştırılmaktadır. Probit model tahminleri, portföy ve diğer yatırım girişlerindeki aşırı artışlar için hem yurtiçi hem de küresel faktörlerin önemli olduğunu; toplam sermaye girişleri ile doğrudan yabancı yatırım girişlerindeki aşırı artışlar için ise yurtiçi değişkenlerin açıklama gücünün daha yüksek olduğunu göstermektedir. Ulaşılan bulgulara göre; brüt sermaye girişlerine dair veriler, net girişlere ait verilerden daha anlamlı sonuçlar vermektedir. Ayrıca yurtiçi sanayi üretimindeki, reel döviz kurundaki, küresel büyümedeki ve küresel likiditedeki artışlar, sermaye girişlerinin doğrudan yabancı yatırım dışında kalan bileşenlerinde aşırı artış olasılığını yükseltmektedir. Doğrudan yatırım girişlerindeki aşırı artışların belirli yurtiçi ve küresel değişkenlere tepkisi, diğer bileşenlerinkinden oldukça farklıdır. İlave olarak, brüt portföy girişlerindeki aşırı artışlar finansal kırılganlığa; brüt doğrudan yatırım ve brüt diğer yatırım girişlerindeki aşırı artışlar ise makroekonomik istikrarsızlığa daha duyarlıdır.
... For instance, Bruno et al. [16] provide empirical evidence that macroprudential policies are effective regulatory measures in mitigating bank and bond inflows to the Asia-Pacific countries [18]. In turn, Beirne and Friedrich [7,8] provide evidence that the effectiveness of macroprudential regulations in reducing capital flows also relies on the composition of the domestic banking system, such as the regulatory quality or banks' efficiency [1,63]. These empirical findings largely confirm the theoretical literature on macroprudential policies and their welfareenhancing character [32,34,46,48]. ...
After the Global Financial Crisis, the usage of capital controls and macroprudential policies has returned and becomes an essential element of the policy paradigm in different countries. However, our knowledge on the effectiveness of these policy instruments is still insufficient and requires serious empirical reconsideration. The main contribution of our paper is in identifying that capital controls (on both outflows and inflows) and macroprudential instruments are effective measures in reducing the volume of cross-border banking flows in a sample of 112 countries over the period 2000–2016. Using panel regressions incorporating country fixed effects, we find that FX and/or countercyclical reserve and countercyclical capital buffer requirements, reserve requirement ratios and concentration limits are the most effective macroprudential instruments to manage countries’ exposures to global liquidity fluctuations. Additionally, capital surcharges on SIFIs, limits on interbank exposures and foreign currency loans are also associated with a large reduction in flows, a finding which contributes to the literature by emphasizing the importance of macroprudential instruments aimed at financial institutions’ assets or liabilities. However, leverage ratios, limits on domestic currency loans, levy/tax on financial institutions, and other borrower related instruments appear to be insignificant regulatory measures. At times of large and volatile cross-border capital flows, it is desirable to employ both capital controls and macroprudential policies, with latter tend to be generally more effective measures in reducing the volume of cross-border banking flows. The results are robust to changes in the estimation methodology and varying sets of the control variables.
... We capture differences in demographic structure with Dependency ratio (young), the share of people under age 15 compared to those between 15 and 65, and Dependency ratio (old), the share of people over 65 compared to those between 15 and 65. We also include GDP per capita and GDP growth to control for the possibility that capital flows "downhill" from rich to poor countries or to faster-growing economies to achieve greater returns (Abiad, Leigh, & Mody, 2009). ...
Why do some countries run persistent current account surpluses? Why do others run deficits, often over decades, leading to enduring global imbalances? Such persistent imbalances are the root cause of many financial crises and a major source of international economic conflict. We propose that differences in wage-bargaining institutions explain a large share of imbalances through their effect on the trade balance. In countries with coordinated wage bargaining, wage growth in export industries can be restrained to ensure competitiveness, leading to persistent trade surpluses. We estimate the contribution of these institutions to trade balances in Organisation for Economic Co-operation and Development (OECD) member countries since 1977 and find ample support for our hypothesis. Contrary to much of the literature, the choice of fixed or floating exchange rate regimes has only a small effect on trade or current account balances. In other words, internal adjustment in surplus countries via wage-bargaining institutions trumps external adjustment by deficit countries.
... Since the mid-1980s, most emerging countries opted to liberalize their financial markets. Most of the related academic literature has focused on testing the informational efficiency of developed markets (See: Henry, 2000;Kim and Singal, 2000;Chordia, Roll, and Subramanyam, 2005;and Abiad, Daniel, and Ashoka, 2009) rather than that of emerging markets (e.g. Bekaert, Harvey, and Lundbald, 2007;Guidi and Gupta, 2011;and Rizvi et al., 2018). ...
We use a three-step process employing multifractal detrended fluctuation analysis to
study time-varying changes in the volatility and efficiency of Asian emerging equity
markets. Our findings suggest that, in emerging markets, long-term stability and
efficiency are linked to market development and liberalization. Our findings further
suggest that financial crises have a negative impact on the efficiency of emerging
markets but only in the short term.
... Somewhat surprisingly, when designing the common currency, the removal of capital controls, and the single market in financial services, the EU showed itself immune to the lessons from earlier experiences such as the Asian crisis, or the Nordic crisis of the early 1990s (Jonung et al 2009). Similarly, as late as 2009 three IMF researchers (Abiad et al 2009) could still argue that because, in contrasts to Asia, capital flowed downhill in Europe convergence had significantly accelerated. ...
Although the World Bank has labelled the EU a “convergence machine”, the process has stalled. Being heavily dependent on foreign capital inflows, the drying-up of international financial markets in 2008 led to a severe crisis in the East European member states, undoing much of the gains since the start of transition. The Eurocrisis, that erupted in 2010, and partly was caused by the 2008 financial meltdown, sparked a similarly severe crises in Southern member states as a result of which the EU’s north-south gap in per capita GDP is increasing again. This performance contrast sharply contrasts with the experience of countries such as Japan, South Korea, Taiwan, Singapore and Hong-Kong.
This paper argues that the differences in convergence performance can only be understood in terms of the interaction of macroeconomic, microeconomic and political factors. In particular it makes three points (1) The persistently high GDP growth rates required for successful catch-up invariably reflect high rates of investment. Through the credit channel, the switch to monetary disinflation and inflation targeting regimes ushered in a period of permanently lower growth. (2) Substantial inflows of foreign capital historically have proven to be a two-edged sword as they expose the debtor country to destabilising sudden stops, such as witnessed again since 2008. (3) On the microeconomic level, successful catch-up has relied on asymmetric integration into the world economy allowing emerging economies to enjoy the benefits of a liberal global order while not exposing their domestic economies to the full pressures of that system.
Accordingly, the path along which European integration integrated peripheral regions into the international economy is the principal cause of the failure to achieve rapid convergence. The EU’s insistence on a level playing field increasingly interferes with peripheral countries' need for asymmetric integration, whereas the single market in financial services in combination with the adoption of the common currency exposed the periphery to highly damaging shocks. The switch to monetary targeting and the common currency, in turn, has directly hindered convergence by depressing overall EU growth rates, and indirectly by promoting political pressures in the core countries to insist on a reciprocal mode of enlargement.
... By using data on credit to the non-financial sector we differentiate this from inter-bank lending, which is strongly correlated with financial intermediation and important in financial hubs such as the UK. We also include GDP per capita to control for the possibility that capital flows "downhill" from rich to poor countries to achieve greater returns in a relatively capital-scarce setting (Abiad, Leigh, and Mody, 2009) and GDP growth because faster-growing economies should attract capital from abroad. Given the importance of commodity price shocks for importers and exporters (in our sample, in particular Norway as an oil exporter), we also control for changes in the terms of trade. ...
Why do some countries run persistent current account surpluses? Why do others run deficits, often over decades, leading to enduring global financial imbalances? Such persistent imbalances are the root cause of many financial crises and a major source of international economic conflict. We propose that differences in wage-bargaining institutions explain a large share of imbalances through their effect on the trade balance. In countries with coordinated wage bargaining, wage growth can be restrained to ensure competitiveness, leading to long-term trade surpluses. We estimate the contribution of these institutions to trade balances in OECD member countries since 1977 and find ample support for our hypothesis. Although the introduction of the euro has clearly exacerbated the problem, no substantial difference otherwise exists between fixed and floating exchange rates. In other words, internal adjustment in surplus countries trumps external adjustment by deficit countries.
Purpose:This study examines the relationship between fiscal deficitsand current account deficits in SADC countries.Methods:A panel analysis using a random-effectsmodel with secondary datafrom2009 to 2020 was employed.Results:Higher fiscal deficits affected current account deficits in the SADC region.Real interest rates and trade openness are critical determinants of both deficits.Contributions:This study enhances the understanding of macroeconomic imbalances in the SADC region, guiding policymakers in creating tailored policy frameworks for economic stability and sustainable development.Novelty:The study provides a comprehensive analysis of the relationship between fiscal deficit and current account deficits in Southern African Development Community (SADC) 12-member countries, offering significant insights into the macroeconomic dynamics of the region.A panel analysis using a random effects model with data spanning September 2009 to December 2020 was employed, capturing trends and individual country effects.This study provides a robust examination of common trends and individual country effects, enriching the understanding of how these macroeconomicvariables are important within the SADC context.Its emphasis on tailored policy frameworks to address fiscal and external imbalances reflects a forward-looking approach, offering practical guidance for policymakers striving to enhance economic stability and sustainable development within the SADC region.As an area for further study, the same research can be replicated in BRICKS countriesand a comparative analysis can be conducted for a broader analysis
This chapter provides final discussions as well as concludes our pivot by discussing the results of our empirical analysis in light of the OCA theory and literature. There is a lack of agreement in the literature on whether the level of intra-EA factor mobility justifies sharing a common currency. Given an endogenous development of the currency union along the sample period toward higher levels of migration, we show with our analysis that the different conclusions of the literature can be strictly dependent on the sample period selected. Thus, we defend that our research work with this pivot to some extent reconciles the literature on labor mobility in the EA.KeywordsEAMigrationCapital flowsOptimal currency areasStabilizationEconomic crisis
This chapter analyzes different theories on how factor mobility can counteract both symmetric and asymmetric economic shocks in currency unions, as well as states the research questions of this pivot. Moreover, it gives the reader a summary of the literature on labor and capital mobility, highlighting their importance to the well-functioning of currency unions, where countries are not able to execute their own monetary policies by themselves. The chapter also discusses the possibility of endogenous development of the EA toward more factor mobility over time.KeywordsFactor mobility theoriesOptimal Currency AreasMigration and capital flowsEconomic shocksEconomic stabilization
Does Indian sovereign yield volatility reflect economic fundamentals, or whether it is a self-generated force flowing through markets with little connection to such fundamentals? To answer the question, this research explores the volatility dynamics and measures the persistence of shocks to the sovereign bond yield volatility in India from 1 January 2016, to 18 May 2022, using a family of GARCH models. The empirical results indicate the high volatility persistence across the maturity spectrum in the sample period. However, upon decomposing the markets into bull and bear phases, our results support the existence of weak volatility persistence and rapid mean reversion in the bear market. This shows that the economic response policies implemented by the government during the pandemic, including fiscal measures, have a restraining effect on sovereign yield volatility. For a positive γ, the results suggest the possibility of a “leverage effect” that is markedly different from that frequently seen in stock markets. Results further indicate that the fluctuations in Indian sovereign yields cannot be dissociated from inflation and money market volatility. Our findings herein provide valuable information and implications for policymakers and financial investors worldwide.
We re-examine the nexus between fiscal balances and current account balances for 18 OECD countries from 1995Q1 to 2018Q1 using panel cointegration and panel vector autoregressive (VAR). The findings confirm a long-run relationship between the fiscal balance and the current account balance. Our results indicate that strengthening the fiscal balance by one percentage point of GDP improves the current account balance by about 0.1–0.3 percentage points of GDP. On the other hand, an increase in real government consumption generally worsens the current account balance. The impact of the real effective exchange rate is not statistically significant.
This thesis empirically investigates commonly accepted theories in international economics. Do flexible exchange rates really help reducing external imbalances? Does globalisation always put downward pressure on production prices and markups? Does trade favour high-skilled workers at the expense of lower-skilled workers in advanced economies? The first chapter explores determinants of sustained and sizeable current account adjustments, based on a selection model to jointly assess determinants of current account reversals and their magnitude. These determinants include exchange rate regimes, as well as financial integration variables and structural policies. The second chapter highlights cross-industry heterogeneous responses of prices, productivity and markups to increased foreign competition. In the case of anti-competitive responses, two leads are investigated: market concentration and quality upgrading to address competition from low-wage countries. The third chapter presents an Input-Output decomposition of changes in employment into three channels: final consumption, trade and technology. This decomposition indicates drivers of skill-biased changes in employment in the case of France.
The Reserve Bank of India has taken a few measures since Independence to improve access to Banking services and inclusive growth. Dr.C.Rangarajan (2008) has seen that money related consideration must be taken up in a mission mode and proposed a National Mission on Financial Consideration (NMFI) including portrayal of all partners for proposing the generally arrangement changes required, and supporting partners in the area of open, private and NGO divisions in embraced limited time activities.Nachiket Mor committee report has set Framing a clear and detailed vision for financial inclusion and financial deepening in India. Articulating a set of design principles that will guide the development of institutional frameworks and regulation for achieving financial inclusion and financial deepening, including approaches to prudential regulation, consumer protection, and systemic risk management for institutions involved in financial inclusion and deepening. Financial services to each and every small business and low-income household in a flexible, convenient, reliable, and continuous manner.developing a comprehensive monitoring framework to track the progress of the financial inclusion and deepening efforts on nationwide basis. Inspite of these provisions the financial inclusion and financial literacy in rural areas in india need condsiderable policy changes .this research paper focuses on issues which will surely bring ground realities of women farm labourers of villages in rural Maharastra.
U radu se analizira sadržaj izbornog dokumenta tadašnje Demokratske opozicije Srbije “Program za demokratsku Srbiju” (nazvan i “Ugovor s narodom”), pre svega ona obećanja – 10 tačaka – koja je DOS predstavio kao akte koje će usvojiti „prvog dana prvog zasedanja novoizabrane Skupštine“. Sa distance od dve decenije moguće je utvrditi u kojoj su funkciji bila obećanja DOS-a na izborima 2000, da li su tada data obećanja ispunjena i u kojoj meri, te izvesti zaključak o neuspešnosti vlasti DOS-a i teškim posledicama te politike po zemlju. U cilju objektivizacije ocene o neuspešnosti DOS-ove politike primenjeni su kriterijumi objektivizacije napretka i nazatka koje je svojevremeno utvrdio akademik Radomir Lukić.
The paper seeks to determine the factors that drive the current account dynamics of the 11 EU members from Central and Eastern Europe (CEE). Panel data models are estimated on annual data for the period 1997–2017 and both domestic pull factors and external push factors are included. The models are, as a key innovation, estimated separately for floating and fixed exchange rate regimes. The current account exhibits substantial persistence in both cases. For the floaters, the current account is driven by domestic factors while external factors appear unimportant. For the fixers, the current account is mainly driven by external factors, suggesting there is substantial vulnerability to external developments. The analysis underscores the importance of the exchange rate regime for the drivers of the current account balance in the CEE countries.
Cambridge Core - Economic Development and Growth - Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos
Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos April 2020
Economic Growth and Structural Reforms in Europe - edited by Nauro F. Campos April 2020
This chapter provides a brief introduction of theoretical models related to international capital flows and discusses neoclassical and new growth theory and their implications about cross-border capital flows. Notations are used to show a simple empirical specification of neoclassical model for cross border capital flows and the determinants of capital flows. This chapter systematically reviews the vast empirical literature describing and attempting to resolve the Lucas paradox of why capital doesn’t flow from rich to poor countries.
We first propose a novel methodology for identifying episodes of strong equity and bond flows using estimates from a regime‐switching model that keeps context‐ and sample‐specific assumptions to a minimum. We then assess the impacts of U.S. stock market volatility (VIX) and U.S. monetary policy shocks on equity and bond flow episodes. Our results indicate that the impacts of both shocks differ across in‐ and outflow episodes and, based on an assessment of equity flows, vary considerably over time. While VIX shocks are mostly associated with asymmetric impacts across episodes, U.S. monetary policy shocks generate such asymmetries primarily over time.
Using industry data from Eurostat and applying the Rajan-Zingales methodology, we investigate the short-run real growth effects of foreign bank presence in the European Union. Our sample stretches from 2000 until 2012 and includes the phase of rapid financial integration before the global financial crisis as well as the following phase of financial fragmentation and bank deleveraging. We find evidence that foreign bank presence had a more than four times stronger growth effect during the crisis than in normal times. Growth effects are also stronger in times of domestic bank deleveraging. In light of these results, we conclude that a reintegration of the European banking sector is an important building block of future growth perspectives in the European Union.
Stock market integration is investigated using the minimum spanning tree (MST) technique, a technique that finds minimum total distance of edges that connect vertices (markets). The distance measure is a transformed variable of cross-correlation coefficients among the market returns or indexes. Prior studies have shown that financial openness led to financial market integration and encouraged foreign capital inflows, both long-run capital such as foreign direct investment, and short-run capital in the stock markets. However, this paper found that stock markets are clustered into regional areas especially when market return in both local currency units and US Dollar values were used in estimating correlation coefficients. In addition, markets responded differently to shocks in other markets. Although the degree of integration is dynamic through the observation periods, there is trend that the markets are becoming more integrated. It is also found that stock markets became more integrated when there were economic crises or strong market shocks in a leading developed market (subprime crisis in US for instance).
This study empirically investigates the existence of twin deficits—the impact of fiscal policy on the current account—among selected major oil-exporting countries. Given the huge effects of the oil proceeds on these economies, the study separates the effects of oil on the fiscal balance from its effect on the current account balance. The investigation took a further step by grouping these countries—based on their fiscal policy actions over the period of years under review—into pro-cyclical and counter-cyclical fiscal countries. In line with the existing literature, the impact of fiscal balance on the current account balance takes into consideration the contemporaneous effects brought about by exchange rate fluctuations, the growth in GDP, rate of openness and the growth in money supply. The models are estimated based on a panel of 31 oil-exporting countries over the period 1984–2013, using the two-stage least squares estimation techniques. The results from all countries estimations reveal the existence of twin-deficit in the total economy. In the non-oil economy, on the other hand, the evidence of twin-deficit disappears. This evidence is also reported in the counter-cyclical fiscal countries. Results from pro-cyclical fiscal countries indicated the total opposite, revealing the existence of twin-deficit in the non-oil economy, while this evidence does not occur in the total economy. The indisputable conclusion is that oil dominance continues to blur the existence of twin deficits among the oil-exporting countries.
The Lucas Paradox observes that capital flows predominantly to relatively rich countries, contradicting the neoclassical prediction that it should flow to poorer capital-scarce countries. In an influential study, Alfaro, Kalemli-Ozcan, and Volosovych (AKV) argue that cross-country variation in institutional quality can fully explain the Paradox, contending that if institutional quality is included in regression models explaining international capital inflows, a country’s level of economic development is no longer statistically significant. We replicate AKV’s results using their cross-sectional IFS capital flow data. Motivated by the importance of conducting inference in statistically adequate models, we focus on misspecification testing of alternative functional forms of their empirical model of capital flows. We show that their resolution of the Paradox relies on inference in a misspecified model. In models that do not fail basic misspecification tests, even though institutional quality is a significant determinant of capital inflows, a country’s level of economic development also remains a significant predictor. The same conclusions are reached using an extended dataset covering more recent IFS international capital flow data, first-differenced capital stock data and additional controls.
Using a large sample of advanced and emerging market economies over the period 1999-2012, we examine the effectiveness of macroprudential policies (MPPs) in managing cross-border bank flows. Conditioning on the structure of the banking sector in the MPP-implementing country, we find that higher regulatory quality and a higher credit-to-deposit ratio increase the effectiveness of MPPs, while a higher cost-to-income ratio has the opposite effect. If all three financial variables are evaluated at the median, the marginal effect of our preferred MPP measure leads to a reduction of international bank inflows in percent of GDP by around half a percentage point and is only marginally significant. However, when the more enhanced 25th (10th) percentiles of their respective distributions are considered, we observe, as a response to the same MPP measure, a reduction of bank inflows by 3.44 (5.39) percentage points that is highly statistically and economically significant. Additionally, we find that the structure of the domestic banking sector determines spillovers from MPPs across asset classes, while spillovers from MPPs across countries are a function of banking sector conditions both at home and abroad.
Even though the Great Recession has been a global crisis, the performance of emerging market economies has been heterogeneous during the crisis and the recovery. Several emerging economies in Europe were hit more severely than other emerging market economies, and for many emerging European countries the dynamics of output have been more similar to advanced economies.
The subprime crisis precipitated the worst recession amongst the OECD countries since the Second World War. Although the value of subprime assets as a proportion of total financial assets was relatively small, the excessive leverage of many US and UK financial institutions, the marked revaluation of the risk associated with securitised assets, together with the collapse in world trade, meant that the 2008–10 crisis was the worst since the Great Depression of 1929. Moreover, contagion effects, especially those initiated through the freezing of the interbank and international financial loans markets, meant that the impact of the crisis extended far beyond those relatively few countries (especially the US and UK) whose banks were holders of the ‘toxic assets’.1 In this chapter the impact of the financial crisis on the European Union Transition Economies (TEs) and the transition Central Asian Economies (CAEs) is examined.2 Particular attention is paid to the financial transmission mechanism that was crucial in determining the impact of the crisis on the TEs.
We construct a new indicator of financial development by estimating a regional effect on the probability that, ceteris paribus, a household is shut off from the credit market. By using this indicator we show that the level of local financial development enhances the probability an individual starts his own business, increases the creation of new firms and the level of competition, eases liquidity constraints, and promotes growth of firms. As predicted by theory, these effects are stronger for smaller firms than for larger ones, which can more easily raise funds outside of the local area. Overall, the results suggest local financial development is an important determinant of the economic success of an area.
We investigate empirically the determinants of the quality of governments in a large cross-section of countries. We assess government performance using measures of government intervention, public sector efficiency, public good provision, size of government, and political freedom. We find that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics of Muslims exhibit inferior government performance. We also find that the larger governments tend to be the better performing ones. The importance of (reasonably) exogenous historical factors in explaining the variation in government performance across countries sheds light on the economic, political, and cultural theories of institutions.
This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
In this paper we take a critical look at current European regional policies. First, we document the motivation for such policies, that is, the large income disparities across the regions of the EU15. Large disparities are certainly present. Second, we illustrate the various instruments adopted and discuss their underpinnings in established economic theories. Next, we look at available data, searching for three kinds of evidence: (1) if disparities are either growing or decreasing, we conclude they are neither; (2) which are the major factors explaining such disparities and, in particular, if they are the factors predicted by the economic models adopted by the Commission to justify current policies, we conclude this is most certainly not the case; (3) if there are clear signs that EU policies, as opposed to other social and economic factors, are actually reducing such disparities, we cannot find any clear sign of such desired impact. Our conclusion is that regional and structural policies serve mostly a redistributional purpose, motivated by the nature of the political equilibria upon which the European Union is built. They have little relationship with fostering economic growth. This casts a serious doubt on their social value and, furthermore, strongly questions extending such policies to future members of the European Union. A successful EU enlargement, in our view, calls for an immediate and drastic revision of regional economic policies.
— Michele Boldrin and Fabio Canova
Over the past decade European economic integration has seen considerable institutional success, but the economic performance of the EU has been varied. While macroeconomic stability has improved and an emphasis on cohesion preserved, the EU economic system has not delivered satisfactory growth performance. This book is the report of a high-level group commissioned by the President of the European Commission to review the EU economic system and propose a blueprint for an economic system capable of delivering faster growth along with stability and cohesion. It assesses the EU s economic performance, examines the challenges facing the EU in the coming years, and presents a series of recommendations. The report views Europe's unsatisfactory growth performance during the last decades as a symptom of its failure to transform into an innovation-based economy. It has now become clear that the context in which economic policies have been developed has changed fundamentally over the past thirty years. A system built around the assimilation of existing technologies, mass production generating economics of scale, and an industrial structure dominated by large firms with stable markets and long term employment patterns no longer delivers in the world of today, characterized by economic globalization and strong external competition. What is needed now is more opportunity for new entrants, greater mobility of employees within and across firms, more retraining, greater reliance on market financing, and higher investment in both R&D and higher education. This requires a massive and urgent change in economic policies in Europe.
The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth. Similarly, evidence based on microeconomic (firm- or industry-level) data shows some benefits of financial integration and the distortionary effects of capital controls, but the macroeconomic evidence remains inconclusive. At the same time, some studies argue that financial globalization enhances macroeconomic stability in developing countries, but others argue the opposite. This paper attempts to provide a unified conceptual framework for organizing this vast and growing literature, particularly emphasizing recent approaches to measuring the catalytic and indirect benefits to financial globalization. Indeed, it argues that the indirect effects of financial globalization on financial sector development, institutions, governance, and macroeconomic stability are likely to be far more important than any direct impact via capital accumulation or portfolio diversification. This perspective explains the failure of research based on cross-country growth regressions to find the expected positive effects of financial globalization and points to newer approaches that are potentially more useful and convincing.
The magnitude and the direction of net international capital flows do not fit neoclassical models. The fifty U.S. states comprise an integrated capital market with very low barriers to capital flows, which makes them an ideal testing ground for neoclassical models. We develop a simple frictionless open economy model with perfectly diversified ownership of capital and find that capital flows among the states are consistent with the model. Therefore, the small size and "wrong" direction of net international capital flows are likely due to frictions associated with national borders, not to inherent flaws in the neoclassical model. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.
We introduce imperfect creditor protection in a multicountry Schumpeterian growth model. The theory predicts that any country
with more than some critical level of financial development will converge to the growth rate of the world technology frontier,
and that all other countries will have a strictly lower long-run growth rate. We present evidence supporting these and other
implications, in the form of a cross-country growth regression with a significant and sizable negative coefficient on initial
per-capita GDP (relative to the United States) interacted with financial intermediation. In addition, we find that other variables
representing schooling, geography, health, policy, politics, and institutions do not affect the significance of the interaction
between financial intermediation and initial per capita GDP, and do not show any independent effect on convergence in the
regressions. Our findings are robust to removal of outliers and to alternative conditioning sets, estimation procedures, and
measures of financial development.
We present an overview of the financial structure of the enlarged European Union with 25 countries. We start by describing the financial system development in all member states since 1995, and then compare the structure between the old and new countries. Using financial measures we document the prevailing substantial differences in the financial structure between new and old member states after the enlargement in 2004. Finally, we compare the financial structures of an enlarged EU with those of the United States and Japan.
We examine the empirical role of different explanations for the lack of capital flows from rich to poor countries-the "Lucas Paradox." The theoretical explanations include cross-country differences in fundamentals affecting productivity, and capital market imperfections. We show that during 1970-2000, low institutional quality is the leading explanation. Improving Peru's institutional quality to Australia's level implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
We introduce imperfect creditor protection in a multicountry Schumpeterian growth model. The theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. We present evidence supporting these and other implications, in the form of a cross-country growth regression with a significant and sizable negative coefficient on initial per-capita GDP (relative to the United States) interacted with financial intermediation. In addition, we find that other variables representing schooling, geography, health, policy, politics, and institutions do not affect the significance of the interaction between financial intermediation and initial per capita GDP, and do not show any independent effect on convergence in the regressions. Our findings are robust to removal of outliers and to alternative conditioning sets, estimation procedures, and measures of financial development. © 2005 MIT Press
The authors present estimates of six dimensions of governance covering 199 countries and territories for four time periods: 1996, 1998, 2000, and 2002. These indicators are based on several hundred individual variables measuring perceptions of governance, drawn from 25 separate data sources constructed by 18 different organizations. The authors assign these individual measures of governance to categories capturing key dimensions of governance and use an unobserved components model to construct six aggregate governance indicators in each of the four periods. They present the point estimates of the dimensions of governance as well as the margins of errors for each country for the four periods. The governance indicators reported here are an update and expansion of previous research work on indicators initiated in 1998 (Kaufmann, Kraay, and Zoido-Lobat 1999a,b and 2002). The authors also address various methodological issues, including the interpretation and use of the data given the estimated margins of errors.
This paper shows that the effect of capital account liberalization on growth depends upon the environment in which that policy occurs. A theoretical model demonstrates the possibility of an inverted-U shaped relationship between the responsiveness of growth to capital account liberalization and institutional quality. Three empirical specifications based on the model are estimated using a panel of 71 countries. Estimates of all three specifications support the hypothesis of a non-monotonic interaction between the responsiveness of growth to capital account liberalization and institutional quality, with about one-quarter of the countries, those with better (but not the best) institutions exhibiting a statistically significant and economically meaningful effect of capital account openness on economic growth.
Despite the appreciation of the exchange rate, the eight Central and Eastern European countries (the CEE-8) that entered the European Union in May 2004 have achieved a decade of impressive export growth, expanding significantly their shares of world markets. Does this mean that the real exchange rate is irrelevant? If not, what other factors compensated for the appreciation to explain the apparently strong competitiveness of these economies? And will these favorable factors continue to power export growth? This paper places in international context the achievements of the CEE-8 and helps more broadly to identify the determinants of international competitiveness. Building from data at the six-digit level of disaggregation, it shows that the CEE-8 made an impressive shift in product quality and in the technological intensity of exports, and that these shifts associated with the structural transformation were also associated with increased market share. The analysis strongly suggests that, when trading in international markets, countries benefit from higher product quality. However, while the structural transformation achieved was valuable in raising market shares, the easy gains from this process may be over.
Having smoothly acceded to the European Union (EU) in May 2004, the overarch- ing objective for the EU’s new member states is to continue raising living standards to Western European levels. This Occasional Paper examines the progress toward income convergence achieved by the the EU’s eight Central and Eastern European countries thus far, the prospects for further income convergence over the medium term, and the policy challenges that these countries will face in facilitating the catch-up process.
We characterize the patterns of capital flows between rich and poor countries. Traditional economic models predict that capital should flow from capital-rich to capital-poor economies. We find that, in recent years, capital has been flowing in the opposite direction, although foreign direct investment flows do behave more in line with theory. Do these perverse patterns of flows dampen growth in non-industrial countries by depriving them of financing for investment? To the contrary, we find that non-industrial countries that have relied more on foreign finance have not grown faster in the long run. By contrast, growth and the extent of foreign financing are positively correlated in industrial countries. We argue that the reason for this difference may lie in the limited ability of non-industrial countries to absorb foreign capital.
We study the determinants of net capital income flows within the United States. We analyze a simple multi-state neoclassical model in which total factor productivity varies across states and over time and capital flows freely across state borders. The model predicts that capital will flow to states with relatively high output growth. Since relative growth patterns are persistent such states are also high output states, which implies that high output will be associated with inflows of capital and net outflows of capital income. Our empirical findings correspond well to the predictions of the model and indicate persistent net capital income flows and net cross-state investment positions between states which are an order of magnitude larger than observed capital income flows between countries. Thus, our results imply that frictions associated with national borders are likely to be the main explanation for 'low' international capital flows.
We investigate empirically the determinants of the quality of governments in a large cross-section of countries. We assess government performance using measures of government intervention, public sector efficiency, public good provision, size of government, and political freedom. We find that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics or Muslims exhibit inferior government performance. We also find that the larger governments tend to be the better performing ones. The importance of historical factors in explaining the variation in government performance across countries sheds light on the economic, political, and cultural theories of institutions.
The following values have no corresponding Zotero field:
ID - 4
Using a sample of 110 developed and developing countries for the period 1990-2004 we analyze the empirical characteristics of systemic sudden stops (3S) in capital flows --understood as large and largely unexpected capital account contractions that occur in periods of systemic turmoil -- and the relevance of balance sheet effects in the likelihood of their materialization. We conjecture that large real exchange rate (RER) fluctuations come hand in hand with 3S. A small supply of tradable goods relative to their domestic absorption -- a proxy for potential changes in the real exchange rate -- and large foreign-exchange denominated debts towards the domestic banking system, denoted Domestic Liability Dollarization, DLD, are claimed to be key determinants of the probability of 3S, conforming a balance-sheet effect that impacts on the probability of 3S in non-linear fashion. Regarding financial integration, the larger is the latter, the larger is likely to be the probability of Sudden Stop; however, beyond a critical point the relationship gets a sign reversion.
We provide new measures of ethnic, linguistic, and religious fractionalization for about 190 countries. These measures are more comprehensive than those previously used in the economics literature and we compare our new variables with those previously used. We also revisit the question of the effects of ethnic, linguistic, and religious heterogeneity on the quality of institutions and growth. We partly confirm and partly modify previous results. The patterns of cross-correlations between potential explanatory variables and their different degree of endogeneity makes it hard to make unqualified statements about competing explanations for economic growth and the quality of government. Our new data, which features the underlying group structure of ethnicities, religions and languages, also allows the computation of alternative measures of heterogeneity, and we turn to measures of polarization as an alternative to the commonly used index of fractionalization.
The self-assembly of cucurbit[7]uril (Q7) with o-carborane (1) produces a molecular ball bearing nanostructure (2). While investigating the possible role of o-carborane as a template for the controlled synthesis of Q7, new synthetic reaction conditions were discovered. Both the solvent and the reaction temperature had a marked effect on the relative percentages of cucurbit[n]uril (n = 5, 6, 7, 8) produced. The effect of the o-carborane in the reaction mixture is discussed.
We develop a standard model to show how transaction costs in international investment affect conventional tests of consumption risk sharing, both in a multilateral and a bilateral setting. We implement the tests in a novel international data set on bilateral holdings of equity, bonds, foreign direct investment (FDI) and bank loans. In our data, high foreign capital holdings are associated with international consumption risk sharing as implied by our theory. This is especially true of investment in equity or bonds, but not of foreign direct investment or bank loans. In our model, the implication is that transaction costs are higher for FDI and international loans. The discrepancy could reflect technological differences, but also the prospect of expropriation, perhaps most stringent for FDI or loans. We argue that expropriation risk is endogenous to both the borrower's institutions and its openness to international markets. The detrimental impact of poor institutions is muted in open economies, where the possibility of subsequent exclusion from world markets deters expropriation of foreign capital. We show the implied effects of institutions prevail in both the cross-section of consumption risk sharing and in observed international investment patterns.
We critically assess several of the key assertions underlying the global saving glut hypothesis. First, we investigate whether the behavior of the U.S. current account is anomalous in light of previous industrial country experience. Second, we determine whether East Asian current account balances are predictable using standard macroeconomic variables, augmented with institutional factors. Finally, we investigate whether higher levels of financial development in key East Asian economies would result in smaller current account surpluses. We find that a 1 percentage point increase in the budget balance would increase the current account balance by 0.10–0.49 percentage points for industrialized countries, and that the U.S. current account performance over the last four years is borderline anomalous. While more developed financial markets would lead to smaller current account balances for countries with highly developed legal systems and open financial markets, for key East Asian countries, greater financial development would cause higher saving. Asian current account surpluses seem to be driven by depressed investment, not excess saving.
Estimation of the dynamic error components model is considered using two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator. Both estimators require restrictions on the initial conditions process. Asymptotic efficiency comparisons and Monte Carlo simulations for the simple AR(1) model demonstrate the dramatic improvement in performance of the proposed estimators compared to the usual first-differenced GMM estimator, and compared to non-linear GMM. The importance of these results is illustrated in an application to the estimation of a labour demand model using company panel data.
We examine the capital flows–domestic investment relationship for 60 developing countries from 1979 to 1999. In the 1990s, even as liberalization attracted new flows, foreign capital stimulated less domestic investment than in the preceding decade. With greater financial integration, governments accumulated more international reserves and domestic residents diversified by investing abroad. Foreign investors were also motivated by diversification objectives rather than by unmet investment needs. Inflows were channeled increasingly through portfolio flows—or through foreign direct investment (FDI) with the characteristics of portfolio capital—resulting in weak investment stimulus. However, stronger policy environments strengthened the link between inflows and investment.
We construct estimates of external assets and liabilities for 145 countries for 1970–2004. We describe our estimation methods and key features of the data at the country and global level. We focus on trends in net and gross external positions, and the composition of international portfolios. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories accounting for this discrepancy.
This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized
method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our
GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation
in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying
restrictions and Hausman specification tests.
The neoclassical growth model accords with empirical evidence on convergence if capital is viewed broadly to include human investments, so that diminishing returns to capital set in slowly, and if differences in government policies or other variables create substantial differences in steady-state positions. However, open-economy versions of the theory predict higher rates of convergence than those observed empirically. The authors show that the open-economy model conforms with the evidence if an economy can borrow to finance only a portion of its capital, for example, if human capital must be financed by domestic savings. Copyright 1995 by American Economic Association.
This paper inquires into the causes of the contrasting experiences between Asia and Europe and asks what they bode for the future. It poses questions like: Is the contrast explicable in terms of the fact that Europe was earlier to begin the process of removing controls on cross-border portfolio capital flows? Is it explicable by the fact that Europe had better developed financial markets at the start of its regional monetary and financial integration project? Is the main difference deeper trade and factor market integration due to Europe’s Single Market project, compared to more partial and tentative moves toward regional trade integration in Asia? Or does the euro make a key difference through the elimination of exchange risk?
A large, untapped reservoir of potential partnerships between private financial institutions (banks, asset managers, private equity firms, etc.) and aid donors remains to be fully exploited. Banks, private equity and asset management firms are important parts of a broad set of private actors in the field. Private financial institutions take increasingly into account variables other than financial ones to assess their investment decisions around the world. The OECD Global Forum on Development could host a market place for ideas for improving and promoting donor-private financial institutions partnerships: an Innovation Laboratory on Development Finance. An OECD Development Finance Award hosted by the OECD Global Forum on Development should be created
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract
more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital does not flow more to countries that invest and grow more.
We call this puzzle the “allocation puzzle”. Using a wedge analysis, we find that the pattern of capital flows is driven by
national saving: the allocation puzzle is a saving puzzle. Further disaggregation of capital flows reveals that the allocation
puzzle is also related to the pattern of accumulation of international reserves. The solution to the “allocation puzzle”,
thus, lies at the nexus between growth, saving, and international reserve accumulation. We conclude with a discussion of some
possible avenues for research.
This paper evaluates the importance of property rights institutions', which protect citizens against expropriation by the government and powerful elites, and contracting institutions', which enable private contracts between citizens. We exploit exogenous variation in both types of institutions driven by colonial history, and document strong first-stage relationships between property rights institutions and the determinants of European colonization (settler mortality and population density before colonization), and between contracting institutions and the identity of the colonizing power. Using this instrumental variables strategy, we find that property rights institutions have a first-order effect on long-run economic growth, investment, and financial development. Contracting institutions appear to matter only for the form of financial intermediation. A possible interpretation for this pattern is that individuals often find ways of altering the terms of their formal and informal contracts to avoid the adverse effects of contracting institutions but are unable to do so against the risk of expropriation.
Recent research in international business cycles finds that international consumption comovements do not match the risk-sharing predictions of standard complete markets models. In this paper, the author asks whether two different types of explanations can help explain this result: (1) nonseparabilities between tradables and nontradable leisure or goods and (2) the effects of capital market restrictions on consumption risk sharing. She finds that risk sharing cannot be resolved by either explanation alone. However, when the author allows for both nonseparabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected. Copyright 1996 by University of Chicago Press.
A key economic issue is whether poor countries or regions tend to grow faster than rich ones: are there automatic forces that lead to convergence over time in the levels of per capita income and product? The authors use the neoclassical growth model as a framework to study convergence across the forty-eight contiguous U.S. states. They exploit data on personal income since 1840 and on gross state product since 1963. The U.S. states provide clear evidence of convergence, but the findings can be reconciled quantitatively with the neoclassical model only if diminishing returns to capital set in very slowly. Copyright 1992 by University of Chicago Press.
In this lecture, we use Schumpeterian growth theory, where growth comes from quality-improving innovations, to elaborate a theory of growth policy and to explain the growth gap between Europe and the US. Our theoretical apparatus systematizes the case-by-case approach to growth policy design. The emphasis is on three policy areas that are potentially relevant for growth in Europe, namely: competition and entry, education, and macropolicy. We argue that higher entry and exit (higher firm turnover) and increased emphasis on higher education are more growth-enhancing in countries that are closer to the technological frontier. We also argue that countercyclical budgetary policies are more growth-enhancing in countries with lower financial development. The analysis thus points to important interaction effects between policies and state variables, such as distance to frontier or financial development, in growth regressions. Finally, we argue that the other endogenous growth models, namely the AK and product variety models, fail to account for the evidence on the relationship between competition, education, volatility, and growth, and consequently cannot deliver relevant policy prescriptions in the three areas we consider. (JEL: O20, O30, O40) (c) 2006 by the European Economic Association.
This paper examines the robustness of explanatory variables in cross-country economic growth regressions. It employs a novel approach, Bayesian Averaging of Classical Estimates (BACE), which constructs estimates as a weighted average of OLS estimates for every possible combination of included variables. The weights applied to individual regressions are justified on Bayesian grounds in a way similar to the well-known Schwarz criterion. Of 32 explanatory variables we find 11 to be robustly partially correlated with long-term growth and another five variables to be marginally related. Of all the variables considered, the strongest evidence is for the initial level of real GDP per capita ...
Ce document examine la robustesse des variables explicatives dans le cadre de régressions internationals pour la croissance économique. Les résultats sont obtenus en utilisant une nouvelle méthode « Bayesian Averaging of Classical Estimates » (BACE), qui construit les estimateurs comme la moyenne pondérée des estimateurs des MCO pour chacune des combinaisons de variables. Les poids appliqués aux regressions sont justifiés sur la base d’un critère bayesien dans une façon similaire au critère bien connu de Schwarz. Sur les 32 variables explicatives, nous trouvons onze variables robustes partiellement corrélés avec la croissance à long terme et cinq autres variables qui sont marginalement liées. De toutes les variables considérées, le résultat le plus probant est obtenu pour le niveau initial du PIB par habitant ...
This paper proposes a simple model to study the relationship between domestic institutions - financial system, corporate governance, and property rights protection - and patterns of international capital flows. It studies conditions under which financial globalization can be a substitute for reforms of domestic financial system. Inefficient financial system and poor corporate governance in a country may be completely bypassed by two-way capital flows in which domestic savings leave the country in the form of financial capital outflows but domestic investment takes place via inward foreign direct investment. While financial globalization always improves the welfare of a developed country with a good financial system, its effect is ambiguous for a developing country with an inefficient financial sector/poor corporate governance. However, the net effect for a developing country is more likely to be positive, the stronger its property rights protection. This is consistent with the observation that developed countries are often more enthusiastic about capital account liberalization around the world than many developing countries. A noteworthy feature of this theory is that financial and property rights institutions can have different effects on capital flows.
We investigate the medium-term determinants of the current account using a model that controls for factors related to institutional development, with a goal of informing the recent debate over the existence and relevance of the "savings glut." The economic environmental factors that we consider are the degree of financial openness and the extent of legal development. We find that for industrial countries, the government budget balance is an important determinant of the current account balance; the budget balance coefficient is 0.21 in a specification controlling for institutional variables. More interestingly, our empirical findings are not consistent with the argument that the more developed financial markets are, the less saving a country undertakes. We find that this posited relationship is applicable only for countries with highly developed legal systems and open financial markets. For less developed countries and emerging market countries we usually find the reverse correlation; greater financial development leads to higher savings. Furthermore, there is no evidence of "excess domestic saving" in the Asian emerging market countries; rather they seem to have suffered from depressed investment in the wake of the 1997 financial crises. We also find evidence that the more developed equity markets are, the more likely countries are to run current account deficits.
In their wide-ranging paper, Prasad, Rajan, and Subramanian (PRS) update and explore a new dimension of the well-established, though seemingly perverse, Lucas puzzle—that capital tends to flow from poor to rich countries. Building on the recent finding by Gourinchas and Jeanne (2006) that capital flows to nonindustrial countries have been relatively concentrated among the slow, not the rapid growers, PRS document that current account balances for these countries are also positively correlated with long-run growth. Thus, countries that grew more quickly have been less reliant on foreign finance. In contrast, they find the opposite (but expected) negative correlation for industrial countries. After presenting a variety of relevant empirical relationships, the authors consider possible explanations for this new "stylized fact." Their preferred hypotheses focus on the role of underdeveloped domestic financial markets that limit countries' ability to absorb foreign capital and on countries' desire to avoid capital inflows that would cause overvalu- ation. They also discuss a variety of possible implications, including for interpreting recent global imbalances and informing policy toward capital account openness.
The authors revisit Western Europe’s record with labor–productivity convergence and tentatively extrapolate its implications for the future path of Eastern Europe. The poorer Western European countries caught up with the richer ones through both higher rates of physical capital accumulation and greater total factor productivity (TFP) gains. These (relatively) high rates of capital accumulation and TFP growth reflect convergence along two margins. One margin (between industries) is a massive reallocation of labor from agriculture to manufacturing and services, which have higher capital intensity and use resources more efficiently. The other margin (within industries) reflects capital deepening and technology catch-up at the industry level. In Eastern Europe the employment share of agriculture is typically quite large, and agriculture is particularly unproductive. Hence, there are potential gains from sectoral reallocation. However, the between-industry component of the East’s income gap is quite small. Hence, the East seems to have only one real margin to exploit: the within-industry one. Coupled with the fact that within-industry productivity gaps are enormous, this suggests that convergence will take a long time. On the positive side, however, Eastern Europe already has levels of human capital similar to those of Western Europe. This is good news because human capital gaps have proved very persistent in Western Europe’s experience. Hence, Eastern Europe does start out without the handicap that is harder to overcome.
The current diversity in the degree of financial development across the EU can be a great opportunity at a time where this area is poised to become increasingly financially integrated. Integration should accelerate the development of the most backward financial markets, and allow companies from these countries to access more sophisticated credit and security markets. In line with a large recent literature, it is reasonable to expect that financial integration will have a ‘growth dividend’ in Europe. This paper attempts to quantify this growth dividend, using both industry and firm-level data to estimate the empirical relationship between financial market development and growth, and to gauge how it will distribute itself across countries and sectors.
— Luigi Guiso, Tullio Jappelli, Mario Padula and Marco Pagano