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International Finance
Abstract
A particularly negative perceived side of globalization is associated with the idea of financial jugglers on Wall Street and elsewhere, who at the push of a button and in seconds move huge financial flows across the globe, thereby enriching themselves excessively, potentially destabilizing companies and countries and plunging people into misery everywhere. In fact, every day unimaginably large values of shares, bonds, credit contracts and -certificates as well as currencies are traded on the global financial markets, which far exceed all other global economic transfers in value. To this development have contributed the worldwide liberalization of capital flows, the growth of internationally operating banks and other financial institutions, the development of new, highly complex financial instruments and of course the worldwide networking of financial actors with always fast-working IT infrastructure.
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We review the debate on the association of financial globalization with inequality. We show that the within-country distributional impact of capital account liberalization is context specific and that different types of flows have different distributional effects. Their overall impact depends on the composition of capital flows, their interaction, and on broader economic and institutional conditions. A comprehensive set of policies-macroeconomic, financial and labor-and product-market specific-is important for facilitating wider sharing of the benefits of financial globalization.
This paper studies the interconnectedness of the global financial system and its susceptibility to shocks. A novel multilayer network framework is applied to link debt and equity exposures across countries. Use of this approach—that examines simultaneously multiple channels of transmission and their important higher order effects—shows that ignoring the heterogeneity of financial exposures, and simply aggregating all claims, as often done in other studies, can underestimate the extent and effects of financial contagion. The structure of the global financial network has changed since the global financial crisis, impacted by European bank’s deleveraging and higher corporate debt issuance. Still, we find that the structure of the system and contagion remain similar in that network is highly susceptible to shocks from central countries and those with large financial systems (e.g., the USA and the UK). While, individual European countries (excluding the UK) have relatively low impact on shock propagation, the network is highly susceptible to the shocks from the entire euro area. Another important development is the rising role of the Asian countries and the noticeable increase in network susceptibility to shocks from China and Hong Kong SAR economies.
This paper examines the evolving importance of common global components underlying domestic financial conditions. It develops financial conditions indices (FCIs) that make it possible to compare a large set of advanced and emerging market economies. It finds that a common component, “global financial conditions,” accounts for about 20 percent to 40 percent of the variation in countries’ domestic FCIs, with notable heterogeneity across countries. Its importance, however, does not seem to have increased markedly over the past two decades. Global financial conditions loom large, but evidence suggests that, on average, countries still appear to hold considerable sway over their own financial conditions—specifically, through monetary policy. Nevertheless, the rapid speed at which foreign shocks affect domestic financial conditions may also make it difficult to react in a timely and effective manner, if deemed necessary.
This paper uses a new measure of financial development to show that many benefits in terms of growth and stability can still be reaped from further financial development in most emerging markets. First, it defines financial development as a combination of depth, access and efficiency. Second, it highlights that the economic growth weakens at higher levels of financial development. Third, it indicates that the pace of financial development matters. Forth, it provides a new angle related to the tradeoffs of financial regulation. Finally, it finds that there is no “one-size-fits-all” in the sequencing of developing financial institutions versus markets, though as economies evolve the relative benefits from institutions decline and those from markets increase. © 2015, Universidad Externado de Colombia. All rights reserved.
The global financial crisis experience shone a spotlight on the dangers of financial systems that have grown too big too fast. This note reexamines financial deepening, focusing on what emerging markets can learn from the advanced economy experience. It finds that gains for growth and stability from financial deepening remain large for most emerging markets, but there are limits on size and speed. When financial deepening outpaces the strength of the supervisory framework, it leads to excessive risk taking and instability. Encouragingly, the set of regulatory reforms that promote financial depth is essentially the same as those that contribute to greater stability. Better regulation—not necessarily more regulation—thus leads to greater possibilities both for development and stability.
This paper analyzes the management of surges in capital inflows to Emerging Markets. It reviews the main policy tools, including fiscal and monetary policy, exchange rate policy, foreign exchange market intervention, domestic prudential regulation, and capital controls. A key conclusion is that, if the economy is operating near potential, if the level of reserves is adequate, if the exchange rate is not undervalued, and if the flows are likely to be transitory, then use of capital controls -in addition to both prudential and macroeconomic policy- is justified as part of the policy toolkit to manage inflows. Evidence from the current crisis suggests that controls aimed at achieving a less risky external liability structure reduced financial fragilities and increased growth resilience.
We examine the evolution of real per capita GDP around 100 systemic banking crises. Part of the costs of these crises owes to the protracted nature of recovery. On average, it takes about eight years to reach the pre-crisis level of income; the median is about 6 ½ years. Five to six years after the onset of crisis, only Germany and the US (out of 12 systemic cases) have reached their 2007-2008 peak in real income. Forty five percent of the episodes recorded double dips. Post-war business cycles are not the relevant comparator for the recent crises in advanced economies.
The prevailing model of international economic regimes is strictly positivistic in its epistemological orientation and stresses the distribution of material power capabilities in its explanatory logic. It is inadequate to account for the current set of international economic regimes and for the differences between past and present regimes. The model elaborated here departs from the prevailing view in two respects, while adhering to it in a third. First, it argues that regimes comprise not simply what actors say and do, but also what they understand and find acceptable within an intersubjective framework of meaning. Second, it argues that in the economic realm such a framework of meaning cannot be deduced from the distribution of material power capabilities, but must be sought in the configuration of state-society relations that is characteristic of the regime-making states. Third, in incorporating these notions into our understanding of the formation and transformation of international economic regimes, the formulation self-consciously strives to remain at the systemic level and to avoid becoming reductionist in attributing cause and effect relations. The article can therefore argue that the prevailing view is deficient on its own terms and must be expanded and modified. Addressing the world of actual international economic regimes, the article argues that the pax Britannica and the pax Americana cannot be equated in any meaningful sense, and that the postwar regimes for money and trade live on notwithstanding premature announcements of their demise.
The literature appears to have reached a consensus that financial globalization has had a “disciplining effect” on monetary policy, as it has reduced the returns from—and hence the temptation for—using monetary policy to stabilize output. As a result, monetary policy over recent years has placed more emphasis on stabilizing inflation, resulting in reduced inflation and greater output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists. One reason is likely to be that de facto measures of financial globalization are endogenous, and that instruments for financial globalization are elusive. This paper introduces a new instrument—financial remoteness—as a plausibly exogenous instrument for financial openness. It examines the relationship between financial globalization and median inflation levels over an 11-year cross-section from 1994 through 2004, as well as a panel of five-year median inflation levels between 1980 and 2004. The results confirm a negative relationship between median inflation and financial globalization in the base specification, but this relationship is sensitive to the inclusion of conditioning variables or country fixed effects, precluding any strong inferences. IMF Staff Papers (2009) 56, 198–221. doi:10.1057/imfsp.2008.34; published online 3 February 2009
This paper reviews the literature on the effects of capital account liberalization and stock market liberalization on economic growth. The various empirical measures used to gauge the presence of controls on capital account transactions as well as indicators of stock market liberalization are discussed. We compare detailed measures of capital account controls that attempt to capture the intensity of enforcement with others that simply capture whether or not controls are present. Our review of the literature shows the contrasting results that have been obtained. These differences may reflect differences in country coverage, sample periods and indicators of liberalization. In order to reconcile these differences, we present new estimates of the effects on growth of capital account liberalization and stock market liberalization. We find some support for a positive effect of capital account liberalization on growth, especially for developing countries.
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.
Rapid increases in international economic exchanges during the past four decades have made national economies very open to the world economy by historical standards. Much recent economic analysis has been devoted to exploring the effects of such internationalization on macroeconomic policy options, national competitiveness, and rewards to various factors of production. The central proposition of this volume is that we can no longer understand politics within countries without comprehending the nature of the linkages between national economies and the world economy, and changes in such linkages. The authors examine the effect of internationalization on the policy preferences of socio-economic and political agents within countries toward national policies and national policy-making institutions and on the national policies and policy institutions themselves.
Episodes of account liberalization increase the Gini measure of inequality, based on panel data estimates for 149 countries from 1970 to 2010. These episodes are also associated with a persistent increase in the share of income going to the top. We investigate three channels through which these impacts could occur. First, the impact of liberalization on inequality is stronger where credit markets lack depth and financial inclusion is low; positive impacts of liberalization on poverty rates also vanish when financial inclusion is low. Second, the impact on inequality is also stronger when liberalization is followed by a financial crisis. Third, liberalization seems to alter the relative bargaining power of firms and workers: the labor share of income falls in the aftermath of capital account liberalization.
The traditional mode of governance of national and global monetary and financial markets was obviously too weak and piecemeal to hinder the recurrent outbreak of regional and worldwide crises. The latest and gravest in this series triggered a massive institutional and operational overhaul, achieved both by the creation of new institutions and also by old and new ones being made stronger and more inclusive, foremost by introducing major emerging countries into their steering and oversight bodies. During this endeavour, national and institutional self-interests were initially subdued, but would come out forcefully later. As a consequence, the new edifices for multilateral market regulation and surveillance, as well as its financing, went only as far as the difficult compromise of an enlarged body of players would allow. Therefore, regional solutions or cooperation between like-minded countries were often seen as alternatives to a strong multilateral understanding, but are only able to complement the existing international monetary and financial system.
This paper re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between the real and the financial sector for 26 countries. Our time series analysis suggests that the evidence in support of a finance-led growth is weak once we take into account the dynamics of financial development and growth. We show that causality patterns depend on whether countries' financial development stems from the stock market or the banking sector. Stock market development tends to cause growth, while a reverse or bi-directional causality is present between banking sector development and output growth. We also bring evidence that causality patterns differ between market-based and bank-based economies suggesting that financial structure influences the causal direction between financial and economic development. Thus, the relation between financial and economic development is likely to be more complex than suggested in earlier studies.
In the last decade a growing number of developing countries have opened their financial systems by liberalizing capital flows and the rules governing the international operations of financial intermediaries. One explanation of this rush toward greater financial internationalization is that increasing interdependence generates domestic and foreign political pressures for capital account liberalization. While we find evidence for that hypothesis, we find that the proximate cause in developing countries more frequently is found in balance of payments crises. Politicians perceive that financial openness in the face of crisis can increase capital inflows by indicating to foreign investors that they will be able to liquidate their investments and by signaling government intentions to maintain fiscal and monetary discipline. The argument is explored through case studies of Chile, Indonesia, Mexico, and South Korea.
banks dominate intermediation of short-term domestic credit and foreign currency denominated funds. In this setting, monetary policy will mainly affect the economy through exchange rate management and/or changes in the domestic money supply. Direct measures, such as politically decided discreet changes in the exchange rate (mostly old style devaluations), and quantitative instruments (eg reserve requirements) will be the dominant tools of monetary policy. However, the importance of the interest rate channel of monetary policy transmission will grow as domestic financial markets develop and both firms and households finance their expenditure and investment to a greater degree in terms of domestic currency and at ever longer maturities, either in bond markets or through bank credit. This will in turn enhance the role of market-based indirect instruments, primarily interest rates on short-term lending by central banks to commercial banks, and create the conditions for market-determined exchange rates. There is some debate regarding to what degree, and under what conditions, the external liberalisation of domestic financial systems will further promote the development of the financial system. However, in spite of some financial stability risks, it seems that countries generally benefit through economies of scale, increased competition and deeper and more liquid financial markets, at least if certain minimum conditions are met.4 The cross-border financial integration triggered by external financial liberalisation will thus in most cases give a further boost to domestic financial market development and, in doing so, to the interest rate channel of monetary policy transmission. However, we also know from economic theory that co-movements of asset returns will increase as cross-border financial integration progresses, which, for small countries that are unable to affect global asset returns, will mean that domestic interest rates at longer maturities will increasingly be affected by global rates. In other words, although cross-border financial integration might initially give a boost to the interest rate channel due to favourable effects on the development of domestic capital markets, it will eventually be its demise.
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