Conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk. There is little evidence, however, that countries have increased risk sharing despite ...widespread financial liberalization. We show that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets, while actual markets are far from frictionless: financial contracts are incomplete and contract enforceability is limited. When countries remove official capital controls, default risk is still present as an implicit barrier to capital flows. If default risk were eliminated, capital flows would be six times greater, and international risk sharing would increase substantially.
► Empirically, international risk sharing improves little after financial integration. ► An incomplete market model with default risk can explain this puzzling observation. ► Default risk still limits capital flow and risk sharing even without capital controls. ► Eliminating default risk implies much larger flows and better risk sharing.
•Hurst exponents are developed using rolling and fixed windows for Indian stock markets.•Time-varying Hurst exponents indicate long memory persistence.•The efficiency gap between the estimated and ...theoretical Hurst level is developed.•The efficiency gap is unaffected by liquidity and market capitalization.•Net flow of foreign institutional investments increases the efficiency gap.
We examine the adaptive market hypothesis using the Generalized Hurst exponent, derived using fixed and rolling windows. We find that the Indian stock market is moving towards efficiency. We also ascertain a positive and significant link between the Indian market's efficiency gap and financial crises, other international shocks and major domestic policy and crisis-related events. Net foreign institutional investment increases the efficiency gap, although the impact is less for international events. Foreign institutional investment and market microstructure factors do not influence efficiency in an emerging market. This evidence would benefit a stock market liberalization policy review.
•We study the impact of capital account liberalization on bank funding structures.•Our analysis includes nearly 600 Latin American banks since the 1990s.•Capital account liberalization lowers bank ...equity and raises interbank funding.•The shifts are stronger for large and informationally less opaque banks.•The effects are stronger when global money market rates are lower.
Using a sample of almost 600 banks in Latin America, we show that capital account liberalization lowers the share of equity and raises the share of interbank funding in total liabilities of the banking system. These shifts are mostly due to large banks; smaller banks, instead, increase their resort to retail funding by offering higher average deposit interest rates than larger banks. We also find significant differences in the behavior of banks with seemingly greater information opacity. These findings have positive implications for macro-prudential regulation.
The world has been experiencing dramatic demographic change since the 1950s, with almost all countries facing ageing challenges this coming century. However, the timing and speed of this demographic ...transition are significantly asymmetric across countries. This paper examines the impacts of global demographic change on macroeconomic conditions, international trade and capital flows in major economies in a global multi‐region and multi‐sector general equilibrium model. We separately simulate demographic shocks in six regions of the world economy to understand how each shock individually affects the world economy and then combine these shocks to obtain the consequences of global demographic change. The paper finds that future demographic change will significantly impact each region's GDP, changing the landscape of the world economy. However, the spillover effects on GDP across the countries are relatively small. In young economies such as emerging Asia and Africa, while economic growth will significantly benefit from demographic dividends, demographic change does not improve per capita GDP. In ageing economies such as Japan and Europe, population ageing will decrease the real interest rate. However, this impact will be offset by rising interest rates in young economies. Due to the differential real interest rates, capital will flow from more ageing to less ageing economies. These capital flows can be substantial and beneficial for all economies.
Over the last two decades, the unprecedented increase in non-bank financial intermediation, particularly the rise of open-end mutual funds and exchange-traded funds, accounts for nearly half of the ...external financing flows to emerging markets, exceeding cross-border lending by global banks. Evidence suggests that investment fund flows enhance risk sharing across borders and provide emerging markets access to more diverse forms of financing. However, a growing body of evidence also indicates that investment funds are inherently more vulnerable to liquidity and redemption risks during periods of global financial market stress, increasing the volatility of capital flows to emerging markets. Benchmark-driven investments, namely passive funds, appear particularly sensitive to global risk shocks, such as tightening US dollar funding conditions, compared to their active fund counterparts. The procyclicality of investment fund flows to emerging markets during times of global stress poses financial stability concerns, with implications for the role of macroprudential policy.
•We explore the role of virtual proximity between countries for bilateral holdings of portfolio investments.•Bilateral portfolio investments are significantly affected by virtual proximity.•The ...impact of virtual proximity is stronger for portfolio equity than for portfolio debt investments.•Controlling for virtual proximity reduces the importance of traditionally used proxies for information asymmetries.•We find the largest positive effects of virtual proximity for investments among advanced countries.
This paper analyses international patterns of bilateral portfolio equity and debt investment in a gravity model framework. We contribute to the literature by exploring the role of virtual proximity – measured by bilateral internet hyperlinks between countries – as a novel proxy for cross-border information flows and cultural proximity more generally. Our findings show that bilateral portfolio investment is significantly affected by virtual proximity, indicating that countries which are more closely connected in terms of web content are more integrated financially. The effect is stronger for equity than for debt investment, highlighting the larger information sensitivity of equity investments, and is largest for investments among advanced economies. Moreover, including virtual proximity in estimations reduces the importance of traditionally-used proxies for information asymmetries and cultural proximity.
The article dwells upon modern approaches to determining the prospects of cooperation with specialized financial institutions for development in the interests of supporting economic growth. It is ...noted that the negative attitude to the prospects of cooperation with the financial aid institutions does not deny their potential. The modern economic relations give reasons to consider development finance institutions as a promising direction for rationalizing the financial openness of economies with an underdeveloped market environment. Involvement of development finance institutions into the economic policies, in the framework of special state programs, is able to extend the capacity of overcoming structural and functional defects of the underdeveloped financial sector that are immanent for the transitive economies. Cooperation with the financial institutions for development helps to overcome information asymmetry, to strengthen competition, to grow market institutions and implement non-speculative counter-cyclical measures for innovative development and industrialization. Paper analyses characteristics of cooperation between Ukraine and international development financial institutions. Also, author offers possible directions of maximizing the effectiveness of international financial support through the activities of national development finance institutions. The functionality and perspective directions of interaction of such institutions, tools and necessary prerequisites for raising their productive activity have been substantiated. Among this, the primary focus should be made not on the redistribution of financial resources, but rather on the intensification of attracting investment funds for the state economic development programs. Important functions of national development institutions at this stage are: establishing information and organizational support for international investment projects in Ukraine in order to develop the institutional environment of the financial sector, to restore investment attractiveness and to streamline the structure of financial openness.
Using a quarterly panel of 98 advanced as well as emerging and developing countries from 1990 to 2018, this paper examines covariates of sudden stops in capital inflows. It shows that domestic ...variables are related to the probability of incurring sharp reversals in capital inflows controlling for global push factors. In particular, negative growth shocks combined with high levels of leverage in the domestic private sector are significantly correlated with sudden stops. This is in line with real business cycle models including an occasionally binding credit constraint and income trend shocks.
Political credit cycles Kern, Andreas; Amri, Puspa
Economics and politics,
March 2021, 2021-03-00, 20210301, Letnik:
33, Številka:
1
Journal Article
Recenzirano
This paper tests the existence of political credit cycles, the positive comovement between credit and elections. While several single‐country studies point to the existence of this relationship, the ...link between electoral cycles and credit expansion has seen little exploration at the multicountry level. Using a comprehensive dataset covering bank and non‐bank credit in 165 countries from 1960 to 2013, we show that both government and private credit significantly increase in election years. This finding suggests the possibility that politicians use not only fiscal and monetary policy to court voters, but also implement credit policies such as interest rate subsidies and tax breaks for debt to enhance credit growth. We also find that a higher degree of financial openness weakens the frequency and magnitude of political credit cycles; yet, the conditional effect of financial openness is stronger for developing countries than developed economies.
•We posit a ‘great moderation’ in global capital flows, characterised by lower volumes and volatility.•We compare the level of international capital flows in 2005–06 to the post-crisis period of ...2013–14.•Gross inflows recovered more for economies with smaller pre-crisis imbalances and lower incomes.•They also recovered more where there were better growth expectations and looser macroprudential policy.•Countries with a more accommodative monetary policy increased gross capital outflows.
This paper highlights a recent ‘great moderation’ in global capital flows, characterised by smaller volumes and lower volatility of cross-border transactions. However, there are substantial differences across countries and regions which we analyse by comparing the level of international capital flows observed in 2005–06, immediately prior to the onset of the global financial crisis, to the post-crisis period of 2013–14, when global flows arguably settled at a ‘new normal’. We find that since the pre-crisis period, gross capital inflows recovered more for economies with smaller pre-crisis external and internal imbalances, lower per capita income, improving growth expectations, a less severe impact of the global financial crisis and less stringent macroprudential policy. On the asset side, countries with a more accommodative monetary policy, a milder impact of the crisis and oil exporters managed to increase gross capital outflows in the post-crisis period.
PDF
