This paper analyzes waves in international capital flows. We develop a new methodology for identifying episodes of extreme capital flow movements using data that differentiates activity by foreigners ...and domestics. We identify episodes of “surges” and “stops” (sharp increases and decreases, respectively, of gross inflows) and “flight” and “retrenchment” (sharp increases and decreases, respectively, of gross outflows). Our approach yields fundamentally different results than the previous literature that used measures of net flows. Global factors, especially global risk, are significantly associated with extreme capital flow episodes. Contagion, whether through trade, banking, or geography, is also associated with stop and retrenchment episodes. Domestic macroeconomic characteristics are generally less important, and we find little association between capital controls and the probability of having surges or stops driven by foreign capital flows. The results provide insights for different theoretical approaches explaining crises and capital flow volatility.
► We develop a new method to identify episodes of extreme capital flow movements. ► Using gross instead of net flows yields very different results than previous work. ► Global factors, especially global risk, are correlated with all types of episodes. ► Contagion through trade, banking and region are correlated with certain episodes. ► Domestic factors are less important. Capital controls do not reduce capital waves.
Inflation Dynamics FORBES, KRISTIN J.
Brookings papers on economic activity,
10/2019, Letnik:
2019, Številka:
2
Journal Article
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Inflation dynamics have been difficult to explain over the last decade. This paper explores whether a more comprehensive treatment of globalization can help. CPI inflation has become more ...synchronized around the world since the 2008 crisis, but core and wage inflation have become less synchronized. Global factors (including commodity prices, world slack, exchange rates, and global value chains) are significant drivers of CPI inflation in a cross-section of countries, and their role has increased over the last decade, particularly the role of nonfuel commodity prices. These global factors, however, do less to improve our understanding of core and wage inflation. Key results are robust to using a less-structured trend-cycle decomposition instead of a Phillips curve framework, with the set of global variables more important for understanding the cyclical component of inflation over the last decade but not the underlying slow-moving inflation trend. Domestic slack still plays a role for all the inflation measures, although globalization has caused some “flattening” of this relationship, especially for CPI inflation. Although CPI inflation is increasingly determined abroad, core and wage inflation are still largely domestic processes.
This paper challenges the current belief that income inequality has a negative relationship with economic growth. It uses an improved data set on income inequality which not only reduces measurement ...error, but also allows estimation via a panel technique. Panel estimation makes it possible to control for time-invariant country-specific effects, therefore eliminating a potential source of omitted-variable bias. Results suggest that in the short and medium term, an increase in a country's level of income inequality has a significant positive relationship with subsequent economic growth. This relationship is highly robust across samples, variable definitions, and model specifications.
Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work ...suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence.
Countries are making more active use of macroprudential tools than in the past with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that ...these tools can accomplish specific domestic goals and should reduce a country's vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility, and they generate leakages to the nonbank financial system and spillovers through international borrowing, lending, and other cross-border exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The COVID-19 crisis provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. The experience to date suggests that macroprudential tools provide some benefits and should remain a focus of macroeconomic policy, but with realistic expectations about what they can accomplish.
The Homeland Investment Act provided a tax holiday for the repatriation of foreign earnings. Advocates argued the Act would alleviate financial constraints by reducing the cost to U.S. multinationals ...of accessing internal capital. This paper shows that repatriations did not increase domestic investment, employment, or R&D—even for firms that appeared to be financially constrained or lobbied for the holiday. Instead, a $1 increase in repatriations was associated with a $0.60 to $0.92 increase in share-holder payouts. Regulations intended to restrict such payouts were undermined by the fungibility of money. Results indicate that U.S. multinationals were not financially constrained and were well-governed.
Why are foreigners willing to invest over $2
trillion per year in the United States? This paper tests various hypotheses and finds that standard portfolio allocation models and diversification ...motives are poor predictors of foreign holdings of U.S. liabilities. Instead, foreigners hold greater shares of their investment portfolios in the United States if they have less developed financial markets. The magnitude of this effect decreases with income per capita. Countries that trade more with the United States also have greater portfolio shares in U.S. equity and bond markets. These results support recent theoretical work on the role of financial development in sustaining global imbalances and have important implications for whether the United States can continue to attract sufficient financing from abroad without major changes in asset prices and returns, especially in bond markets.
Has the occurrence of “extreme capital flow movements”—episodes of sudden surges, stops, flight and retrenchment—changed since the Global Financial Crisis (GFC)? And was the period at the outset of ...the Covid Crisis any different? This paper addresses these questions by updating and building on the dataset and methodology introduced in Forbes and Warnock (2012) to calculate the occurrence of sharp capital flow movements by foreigners and domestics into and out of individual countries. The results suggest that the occurrence of these extreme capital flow movements has not increased since the GFC, including during the early phases of the Covid Crisis (the first half of 2020). The drivers of these episodes, however, appear to have changed since the GFC. Extreme capital flow movements are less correlated with changes in global risk and more correlated with changes in oil prices. More generally, what used to be large global “waves” in international capital flows have more recently become more idiosyncratic “ripples”.
There is growing support for taxes on short-term capital inflows in emerging markets, such as the
encaje adopted by Chile from 1991 to 1998. This paper assesses whether the Chilean capital controls ...increased financial constraints for different-sized, publicly-traded firms. It uses an Euler-equation framework and shows that during the
encaje, smaller traded firms experienced significant financial constraints. These constraints decreased as firm size increased. Both before and after the
encaje, however, smaller firms did not experience significant financial constraints, and there is no relationship between firm size and financial constraints. Although Chilean-style capital controls may yield some benefits, any such benefits should be weighed against this cost of increasing financial constraints for small and mid-sized firms.
This paper tests if real and financial linkages between countries can explain why movements in the world's largest markets often have such large effects on other financial markets, and how these ...cross-market linkages have changed over time. It estimates a factor model in which a country's market returns are determined by global, sectoral, and cross-country factors (returns in large financial markets) and by country-specific effects. Then it uses a new data set on bilateral linkages between the world's five largest economies and approximately 40 other markets to decompose the cross-country factor loadings into direct trade flows, competition in third markets, bank lending, and foreign direct investment. In the latter half of the 1990s, bilateral trade flows are large and significant determinants of how shocks are transmitted from large economies to other stock and bond markets. Bilateral foreign investment is usually insignificant. Therefore, despite the recent growth in global financial flows, direct trade still appears to be the most important determinant of how movements in the world's largest markets affect financial markets around the globe.
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