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This paper discusses recent trends and investigates the drivers of capital flows across regions in the world, with emphasis on Sub-Saharan Africa. The post-global financial crisis behavior of capital flows into Sub-Saharan Africa is unique and differs from that of global capital flows. The structure of financial flows into Sub-Saharan Africa has shifted toward new sources, such as international bond issuances and debt inflows from non-Paris Club governments. The main message is that the behavior of capital flows into Sub-Saharan Africa differs from that of capital flows into global, industrial, and non-Sub-Saharan African developing countries. The regression analysis reveals that gross flows into Sub-Saharan African are predominantly influenced by external factors, such as foreign growth and uncertainty in global markets and policies. Capital flow behavior for Sub-Saharan African countries is different from that of industrial countries due to different economic structures, which render different transmission processes. The main findings suggest that pull and push factors are the driving forces of capital inflows for industrial countries and non-Sub-Saharan African developing countries-especially better economic performance, sound fiscal outcomes, a greater degree of financial openness, and stronger institutions. The impact of these drivers has become stronger in the 2000s. Macroeconomic policy can play an important role in attracting capital inflows. For instance, fiscal discipline promotes greater other investment inflows, and less flexible exchange rate arrangements (more exchange rate stability) foster portfolio investment inflows.
Bond Market --- Capital Flows --- Debt --- Debt Markets --- Finance and Financial Sector Development --- Financial Openness --- Gross Capital Inflows --- Investment Flows
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The global economy got off to a bumpy start this year, but growth in 2015 and 2016 looks to be broadly on track. Projections for developing countries in 2014 have been down downgraded by 0.5 percentage points to 4.8 percent mainly reflecting weak first quarter growth in the US due to weather and the conflict in Ukraine. Going forward growth is projected to firm to 5.3 and 5.5 percent in 2015 and 2016 supported by easy global financial conditions and rebounding exports as high-income countries continue to recover under the influence of a reduced drag from fiscal consolidation and improving labor markets. Financial conditions will eventually tighten, and when they do there is risk of further volatility. Most developing countries are in good fiscal and financial shape, but where vulnerabilities remain countries need to tighten policy to reduce the potential impact of external shocks. Overall, growth for developing countries will be solid but not strong enough to generate the income and employment gains needed to eliminate poverty by 2013. As a result, countries need to focus on structural reform in order to lift growth in and enduring and sustainable manner.
Capital Inflows --- Developing Countries --- Finance and Financial Sector Development --- Forecast --- Growth --- High-Income Countries --- Inflation --- International Economics and Trade --- Macroeconomics --- Macroeconomics and Economic Growth --- Monetary Easing --- Outlook --- Unemployment
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A large literature has argued that different types of capital flows have different consequences for macroeconomic stability. By distinguishing between foreign direct investment and portfolio and other investments, this paper studies the effects of the composition of capital inflows on output volatility. The paper develops a simple empirical model which, under certain conditions that hold in the data, yields three key testable implications. First, output volatility should depend positively on the volatilities of both foreign direct investment and portfolio and other inflows. Second, output volatility should be an increasing function of the correlation between both kinds of inflows. Third, output volatility should be a decreasing function of the share of foreign direct investment in total capital inflows, for low values of that share. The data provide strong support for all three implications, even after controlling for other factors that may influence output volatility, and after dealing with potential endogeneity problems. These findings call attention to the importance of taking into account the synchronization and composition of capital flows for output stabilization purposes, as opposed to just focusing on the volatility of each component of capital flows.
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This paper creates an index of capital controls to analyze the determinants of capital flows to Brazil, accounting for the endogeneity of capital controls by considering a government that sets controls in response to capital flows. It finds that the government reacts strongly to capital flows by increasing controls on inflows during booms and relaxing them in moments of distress. The paper estimates a vector autoregression with capital flows, controls, and interest differentials. It shows that controls have been temporarily effective in altering levels and composition of capital flows but have had no sustained effects in the long run.
Exports and Imports --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- International Investment --- Long-term Capital Movements --- International economics --- Capital flows --- Capital controls --- Capital inflows --- Capital outflows --- Private capital flows --- Balance of payments --- Capital movements --- Brazil
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This paper develops a model that focuses on the interaction of liquidity creation by financial intermediaries with capital flows and exchange rate collapses. The intermediaries’ role of transforming maturities is shown to result in larger movements of capital and a higher probability of crisis. These movements resemble the observed cycle in capital flows: large inflows, crisis and abrupt outflows. The model highlights how adverse productivity and international interest rate shocks may trigger a sudden outflow of capital and an exchange collapse. The initial shock is magnified by the behavior of individual foreign investors linked through their deposits in the intermediaries. The expectation of an eventual exchange rate crisis links investors’ behavior even further.
Exports and Imports --- Finance: General --- Foreign Exchange --- International Investment --- Long-term Capital Movements --- Portfolio Choice --- Investment Decisions --- International economics --- Currency --- Foreign exchange --- Finance --- Capital outflows --- Exchange rates --- Capital inflows --- Capital flows --- Liquidity --- Capital movements --- Economics --- United States
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Beginning in 1985 Italy embarked on a path of progressive removal of its system of controls on portfolio investment, a process formally completed with the abolition of all remaining restrictions in 1990. In this paper we review this policy of capital liberalization and integrate the analysis with an examination of the process of stabilization of the lira exchange rate in the 1980s. Various indicators of capital controls’ effectiveness and target zone credibility are used to identify the temporal relations among capital liberalization, exchange rate stabilization and capital flows.
Exports and Imports --- Foreign Exchange --- Financial Aspects of Economic Integration --- International Investment --- Long-term Capital Movements --- International economics --- Currency --- Foreign exchange --- Capital controls --- Exchange rates --- Capital flows --- Capital inflows --- Exchange rate stability --- Balance of payments --- Capital movements --- Italy
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This paper reviews the experiences of a number of European countries in coping with capital inflows. It describes the nature of the inflows, their implications for macroeconomic and financial stability, and the policy responses used to cope with them. The experiences suggest that as countries become more integrated with international financial markets, there is little room to regulate capital flows effectively. The most effective ways to deal with capital inflows would be to deepen the financial markets, strengthen financial system supervision and regulation, where needed, and improve the capacity to design and implement sound macroeconomic and financial sector policies. These actions will help increase the absorption capacity and resilience of the economies and financial systems to the risks associated with the inflows.
Exports and Imports --- Foreign Exchange --- Money and Monetary Policy --- International Investment --- Long-term Capital Movements --- Monetary Policy --- Currency --- Foreign exchange --- International economics --- Monetary economics --- Capital inflows --- Exchange rate flexibility --- Exchange rates --- Inflation targeting --- Capital movements --- Monetary policy --- Czech Republic
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Although capital inflows are generally beneficial to recipient countries, they also pose a challenge for the conduct of economic policy. This paper proposes a conceptual taxonomy to guide the design of policy responses in the face of capital flows. We explore how responses to capital surges should be differentiated based on the source of balance of payments pressures. We also examine whether the policy choices in emerging market countries conform to the taxonomy's predictions and find some correspondence, especially during periods of high global liquidity.
Exports and Imports --- Current Account Adjustment --- Short-term Capital Movements --- International Investment --- Long-term Capital Movements --- Open Economy Macroeconomics --- International economics --- Capital inflows --- Capital flows --- Current account surpluses --- Current account deficits --- Current account balance --- Balance of payments --- Capital movements --- Turkey
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We study the characteristics of credit booms in emerging and industrial economies. Macro data show a systematic relationship between credit booms and economic expansions, rising asset prices, real appreciations and widening external deficits. Micro data show a strong association between credit booms and leverage ratios, firm values, and banking fragility. We also find that credit booms are larger in emerging economies, particularly in the nontradables sector; most emerging markets crises are associated with credit booms; and credit booms in emerging economies are often preceded by large capital inflows but not by financial reforms or productivity gains.
Credit --- Business cycles --- Econometric models. --- Borrowing --- Finance --- Money --- Loans --- Exports and Imports --- Financial Risk Management --- Money and Monetary Policy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- International Investment --- Long-term Capital Movements --- Financial Crises --- Monetary economics --- International economics --- Economic & financial crises & disasters --- Credit booms --- Sudden stops --- Financial crises --- Capital inflows --- Capital movements --- Chile
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The question of how India should adapt monetary policy to ongoing financial globalization has gained prominence with the recent surge in capital inflows. This paper documents the degree to which India has become financially globalized, both in absolute terms and relative to emerging and developed countries. We find that despite a relatively low degree of openness, India's domestic monetary conditions are highly influenced by global factors. We then review the experiences of countries that have adapted to financial globalization, drawing lessons for India. While we find no strong relationship between the degree of stability in monetary conditions and the broad monetary policy regime, our findings suggest that improvements in monetary operations and communication?sometimes prompted by a shift to an IT regime?have helped stabilize broader monetary conditions. In addition, the experience of countries which used non-standard instruments suggests that room to regulate capital flows effectively through capital controls diminishes as financial integration increases.
Monetary policy --- Finance --- Globalization --- Global cities --- Globalisation --- Internationalization --- International relations --- Anti-globalization movement --- Banks and Banking --- Exports and Imports --- Foreign Exchange --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- International Investment --- Long-term Capital Movements --- Central Banks and Their Policies --- Banking --- Currency --- Foreign exchange --- International economics --- Exchange rates --- Capital inflows --- Open market operations --- Exchange rate arrangements --- Banks and banking --- Capital movements --- India
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