The relationships among capital flow surges, reversals and sudden stops

2017 ◽  
Vol 9 (4) ◽  
pp. 393-413 ◽  
Author(s):  
Levan Efremidze ◽  
Sungsoo Kim ◽  
Ozan Sula ◽  
Thomas D. Willett
Keyword(s):  
Capital Flows ◽  
Foreign Capital ◽  
Capital Flow ◽  
Sudden Stops ◽  
Economic Policies ◽  
Content Type ◽  
Foreign Capital Flows ◽  
The Relationship ◽  
Flow Reversals ◽  
Capital Flow Reversals

Purpose This paper aims to investigate the relationship between capital flow surges, reversals and sudden stops. Design/methodology/approach Emphasizing the importance of looking at the behavior of domestic as well as foreign capital flows, the authors distinguish sudden stops from capital flow reversals by attributing the former to foreign capital flows only. Findings It is found that, despite the large differences in the number of surges identified by several different measures in the literature, a majority of surges do end in reversals of some type. The percentages tend to be slightly over half for surges in net capital flows, but on average, 70 per cent of gross surges end in sudden stops. Furthermore, contrary to popular belief, approximately half of sudden stops and net capital flow reversals are not preceded by surges. It is also found that surges that persist longer are more likely to turn into sudden stops and reversals. Research limitations/implications The authors find substantial empirical differences in the characteristics of sudden stops (based on gross foreign flows) and reversals (based on net flows). Practical implications Large inflows of financial capital are not always a strong indicator that a country’s economic policies will continue to provide stability in the future. They may signal an increase rather than reduction in the risk of future instability. Originality/value This study focuses on an issue that has been less explored to date, the relationship between capital flow surges, reversals and sudden stops. The authors distinguish, redefine and document differences among capital flow reversals and sudden stops. Duration of surges is related to the likelihood of having reversals and sudden stops.

Foreign Capital Flows to Emerging Markets: a Test of Policy Arbitrage

2004 ◽  
Vol 5 (1) ◽  
pp. 21-32
Author(s):  
Anand Shetty ◽  
John Manley
Keyword(s):  
Emerging Markets ◽  
Capital Flows ◽  
Foreign Capital ◽  
Capital Inflows ◽  
Economic Policies ◽  
National Economic ◽  
Foreign Capital Flows ◽  
Foreign Capital Inflows ◽  
Mexican Peso

Private capital that dominated the foreign capital inflows to emerging markets in the 1990s has been linked to recent financial crises in these markets. This linkage has raised questions about the market’s ability to discipline the flow of capital to emerging markets and the role of policy arbitrage. Policy-arbitrage hypothesis states that international capital flows will arbitrage across national economic policies in search of sound markets. This paper examines the pattern of changes in the foreign capital inflows to emerging markets in the 1990s and tests the policy-arbitrage hypothesis using 22 country-data for a period immediately following the Mexican peso crisis. The test results support the policy-arbitrage hypothesis.

Stress test of banks in India across ownerships: a VAR approach

2017 ◽  
Vol 34 (4) ◽  
pp. 527-554 ◽  
Author(s):  
Sreejata Banerjee ◽  
Divya Murali
Keyword(s):  
Exchange Rate ◽  
Capital Flows ◽  
Banking Sector ◽  
Foreign Capital ◽  
Financial Liberalization ◽  
Stress Test ◽  
Var Model ◽  
Macroeconomic Factors ◽  
Content Type ◽  
Foreign Capital Flows

Purpose This paper aims to examine whether the Indian banking system is robust to withstand unexpected shocks from external and domestic macroeconomic factors after financial liberalization in 1992. As proposed by Demirgüç-Kunt and Detragiache (1998) and Kaminsky and Reinhart (1999) banking crisis follows financial liberalization. India embarked financial deregulation from 1992, whereas the ongoing global financial crisis (GFC) could jeopardize bank portfolios. Design/methodology/approach Stress test is undertaken through the vector auto regressive (VAR) model to examine if decline in GDP, exchange rate volatility and foreign capital portfolio funds adversely impact bank asset quality through higher defaults. The VAR model is run for banks belonging to public, private or foreign ownership. Soundness of banks is measured by the non-performing assets (NPAs) with quarterly data from 1997 to 2014. Post-VAR estimation technique, Granger causality test (GC) and impulse response function (IRF) are used to check for robustness of the VAR model findings. Findings The authors found that there is little divergence among banks of different ownership in responding to the shocks from REER, foreign capital flows and GDP output gap. IRF shows that GDP shock to NPA of public and private banks takes more than nine and eight quarters to stabilize. Foreign banks are impacted by the same macroeconomic factors. The stress test exhibits that public banks are more vulnerable and need recapitalization. Moreover, domestic banks are not adversely affected by the GFC, and credit for this could be attributed to the Reserve Bank of India’s (RBI’s) regulatory policy. Research limitations/implications Surprisingly, capital market indices do not influence banks’ NPA, and this needs further investigation. The limitation arises from the fact that stock market index for banks was launched only in the early 2000. Missing data and limited number of banks shares traded in the market could explain the trivial results. Practical implications Findings of this study will be useful to RBI policymakers and bank managers. The exchange-rate risk faced by borrowers that lead to increased NPAs is an issue that the RBI would be interested to examine. The impact of foreign capital flows, adversely influencing the NPAs of banks, is a significant issue that the RBI is concerned with. Social implications Banking sector crisis has serious repercussions, causing loss of household savings and decline in confidence in the banking sector. Originality/value This topic was explored in India only by Bhattacharya and Roy in (2008). No other similar work has been done to the authors’ knowledge in stress test of banks in India across different ownership. The authors’ study period covers the GFC and shows that it has not caused devastation as it has in developed countries.

scholarly journals Optimal Policy for Financial Market Liberalizations: Decentralization and Capital Flow Reversals

2000 ◽  
Vol 1 (1) ◽  
pp. 19-42 ◽  
Author(s):  
Theo S. Eicher ◽  
Stephen J. Turnovsky ◽  
Uwe Walz
Keyword(s):  
Latin American ◽  
Financial Market ◽  
Open Economy ◽  
Capital Flows ◽  
Financial Liberalization ◽  
Capital Flow ◽  
Foreign Borrowing ◽  
Investment Boom ◽  
Flow Reversals ◽  
Capital Flow Reversals

Abstract Financial market liberalizations are an integral part of economic development. While initial booms in investment and output are commonly seen as signs of successful deregulation, they often reverse at a later stage as international capital flows turn negative and economic growth slows markedly. Such reversals of fortunes have commonly been attributed to incorrect policies that supposedly followed the initial, appropriate measures. It is unclear, however, if capital flow reversals are actually the result of policy reversals, or if they occur as part of the normal transition when financial liberalization is accompanied by a single suboptimal policy. The later hypothesis has not been explored in the theoretical literature.We construct a general equilibrium growth model of a small open economy, in which capital flow reversals are the result of a single, suboptimal policy imposed at the beginning of the financial liberalization. We show how improper taxation of foreign borrowing initially leads to strong growth fuelled by an investment boom and foreign borrowing. Still along the transition, however, the model predicts that capital flows must reverse endogenously at a later stage, as the debt burden rises and the country-specific risk premium increases. Our data on the Latin American and East Asian countries provide strong support for our hypothesis.

scholarly journals Foreign capital flows, exports and growth in Zambia

2015 ◽  
Vol 5 (4) ◽  
pp. 26-37
Author(s):  
Kunofiwa Tsaurai
Keyword(s):  
Capital Flows ◽  
Foreign Capital ◽  
Growth Enhancement ◽  
Vector Error Correction ◽  
Vector Error ◽  
Long Run ◽  
Short Run ◽  
Foreign Capital Flows ◽  
Causality Relationship ◽  
The Impact

This study investigates the causality between FDI net inflows, exports and GDP using Vector Error Correction Model (VECM) approach. The words foreign capital flows and FDI are used interchangeably in this study. The findings from the VECM estimation technique is six fold: (1) the study revealed a long run causality relationship running from exports and GDP towards FDI, (2) the study showed a non–significant long run causality relationship running from FDI and exports towards GDP and (3) the existence of a weak long run causality relationship running from FDI and GDP towards exports in Zambia. The study also found out that no short run causality relationship that runs from FDI and exports towards GDP, short run causality running from FDI and GDP towards exports does not exist and there is no short run causality relationship running from exports and GDP towards FDI. Contrary to the theory which says that FDI brings along with it a whole lot of advantages (FDI technological diffusion and spill over effects), the current study found that the impact of FDI in Zambia is not significant in the long run. This is possibly because certain host country locational characteristics that ensures that Zambia can benefit from FDI inflows are not in place or they might be in place but still not yet reached a certain minimum threshold levels. This might be an interesting area for further research. On the backdrop of the findings of this study, the author recommends that the Zambian authorities should formulate and implement export promotion strategies and economic growth enhancement initiatives in order to be able to attract more FDI.

scholarly journals An Empirical Investigation on Foreign Capital Inflows and Economic Development in Nigeria

2020 ◽  
pp. 63-76
Author(s):  
G. Tunde, Monogbe ◽  
J. Emeka, Okereke ◽  
P. Ebele, Ifionu
Keyword(s):  
Economic Development ◽  
Foreign Direct Investment ◽  
Capital Flows ◽  
Direct Investment ◽  
Foreign Capital ◽  
Capital Inflows ◽  
Portfolio Investment ◽  
Foreign Portfolio Investment ◽  
Foreign Capital Flows ◽  
Foreign Capital Inflows

In an attempt to attained sustainable level of economic development in a nation, empirical studies as well as financial theories posit that foreign capital inflows play a lead role. As such, this study set out to empirically investigate the extent to which foreign capital flows promotes economic development in Nigeria. Time series data between the periods 1986 to 2018 were sourced from the central bank of Nigeria statistical bulletin and world bank data based. The study proxied foreign capital flows using foreign direct investment, foreign portfolio investment, foreign aids and external borrowings which is decomposed into multilateral and bilateral loans while Human development index is used as proxy for economic development. The study further employed unit root test, co-integration test, error correction model and granger causality test to ascertain the direction of relationship. Findings reveal that of the five indices of foreign capital inflows, three (foreign  portfolio investment, foreign aids and bilateral loan) prove to be significant in promoting economic development in Nigeria, while foreign direct investment and multilateral loan are negatively  related to economic development in Nigeria. As such, the study conclude that foreign capital inflows in the form of foreign portfolio investment, foreign aids and bilateral loans are significant in boosting economic development in Nigeria. Therefore, we recommend that managers of the Nigerian economic should create an enabling financial environment as this will help in accelerating further inflows of portfolio investment and thus boost economic development in Nigeria.

scholarly journals The Influence of Financial Inclusion and Macroeconomic on Foreign Direct Investment (FDI) Flows in The Organization of Islamic Cooperation (OIC) Countries

2021 ◽  
Vol 11 (1) ◽  
pp. 71
Author(s):  
Farma Andiansyah
Keyword(s):  
Interest Rates ◽  
Capital Flows ◽  
Foreign Capital ◽  
Panel Data Analysis ◽  
Rapid Development ◽  
Financial Inclusion ◽  
Analysis Tool ◽  
Macroeconomic Variables ◽  
Negative Effect ◽  
Foreign Capital Flows

Foreign capital flows are important factors in the development of sustainable economies, especially in developing countries such as the OIC countries. Lately, the rapid development of the financial sector and macroeconomic stability became a serious concern by foreign investors, where financial inclusion and macroeconomics played an important role in attracting direct foreign capital flows (FDI). The study aims to investigate the role of financial inclusion and macroeconomic variables on the foreign direct flow of capital (FDI) by using data panels in 8 OKI member States during the 2012-2018 time span. The research uses the Fix Effect Model (FEM) Panel data Analysis tool, which is believed to be able to explain the correlation between independent variables and more accurate dependents. As for the results of the study showed that in partial only variable avaibility (the number of branches of the bank/100,000 adults) is a significant positive draws FDI in the OKI country. While on macroeconomic variables the exchange rates have significant negative effect on FDI, while interest rates and economic growth have significant positive relationships in attracting FDI.

Sign in / Sign up

Export Citation Format

Share Document