scholarly journals Productivity Growth and Capital Flows: The Dynamics of Reforms

2017 ◽  
Vol 9 (3) ◽  
pp. 147-185 ◽  
Author(s):  
Francisco J. Buera ◽  
Yongseok Shin
Keyword(s):  
Financial Markets ◽  
Open Economy ◽  
Capital Flows ◽  
Large Scale ◽  
Small Open Economy ◽  
Economic Resources ◽  
Joint Dynamics ◽  
Capital Outflows ◽  
Investment Rates ◽  
Saving Rates

Why doesn't capital flow into fast-growing countries? Using a model with heterogeneous producers and underdeveloped domestic financial markets, we explain the joint dynamics of total factor productivity (TFP) and capital flows. When a large-scale economic reform removes preexisting idiosyncratic distortions in a small open economy, its TFP rises, driven by efficient reallocation of economic resources. At the same time, because of the domestic financial frictions, saving rates surge but investment rates respond only with a lag, resulting in capital outflows. The dynamics of TFP, capital flows, and idiosyncratic distortions in the model are consistent with what is observed during growth acceleration episodes, which often follow large-scale economic reforms. (JEL E21, E22, F21, F32, O16, O47)

scholarly journals Shocks Matter

2020 ◽  
Vol 20 (97) ◽  
Author(s):  
Ruy Lama ◽  
Juan Medina
Keyword(s):  
Open Economy ◽  
Capital Flows ◽  
Small Open Economy ◽  
Policy Instruments ◽  
Output Volatility ◽  
Macroprudential Policy ◽  
Foreign Exchange Intervention ◽  
Leading Role ◽  
Interest Rate Shocks ◽  
Capital Outflows

We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy rate that can largely reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXI takes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results highlight the importance of calibrating the use of multiple instruments according to the underlying shocks that induce shifts in capital flows.

scholarly journals Capital Flows and Foreign Exchange Intervention

2019 ◽  
Vol 11 (2) ◽  
pp. 127-170 ◽  
Author(s):  
Paolo Cavallino
Keyword(s):  
Financial Markets ◽  
Foreign Exchange ◽  
Open Economy ◽  
Capital Flows ◽  
Small Open Economy ◽  
Optimal Size ◽  
Economy Model ◽  
Foreign Exchange Intervention ◽  
Optimal Intervention ◽  
Intervention Policy

I consider a small open economy model where international financial markets are imperfect and the exchange rate is determined by capital flows. I use this framework to study the effects of portfolio flow shocks, derive the optimal foreign exchange intervention policy, and characterize its interaction with monetary policy. I derive the optimal intervention rule in closed form as a function of three implicit targets. Finally, using Swiss data, I estimate the model to quantify the inefficiencies generated by capital flow shocks and the optimal size of the intervention. (JEL E44, E52, E63, F31, F32, F33, F41)

Financial openness, bank capital flows, and the effectiveness of macroprudential policies

2021 ◽  
pp. 1-32
Author(s):  
Hao Jin ◽  
Chen Xiong
Keyword(s):  
Open Economy ◽  
Capital Flows ◽  
Open Economies ◽  
Small Open Economy ◽  
Empirical Support ◽  
Bank Capital ◽  
Macroprudential Policy ◽  
Funding Sources ◽  
Macroprudential Policies ◽  
Dynamic Stochastic

Abstract This paper quantitatively examines the macroeconomic and welfare effects of macroprudential policies in open economies. We develop a small open economy dynamic stochastic general equilibrium (DSGE) model, where banks choose their funding sources (domestic vs. foreign deposits) and are subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but increasingly rely on foreign funding. This endogenous shifts of funding composition significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results also suggest macroprudential policies are less effective in financially more open economies, and optimal policy should take capital flows into consideration. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.

Capital Flows, Default, and Renegotiation in a Small Open Economy

2017 ◽  
Author(s):  
Udara Peiris ◽  
Anna Sokolova ◽  
Dimitrios P. Tsomocos
Keyword(s):  
Open Economy ◽  
Capital Flows ◽  
Small Open Economy

OPTIMAL GROWTH, DEBT DYNAMICS, AND WELFARE UNDER GDP-BASED COLLATERALS

2018 ◽  
Vol 22 (8) ◽  
pp. 1905-1936
Author(s):  
Daria Onori
Keyword(s):  
Financial Markets ◽  
Open Economy ◽  
Small Open Economy ◽  
Optimal Growth ◽  
Public Expenditures ◽  
Growth Path ◽  
Financial Openness ◽  
Collateral Constraint ◽  
Debt Dynamics ◽  
Optimal Growth Path

We analyze the consequences of external debt collaterals on the optimal growth path of a country. We develop a small open economy model of endogenous growth where public spending can be financed by borrowing on imperfect international financial markets, where the country's borrowing capacity is limited. In contrast to the existing literature, which assumes that debt is constrained by the stock of capital, we investigate the consequences of gross domestic product (GDP)-based collaterals. First, we demonstrate that the economy may converge in a finite time, which is determined endogenously, to the regime with binding collaterals. Second, in such regime the steady-state public expenditures-to-GDP ratio is greater than that of the existing literature's models. Finally, we show that the degree of financial openness rises welfare if the collateral constraint is nonbinding and reduces welfare if the constraint binds. The first effect prevails always over the second and total intertemporal welfare increases.

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