China: capital flight or renminbi internationalization?

During 2014–2016, many analysts have claimed the occurrence of a capital flight in China due to the reduction of the country's foreign reserves by over US$800 billion. This paper aims therefore to answer the question: did China really undergo a capital flight in this period? Its methodology includes a detailed analysis of the Chinese external stocks and flows between 2014 and 2016, and an examination of the currency hierarchy and the international usage of the renminbi (RMB). The authors conclude: the fall in the foreign reserves that occurred in China in 2015–2016 was partially due to (i) a strategy of the Chinese government to diversify its international assets; and (ii) Chinese residents (private entities) increasing their foreign-asset holdings. Besides that, there did indeed occur a capital flight in China in 2015–2016, mostly due to a reduction of the non-resident deposits and loans, but these outflows were partially in RMB. Due to that core difference, the effects on the domestic economy are much lower. Furthermore, the RMB outflows may contribute to the internationalization of the RMB.

Globalization of capital, erosion of economic policy sovereignty, and the lessons from John Maynard Keynes

This article observes that current macroeconomic policy modeling, centered on domestic agents or agencies, fails to recognize the role that global investors play in determining the space for effective domestic macroeconomic policies, and argues that these actors must be brought to the center of macro analysis if one wants to understand how policies work in the global financial context. The article describes the key features of global investors, discusses their power to determine the prices at which public-sector liabilities (money and debt) trade in the international markets, and considers how this power affects the effectiveness of macroeconomic policies by national governments. As a result, no government is truly sovereign in a globalized world, and every government is subject to an intertemporal budget constraint (IBC), although, of course, not all governments are born equal and not all IBCs are equally binding: government IBCs are elastic, endogenous to global investor decisions, and yet ineluctable. The article concludes that choosing the correct country policy stance in today's financial global context would benefit from revisiting some of the key policy lessons that John Maynard Keynes left with us, considering his deep knowledge of global financial markets and how they affect country economies.

Financialization, premature deindustrialization, and instability in Latin America

The paper analyses the relation between premature deindustrialization in Latin America and what is termed premature financialization. Premature financialization is defined as a turn to finance, organized as an industrial concern, which is a vehicle for accumulation before the process of industrialization has reached maturity. This contrasts with developed countries where financialization occurs after an advanced stage of economic and social development has been reached, and where the growth of the financial sector, beyond a certain threshold, can be detrimental to economic activity. The paper examines the consequences of premature financialization for investment, growth, and financial stability.

Financialization revisited: the economics and political economy of the vampire squid economy

This paper explores the economics and political economy of financialization using Matt Taibbi's vampire squid metaphor to characterize it. The paper makes five innovations. First, it focuses on the mechanics of the ‘vampire squid’ process whereby financialization rotates through the economy, loading sector balance sheets with debt. Second, it identifies the critical role of government budget deficits for the financialization process. Third, it identifies the critical role of central banks, which are the lynchpin of the system and now serve as de facto guarantors of the value and liquidity of private sector liabilities. Fourth, the paper argues financialization imposes a form of policy lock-in. Fifth, it argues financialization transforms popular attitudes and understandings, thereby generating political support despite poor economic outcomes. In effect, there is a politics of financialization that goes hand-in-hand with the economics. The paper concludes with some observations on why mainstream macroeconomics has no equivalent construct to financialization and discusses the disquieting unexplored terrain that the economy is now in.

Rent-seeking and asset-price inflation: a total-returns profile of economic polarization in America

This paper reconstructs the National Income and Product Accounts to add asset-price (‘capital’) gains to national income to derive a measure of total returns. It also treats rent-extraction as a charge against national income and GDP, not as a contribution to national output. Segregating the Finance, Insurance, and Real Estate sector from the rest of the private sector shows that most growth in wealth and income derives from rentier activities – from the dynamic of finance capitalism more than that of industrial capitalism.

Effectiveness of capital controls in dampening international shocks

This study is a contribution to the ongoing debate on whether capital controls are effective in buffering international shocks and reducing capital flows volatility. The author demonstrates that capital controls can considerably mitigate the effects of monetary and exchange rate shocks and reduce the volatility of capital inflows to emerging markets. This study analyses quarterly data of 28 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital controls actions. Using panel analysis, autoregressive distributed lag, and local projections approaches, this study finds that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond anti-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. The author also finds that capital controls on inflows are more effective for reducing the volatility of capital flows compared to capital controls on outflows.

Wage- and profit-led growth regimes: a panel-data approach

The extensive empirical effort made in the growth and distribution literature to estimate whether economic growth is wage- or profit-led has not sufficiently considered the theoretical foundation of the Neo-Kaleckian model. This paper attempts to respect key tenets of the investment function by estimating a panel-data model in which country-specific structural characteristics and possible endogenous relationships in income distribution and economic growth are explicitly considered. The identification strategy is based on several estimates of the capital stock and the rate of capacity utilization for 61 countries over the period between 1995 and 2014. The main results suggest that the growth regime was wage-led in developed countries, while most developing countries exhibited a profit-led growth regime. Interestingly, however, while the profit-led regime occurs through the international trade channel in Latin American countries, in other developing countries, the causality channel is mainly related to the domestic investment function.

Distribution, wealth and demand regimes in historical perspective: the USA, the UK, France and Germany, 1855–2010

Most empirical macroeconomic research is limited to the period since World War II. This paper analyses the effects of changes in income distribution and in private wealth on consumption and investment covering a period from as early as 1855 through to 2010 for the UK, France, Germany and the USA, based on the data set of Piketty and Zucman (2014). We contribute to the study of wealth effects, of financialization, and of the nature of demand regimes. We find that overall domestic demand has been wage-led in the USA, the UK and Germany. Total investment responds positively to higher wage shares, which is driven by residential investment. For corporate investment alone, we find a negative relation. Wealth effects are found to be positive and significant for consumption in the USA and the UK, but weaker in France and Germany. Investment is negatively affected by private wealth in the USA and the UK, but positively in France and Germany.