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Finance Final > Capital Flows > Flashcards

Capital Flows Flashcards

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1
Q

What is Financial Globalization

A

It measures the freedom of capital flows expressed as (EX-IM)/GDP

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2
Q

de Jure vs de Facto Financial Openness

A

de Jure: What are restrictions to international capital movements?
de Facto: How much international trade in financial assets?

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3
Q

Types of assets

A

-Portfolio investment
-Foreign Direct Investment (FDI)
-Other investments
-Derivatives
-Reservs

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4
Q

What is Portfolio Investment

A

Buying shares of a company in another country (debt), or government bonds

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5
Q

What is Foreign Direct Investment

A

Greater than 10% ownership in a foreign company

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6
Q

What are Other Investments

A

Cross border bank lending through bank loans and trade credit

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7
Q

What are Reserves

A

Savings or liquid funds

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8
Q

What does the Chinn-ito index show about de Jure financial openness?

A

Chinn-ito index shows movement towards greater openness with -2.5= completely closed and 2.5= completely open. However, more so for developed than developing economies.

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9
Q

What are Flows

A

The value of assets traded for a year:
-represented as Inflows/GDP and Outflows/GDP

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10
Q

What do Inflows/GDP represent

A

The net purchase of domestic assets by foreign investors

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11
Q

What do Outflows/GDP represent

A

The net purchase of foreign assets by domestic investors

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12
Q

What are Stocks

A

The value of all assets held in a year (cumulative of flows)

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13
Q

How to calculate Stocks over multiple years

A

-At = At-1 + at
-At = At-2 + at-1 + at
-etc

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14
Q

How to calculate International Integration Measure

A

(Inflows + Outflows)/GDP

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15
Q

Between Flows and Stocks; what is more volatile

A

Flows are more volatile, especially in crisis (ex. 2008 collapse was accelerated by banks pulling out capital in foreign markets)

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16
Q

What does the Solow model explain about the first financial globalization

A

Capital-scarce countries should have a high return on capital (capital flows from capital abundant countries to capital scarce countries)

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17
Q

what is the Solow model equation

A

yt=At(kt)
-At= efficiency parameter (technology) or TFP (Total Factor Productivity)
-kt= capital
-yt= output (produced using inputs more or less efficiently)

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18
Q

What is the Marginal Productivity of Capital (MPK)

A

-The additional unit of output per unit of capital (return on capital)
-In aggregate: decreasing returns (MPK = derivative of yt/ derivative of kt)

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19
Q

What is the Washington Consensus

A

Collection of ideas in 1990’s aimed at modernizing, reforming, deregulating and opening economies.

20
Q

What is the Lucas Puzzle

A

Capital flows towards developed countries from developing countries rather than the other way around.

21
Q

What is the explanation of the Lucas Puzzle

A

That Solow’s TFP=A is not constant, but rather much higher in developed countries causing capital to flow there.

22
Q

What is International Risk Sharing (risk diversification)

A

If investors are risk-averse they will diversify investments into multiple countries

23
Q

Are financial markets globally integrated?

A

Investors still tend to hold large share of investments either domestically or geographically close.

24
Q

What does the equation Y= C+I+G+EX-IM represent?

A

National Income identities

25
Q

Difference between GDP and GNI?

A

-GDP is the value of all final goods and services produced within the national border (products)
-GNI is the value of all final goods and services produced by national factors of production (income)

26
Q

How to calculate GNI

A

GNI = GDP + NFI (Net receipts of Factor Income in Rest of the World)

27
Q

How to calculate NFI

A

NFI = Income residents receive from abroad - income that foreigners receive from domestic country

28
Q

What is the Current Account (CA)

A

A nations transactions with the rest of the world

29
Q

How to calculate Current Account

A

-CA= EX - IM +NFI –> = S-I
- CA = S-I or EX - IM + NFI

30
Q

CA surplus vs deficit

A

-CA surplus: the country is saving more than investing (lending money to the world)
-CA deficit: the country is spending more than investing (borrowing money from the world)

31
Q

What is the Balance of Payment (BOP)

A

the register of all economic transactions with foreign economic agents

32
Q

How to calculate BOP

A

-CA + FA (Financial Account) + KA (Capital Account)
-must =0

33
Q

How to calculate Foreign Accounts (FA)

A

-Records flow of financial assets (FDI, NPF, and Net Other)
-FA= Inflows - Outflows

34
Q

How to calculate Capital Accounts (KA)

A

-Records flow of non-financial assets (ex. debt forgiveness)
-KA= non-financial Inflows - non-financial Outflows

35
Q

What two factors drive Current Accounts

A

-Consumption Smoothing: If anticipated future income is high, countries will run a current account deficit
-Demographics: Ageing countries should save and run current account surpluses

36
Q

What causes domestic distortions of CA

A

-Too high private savings: lack of social insurance, lack of financial development
-Too low private savings: asset bubbles, excessive leverage

37
Q

What causes systemic distortions of CA

A

eg. After the Asian Crisis, emerging markets ran a CA surpluses were so large that they drove down interest rates and incentivized over-borrowing

38
Q

What is an explanation for the Chinese Saving Puzzle

A

Domestic financial distortions, artificial ageing, and lack of social insurance

39
Q

How to Calculate Net External Position (NFA)

A

-NFAt= NFAt-1 + CAt
-if a country runs CA deficit, NFA deteriorates

40
Q

What are capital gains or losses

A

-Changes in the value of assets and liabilities, influenced by the market value or exchange rate
-NFAt - NFAt-1 = CA + capital gains or losses

41
Q

What is the US exorbitant privilege

A

-Gourinchas and Rey: return on US assets held by foreigners (US debt) is less than the return on foreign assets held by the US

42
Q

What is exorbitant duty

A

The consequence of exorbitant privilege when there is a financial crisis

43
Q

What is an external adjustment

A

-Mechanisms used to close CA deficit
- 2 types: Trade Channel and Financial Channel

44
Q

What is the Trade Channel

A

-consume less than what is produced
-run trade surplus

45
Q

What is the Financial Channel

A

-Make capital gains on NFA
-higher return on foreign assets
-default

Finance Final (4 decks)

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