lecture 6 - sara - financial globalisation: accounting facts and history

Question 1

why do financial flows between countries happen?

Answer 1

they happen because of trade transactions (exports and imports) that need to be supported by financial transactions and also due to asset exchanges

Question 2

what is the equation for the current account of an economy?

Answer 2

CA= NX + NI where NX stands for net exports which is given by exports of goods and services minus imports and NI stands for the net income from abroad ie interest income and remitances

Question 3

what is the equation for savings?th

Answer 3

S = Y +NI - C - G where S is savings, Y is income, NI is net income from abroad, C is consumption and G is government spending

Question 4

how can the capital account be wrote in terms of saving and investment?

Answer 4

it can be wrote as CA=S-I so if the savings is equal to investment then the current account is zero, greater the current account will be positive, if it less than then the current account will be negative

Question 5

if the savings is greater than investment what does this mean about the economy relative to the ROW?

Answer 5

the economy is a net lending to the rest of the world. when it is lending more it means it will be accumulating foreign assets.

Question 6

what is the equation for Net foreign assets?

Answer 6

NFA= FA -FL where FA is foreign assets and FL is foreign liabilities

Question 7

how can the current account be wrote in terms of foreign assets?

Answer 7

CA= change in foreign assets - the change in foreign liabilities or the change in net foreign assets

Question 8

why is change in net foreign assets equalling CA a massive simplification>

Answer 8

it is a massive simplification because the changes in the stock of assets and liabilities are not only due to transactions in the financial account but also due to movements of exchange rates and asset prices which affect the market value of the assets. these valuation effects have been shown to be increasingly important in the last 30 years or so

Question 9

how does the international investment position (IIP) get around the movements of exchange rates and asset prices to equalise the change in NFA to the current account?

Answer 9

The International Investment Position (IIP) measures the stocks of foreign
assets and liabilities at market value so it complements Balance of Payments
data, which records flows.

Question 10

what are de jure measures?

Answer 10

they are based on declared restrictions imposed by countries on foreign transactions

Question 11

what are de facto measures?

Answer 11

they are based on actual data. obstfeld and taylor(2004) divide them into quantity measures (actual financial flows among countries )and price measures (testable implications from economic theory based on the idea that some price differences across countries should disappear if markets were truly integrated)

Question 12

what is the chinn-ito index measure of financial globalisation?

Answer 12

it codifies the tabulation of restrictions on cross-border financial transactions reported in the IMF’s Annual Report on
Exchange Arrangements and Exchange Restrictions (AERAER)

Question 13

what are the two disctinct waves of financial globalisation?

Answer 13

the first wave was in the period 1870-1914. and the second wave was after the 1970s

Question 14

what occured to financial globalisation between 1914 and 1970s ?

Answer 14

there was a retrenchment of globalisation as the world entered into wars and there was great depressions

Question 15

what did keynes believe was the source of financial instability in the 1930s?

Answer 15

keynes maintained that free capital mobility was at the source of the financial instability that led to the collapse of the world economy in the 1930s

Question 16

what occured during the east asian crisis in the 1997-1998?

Answer 16

The East Asian crisis in 1997-1998 saw massive capital flights (and
associated economic recessions) in countries that were considered
financially and macroeconomically “sound”.

Question 17

what has evidence shown about net capital flows and the economic cycles?

Answer 17

Evidence has shown that net capital flows (inflows minus outflows) tend to
be pro-cyclical i.e. they sharply increase during booms and suddenly decline
during local/global crises period triggering episodes called “sudden stops”.

Question 18

what view point did the IMF take on capital flows in 2012?

Answer 18

they took an institutional approach on capital flows, they shifted their attetial on the costs of international financial interegration/

Question 19

what are the substatial benefits which capital flows can have on a country?

Answer 19

Capital flows can have substantial benefits for countries, including by
enhancing efficiency, promoting financial sector competitiveness, and
facilitating greater productive investment and consumption smoothing.

Question 20

when is capital flow liberalization most beneficial for a country?

Answer 20

Capital flow liberalization is more beneficial if countries have reached
certain levels or thresholds of financial and institutional development.