week four - capital mobility Flashcards
define financial globalisation
an aggregate concept that refers to rising global linkages through cross border financial flows
define financial integration
an individual country’s linkages to international markets
what does financial globalisation need
financial liberalisation (policies on financial liberalisation and capital account liberalisation)
define capital inflows
amount of capital coming into a country
define capital outflows
capital leaving a country
define financial account
a measurement of increases or decreases in international ownership of assets (inflows - outflows)
inflows > outflows : indebted country
outflows > inflows : creditor country
do creditor/indebted countries have negative or positive current accounts
creditor: positive
indebted: negative
define a portfolio investment
a collection of financial investments like stocks, bonds, mutual funds, derivatives or bitcoins
define a direct investment (FDI)
investments made by an individual or company in one country in a business located in another country
define FDI according to OECD
investor owns at least 10% of voting power of the direct investment enterprise
what does financial globalisation evolution depend on
1) governments: restricting/liberalising policies
2) lenders and borrowers: facilitate capital movements by borrowing or lending internationally
3) financial institution development: the most important factor, institutions can facilitate information technologies or an increase in competition (due to financial deregulation)
what are the three main periods of financial globalisation
1) 1870-1913: gold standard
- free capital mobility
- fixed exchange rates
2) Bretton Woods
- fixed exchange rates
- capital controls
3) now
- free capital mobility
- capital controls
^depending on the country
how can you measure financial integration
- index of financial integration
- financial openness
what is the index of financial integration
measures the extent of government restrictions on capital flows across national borders (de iure)
how can you measure financial openness
the volume of capital actually crossing the borders as a % of GDP, i.e. foreign assets and liabilities as a % of GDP (de facto)
what indicates rapid financial integration
integration index and (financial assets + liabilities)/GDP
is the level of financial integration lower or higher in developing companies
lower
are bank loans and portfolio investments more or less volatile than direct investments
more
evolution of capital flows 1980 onwards
- 1970s:excessliquidityfromoil-producingcountries(petrodollars)
- 1980s: deregulation of foreign exchange and stock markets liberalization and technological advances
- 1986: London began a process of transformation of its financial market (Big Bang) which allowed the entry of a multitude of international financial companies and the application of new technologies to speed up transactions
- Privatisation of state-owned companies: i.e. banks went global, with Spanish banks setting up in Latin America, absorbing many local banks and allowing the expansion of many multinationals that bought state-owned companies in sectors such as telephony, aviation, gas and electricity
- Increased role of institutional investors (mutual funds, pension funds, hedge funds, insurance companies)
- Morerecently:excessliquidityfromChina
- Shocks:2007/8financialcrises,pandemic
what have theoretical models helped show that financial integration can help promote economic growth
(Prasad et al 2003)
- increases domestic savings
- reducing the cost of capital
- transfer of technological and managerial knowledge
- stimulation of domestic financial sector development
financial globalisation benefits
- risk diversification
- efficient allocation of resources
- improvement in capital productivity
- financial sector development
- institutional changes
- better economic policies
why is it difficult to detect a causal effect of financial integration on growth
there is weak empirical evidence because financial integration is not a necessary condition for achieving a high growth rate
why does increased financial globalisation lead to an increase in the frequency of financial crises
- globalisation allows greater access to highly complex financial instruments that limit the ability of supervisors to monitor, assess and determine risks
- increasing the menu of investment opportunities and diversification reduces the incentive for lenders to obtain information from countries where they hold a small percentage of their financial portfolio
In emerging economies:
* Foreign banks are less aware of local risks and find it more difficult to access information than
local banks
* It is much more difficult for banks to get reliable information about their borrowers because information is much scarcer and more obscure
* Property rights are less clear, the judicial system to enforce them is weaker, and banking supervision is underdeveloped and with few means to enforce it
what was the direction of capital flows in the first globalisation vs current globalisation
- first: europe (mainly UK) to other European countries or to new world countries
- current: strong growth of capital flows to east asian countries
- flows to more developed countries are more important
- recently: increase in capital flows from developing countries to other areas
