The chapter presents an overview of major currency and international capital market movements after World War II, showing that the movements brought about by US…
The chapter presents an overview of major currency and international capital market movements after World War II, showing that the movements brought about by US investments in the fifties and sixties that created the offshore Eurodollar bear resemblance to what is now taking place between the United States as the world's investor and China. International money is created in a triangular process of long and short lending intermediated by short borrowing. The imbalances often recorded on US current account are to some extent counterbalanced by the huge returns accruing to businesses of the west. This follows the “dark matter” theory but with the twist that real value is extracted through foreign direct investment in line with the rationale of Eurodollar flows. However, threats are also created in this way. Rather than in superficial notions of instability in currency markets, the high returns on capital abroad have been instrumental both in the deindustrialization of the west and the maintenance of a high rate of consumption through the financialization of the housing market. The eventual overdrive precipitated the crisis starting in 2007, but the dollar relationship with China continues unabatedly.
The assignment of targets to instruments in developing countries cannot satisfactorily follow any simple universal rule. Which approach is appropriate is influenced by…
The assignment of targets to instruments in developing countries cannot satisfactorily follow any simple universal rule. Which approach is appropriate is influenced by whether the economy is dominated by primary exports, by the importance of the domestic bond market and bank credit, by the extent of existing restriction in foreign exchange and financial markets, by the presence or absence of persistent high inflation, and by the existence or non‐existence of an active international market in the country's currency. Eighteen observations and maxims on stabilisation policy are tentatively drawn (pp. 64–8) from the material reviewed, and the maxims are partly summarised (pp. 69–71) in a schematic assignment, with variations, of targets to instruments.
The chapter first emphasizes the aspects which Steuart (1767), Thornton (1802), Tooke (1844, 1838–1857), and Keynes (1923) have in common about the relation between the exchange rate and the short-term rate of interest: they all considered a temporary unfavorable foreign balance caused by an asymmetrical exogenous shock, which called for a discretionary policy favoring international short-term capital inflows to overcome the consequences of the deficit. These aspects draw an unorthodox genealogy on this issue between the four authors, contrary to the tradition originating in Hume and developed later by the British monetary orthodoxy. Secondly, the chapter shows that there was an analytical progress from Steuart (1767) to Keynes (1923), which however faced a limit: if it reinforced an unorthodox genealogy, it did not integrate the modern idea according to which international short-term capital movements may themselves be a source of external disequilibrium. The origin of this limit was probably in the question raised, which was the adjustment to an exogenous asymmetrical shock.
Social scientists have increasingly turned to constructivist models to explain when, and how, international and world-level social forces constrain the policy-making…
Social scientists have increasingly turned to constructivist models to explain when, and how, international and world-level social forces constrain the policy-making autonomy of national states. While constructivists have shown that international ideational processes matter for domestic policy making, they have had a harder time explaining why some ideas gain prominence in policy discussions while others do not. This chapter develops an institutionally centered materialist model of idea selection, arguing that international relations of dependency give actors who control vital financial resources a greater capacity to shape the ideational agenda. This model is explored through a case study of the international sources of American monetary policy in the early 1960s. A detailed examination of archival materials shows that European officials at the Organization for Economic Cooperation and Development were able to advance their own ideas for American monetary policy because the United States was dependent on European cooperation to help resolve its mounting balance of payments problems.
Norway is a small nation state on the northernmost coastline of Western Europe, integrated in the Western world economy. For centuries Norway's integration in the world economy had been based on exports of raw materials such as fish and timber, as well as shipping services. In the early 20th century, furnace-based metals (made possible by cheap hydropower) were added to this export basket. Just as the world economy entered an increasingly unstable phase in 1970s, another natural resource was discovered in Norway: petroleum – that is, oil and natural gas from the North Sea. This chapter analyses the challenges and possibilities inherent in the Norwegian strategy of developing an oil economy in a world economic situation influenced by new and stronger forms of international integration through the four decades between 1970 and 2010.
This study attempts to provide a systematic theoretical analysis of the portfolio selection approach to the determination of inter‐regional and international capital…
This study attempts to provide a systematic theoretical analysis of the portfolio selection approach to the determination of inter‐regional and international capital flows, and to identify the implications of this analysis for the appropriate specification of short‐run econometric models of the foreign exchange market.
We model international short-term capital flow by identifying technical trading rules in short-term capital markets using Genetic Programming (GP). The simulation results…
We model international short-term capital flow by identifying technical trading rules in short-term capital markets using Genetic Programming (GP). The simulation results suggest that the international short-term markets was quite efficient during the period of 1997–2002, with most GP generated trading strategies recommending buy-and-hold on one or two assets. The out-of-sample performance of GP trading strategies varies from year to year. However, many of the strategies are able to forecast Taiwan stock market down time and avoid making futile investment. Investigation of Automatically Defined Functions shows that they do not give advantages or disadvantages to the GP results.
Purpose – Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both…
Purpose – Examine the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both in the domestic and foreign markets, and their importance in promoting good corporate governance practices worldwide and facilitating increased financial integration.
Methodology/approach – Review and synthesize recent academic literature (1970–2011) on the process of international financial integration and the role of foreign institutional investors in the increasingly global financial markets.
Findings – Despite the concern that short-term flow of international capital can be destructive to the emerging and developing market economies, academic evidence on a destabilizing effect of foreign investment activity is limited. Institutional investors’ systematic preference for stocks of large, well-known, globally visible foreign firms can explain the presence of a home bias in international portfolio investment.
Research limitations – Given the breadth of the two literature streams, only representative studies (over 45 published works) are summarized.
Social implications – Regulators of emerging markets should first improve domestic institutions, governance, and macroeconomic fundamentals, and then deregulate domestic financial and capital markets to avoid economic and financial crises in the initial stages of liberalization reforms.
Originality/value of paper – A useful source of information for graduate students, academics, and practitioners on the importance of foreign institutional investors.
The purpose of this paper is to determine whether current account imbalances – surpluses or deficits – are “excessive” and hence constitute a valid concern. The second…
The purpose of this paper is to determine whether current account imbalances – surpluses or deficits – are “excessive” and hence constitute a valid concern. The second objective is to assess the degree of capital mobility by comparing the variance of the current account derived from the intertemporal model with that of the actual current account.
The paper addresses the issues by constructing the intertemporal model using annual data between 1960 and 2006. The authors applied the F‐test, the Bartlett test and the Siegel‐Tukey test to formally validate for equality of the variances of the optimal and actual consumption smoothing current accounts.
Based on vector autoregressive model, it was found that the present value of future net output closely reflects the evolution of the current account series with a small (insignificant) deviation between the actual and the estimated consumption‐smoothing current account. The results show that the hypothesis of full‐consumption smoothing could not be rejected by the data for the full sample period, implying that the degree of capital mobility was quite high, even during the post‐1997 period. The variance ratio of the actual current account to the optimal current account is not statistically greater than one. Therefore, it is concluded that there is no evidence to suggest inappropriate use of capital flows over the entire sample period under investigation.
The authors relied on a more general framework, as suggested by Bergin and Sheffrin, which allows real interest rate to affect current account in order to provide a new perspective on Thailand's current account balance.
This paper aims to investigate the relationship between capital flow surges, reversals and sudden stops.
Emphasizing the importance of looking at the behavior of domestic as well as foreign capital flows, the authors distinguish sudden stops from capital flow reversals by attributing the former to foreign capital flows only.
It is found that, despite the large differences in the number of surges identified by several different measures in the literature, a majority of surges do end in reversals of some type. The percentages tend to be slightly over half for surges in net capital flows, but on average, 70 per cent of gross surges end in sudden stops. Furthermore, contrary to popular belief, approximately half of sudden stops and net capital flow reversals are not preceded by surges. It is also found that surges that persist longer are more likely to turn into sudden stops and reversals.
The authors find substantial empirical differences in the characteristics of sudden stops (based on gross foreign flows) and reversals (based on net flows).
Large inflows of financial capital are not always a strong indicator that a country’s economic policies will continue to provide stability in the future. They may signal an increase rather than reduction in the risk of future instability.
This study focuses on an issue that has been less explored to date, the relationship between capital flow surges, reversals and sudden stops. The authors distinguish, redefine and document differences among capital flow reversals and sudden stops. Duration of surges is related to the likelihood of having reversals and sudden stops.