International Capital Flows : Effects, Defects and Possibilities

University dissertation from Stockholm : Nationalekonomiska institutionen

Abstract: Short-Term Capital Flows and Growth in Developed and Emerging Markets: A lot of attention has been directed towards recent financial crises. Empirical studies have found that short-term flows increase financial fragility and also increase the probability of financial crises. This study takes a macro-oriented approach and shows that large and volatile short-term flows may be growth inhibiting for emerging markets, while no effect is apparent for rich countries. The results in this study indicate that opening up emerging markets capital accounts, which implies increased short-term capital flows, is not a clear-cut way to prosperity.Macroeconomic Effects of Capital Controls on Short-Term Inflows: The financial turbulence of the last decade has led to a reanimated interest in capital controls as means to reduce volatile capital flows and exchange rate movements in emerging markets. A theoretical framework is set up where the effects on the return to capital, due to a tax on short-term capital inflows, are incorporated into a modified Dornbush model. Empirical findings in the form of GARCH and VAR estimations corroborate the theoretical assumptions and predictions of this simplified open economy model, when it comes to real and nominal exchange rates, interest rates and prices.The Effect of the Euro on Foreign Direct Investment: The recent effect of the European Monetary Union on inward FDI-flows is examined here. We use a difference-in-differences approach and fixed effects with common time controls. The estimated results of the latter approach show that the introduction of the Euro raises inward FDI by 17 percent within the Euro-area and by 9 and 12 percent to and from non-member countries respectively. Moreover the geographical effects of the Euro are explored. The results show partial agglomeration tendencies for the euro area. There are also some indications of increased importance of vertical specialization in the sample.

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