Final Report Summary - KF&EM (International Capital Flows and Emerging Markets)
Globalization in emerging markets has not yet produced all the benefits predicted by conventional, neoclassical models. There is broad consensus that market imperfections play a larger role than these models had anticipated. The objective of this research project was to enhance our understanding of the process of financial globalization, emphasizing the interactions between globalization and frictions in both domestic and international financial markets.
On the theory side, the project has developed theories explaining how (i) countries adapt the maturity structure of their foreign borrowing to respond to shocks in international capital markets; (ii) secondary markets for bonds result in public debts being repatriated during crises, resulting in crowding out of domestic investment and even deeper crises; (iii) globalization, by increasing the fraction of creditors that are foreign, reduces the incentives to repay debts and can lead to domestic financial crises; and (iv) globalization, by making it possible for governments to finance fiscal expansions from foreign sources, can make fiscal policy more effective.
On the empirical side, the project has provided evidence that (i) countries are subject to external shocks to the supply of credit, leading them to shift towards shorter maturities during crises; (ii) crises are characterized by a reduction in gross capital flows, i.e. a reduction in both inflows from foreigners and outflows by domestic residents; (iii) during the European sovereign debt crisis banks in periphery economies repurchased their own governments’ bonds, which led to less credit to the private sector; (iv) countries that fail to adopt strict environmental policies end up exporting more goods from polluting industries, which can negate the benefits of stricter policies in advanced economies; (v) fiscal policy is more effective, in the sense of having larger multipliers, in countries where a large fraction of pubic debt is held by foreigners; and (vi) during the last two decades, capital flows between developing countries and between developing countries and developed ones have increased markedly, more than can be accounted for by faster economic growth.
The project has so far resulted in four publications: “Why Do Emerging Economies Borrow Short Term?” in the Journal of the European Economic Association, “Gross Capital Flows: Dynamics and Crises” in the Journal of Monetary Economics, “Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out Effects” in the Journal of Monetary Economics, and “Rethinking the Effects of Financial Globalization” in the Quarterly Journal of Economics. In addition, the paper “Sources of Comparative Advantage in Polluting Industries” has received a favorable revise and resubmit from the Journal of the European Economic Association.
On the theory side, the project has developed theories explaining how (i) countries adapt the maturity structure of their foreign borrowing to respond to shocks in international capital markets; (ii) secondary markets for bonds result in public debts being repatriated during crises, resulting in crowding out of domestic investment and even deeper crises; (iii) globalization, by increasing the fraction of creditors that are foreign, reduces the incentives to repay debts and can lead to domestic financial crises; and (iv) globalization, by making it possible for governments to finance fiscal expansions from foreign sources, can make fiscal policy more effective.
On the empirical side, the project has provided evidence that (i) countries are subject to external shocks to the supply of credit, leading them to shift towards shorter maturities during crises; (ii) crises are characterized by a reduction in gross capital flows, i.e. a reduction in both inflows from foreigners and outflows by domestic residents; (iii) during the European sovereign debt crisis banks in periphery economies repurchased their own governments’ bonds, which led to less credit to the private sector; (iv) countries that fail to adopt strict environmental policies end up exporting more goods from polluting industries, which can negate the benefits of stricter policies in advanced economies; (v) fiscal policy is more effective, in the sense of having larger multipliers, in countries where a large fraction of pubic debt is held by foreigners; and (vi) during the last two decades, capital flows between developing countries and between developing countries and developed ones have increased markedly, more than can be accounted for by faster economic growth.
The project has so far resulted in four publications: “Why Do Emerging Economies Borrow Short Term?” in the Journal of the European Economic Association, “Gross Capital Flows: Dynamics and Crises” in the Journal of Monetary Economics, “Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out Effects” in the Journal of Monetary Economics, and “Rethinking the Effects of Financial Globalization” in the Quarterly Journal of Economics. In addition, the paper “Sources of Comparative Advantage in Polluting Industries” has received a favorable revise and resubmit from the Journal of the European Economic Association.