Capital Flows

Question 1

What is Financial Globalization

Answer 1

It measures the freedom of capital flows expressed as (EX-IM)/GDP

Question 2

de Jure vs de Facto Financial Openness

Answer 2

de Jure: What are restrictions to international capital movements?
de Facto: How much international trade in financial assets?

Question 3

Types of assets

Answer 3

-Portfolio investment
-Foreign Direct Investment (FDI)
-Other investments
-Derivatives
-Reservs

Question 4

What is Portfolio Investment

Answer 4

Buying shares of a company in another country (debt), or government bonds

Question 5

What is Foreign Direct Investment

Answer 5

Greater than 10% ownership in a foreign company

Question 6

What are Other Investments

Answer 6

Cross border bank lending through bank loans and trade credit

Question 7

What are Reserves

Answer 7

Savings or liquid funds

Question 8

What does the Chinn-ito index show about de Jure financial openness?

Answer 8

Chinn-ito index shows movement towards greater openness with -2.5= completely closed and 2.5= completely open. However, more so for developed than developing economies.

Question 9

What are Flows

Answer 9

The value of assets traded for a year:
-represented as Inflows/GDP and Outflows/GDP

Question 10

What do Inflows/GDP represent

Answer 10

The net purchase of domestic assets by foreign investors

Question 11

What do Outflows/GDP represent

Answer 11

The net purchase of foreign assets by domestic investors

Question 12

What are Stocks

Answer 12

The value of all assets held in a year (cumulative of flows)

Question 13

How to calculate Stocks over multiple years

Answer 13

-At = At-1 + at
-At = At-2 + at-1 + at
-etc

Question 14

How to calculate International Integration Measure

Answer 14

(Inflows + Outflows)/GDP

Question 15

Between Flows and Stocks; what is more volatile

Answer 15

Flows are more volatile, especially in crisis (ex. 2008 collapse was accelerated by banks pulling out capital in foreign markets)

Question 16

What does the Solow model explain about the first financial globalization

Answer 16

Capital-scarce countries should have a high return on capital (capital flows from capital abundant countries to capital scarce countries)

Question 17

what is the Solow model equation

Answer 17

yt=At(kt)
-At= efficiency parameter (technology) or TFP (Total Factor Productivity)
-kt= capital
-yt= output (produced using inputs more or less efficiently)

Question 18

What is the Marginal Productivity of Capital (MPK)

Answer 18

-The additional unit of output per unit of capital (return on capital)
-In aggregate: decreasing returns (MPK = derivative of yt/ derivative of kt)

Question 19

What is the Washington Consensus

Answer 19

Collection of ideas in 1990’s aimed at modernizing, reforming, deregulating and opening economies.

Question 20

What is the Lucas Puzzle

Answer 20

Capital flows towards developed countries from developing countries rather than the other way around.

Question 21

What is the explanation of the Lucas Puzzle

Answer 21

That Solow’s TFP=A is not constant, but rather much higher in developed countries causing capital to flow there.

Question 22

What is International Risk Sharing (risk diversification)

Answer 22

If investors are risk-averse they will diversify investments into multiple countries

Question 23

Are financial markets globally integrated?

Answer 23

Investors still tend to hold large share of investments either domestically or geographically close.

Question 24

What does the equation Y= C+I+G+EX-IM represent?

Answer 24

National Income identities

Question 25

Difference between GDP and GNI?

Answer 25

-GDP is the value of all final goods and services produced within the national border (products) -GNI is the value of all final goods and services produced by national factors of production (income)

Question 26

How to calculate GNI

Answer 26

GNI = GDP + NFI (Net receipts of Factor Income in Rest of the World)

Question 27

How to calculate NFI

Answer 27

NFI = Income residents receive from abroad - income that foreigners receive from domestic country

Question 28

What is the Current Account (CA)

Answer 28

A nations transactions with the rest of the world

Question 29

How to calculate Current Account

Answer 29

-CA= EX - IM +NFI --> = S-I - CA = S-I or EX - IM + NFI

Question 30

CA surplus vs deficit

Answer 30

-CA surplus: the country is saving more than investing (lending money to the world) -CA deficit: the country is spending more than investing (borrowing money from the world)

Question 31

What is the Balance of Payment (BOP)

Answer 31

the register of all economic transactions with foreign economic agents

Question 32

How to calculate BOP

Answer 32

-CA + FA (Financial Account) + KA (Capital Account) -must =0

Question 33

How to calculate Foreign Accounts (FA)

Answer 33

-Records flow of financial assets (FDI, NPF, and Net Other) -FA= Inflows - Outflows

Question 34

How to calculate Capital Accounts (KA)

Answer 34

-Records flow of non-financial assets (ex. debt forgiveness) -KA= non-financial Inflows - non-financial Outflows

Question 35

What two factors drive Current Accounts

Answer 35

-Consumption Smoothing: If anticipated future income is high, countries will run a current account deficit -Demographics: Ageing countries should save and run current account surpluses

Question 36

What causes domestic distortions of CA

Answer 36

-Too high private savings: lack of social insurance, lack of financial development -Too low private savings: asset bubbles, excessive leverage

Question 37

What causes systemic distortions of CA

Answer 37

eg. After the Asian Crisis, emerging markets ran a CA surpluses were so large that they drove down interest rates and incentivized over-borrowing

Question 38

What is an explanation for the Chinese Saving Puzzle

Answer 38

Domestic financial distortions, artificial ageing, and lack of social insurance

Question 39

How to Calculate Net External Position (NFA)

Answer 39

-NFAt= NFAt-1 + CAt -if a country runs CA deficit, NFA deteriorates

Question 40

What are capital gains or losses

Answer 40

-Changes in the value of assets and liabilities, influenced by the market value or exchange rate -NFAt - NFAt-1 = CA + capital gains or losses

Question 41

What is the US exorbitant privilege

Answer 41

-Gourinchas and Rey: return on US assets held by foreigners (US debt) is less than the return on foreign assets held by the US

Question 42

What is exorbitant duty

Answer 42

The consequence of exorbitant privilege when there is a financial crisis

Question 43

What is an external adjustment

Answer 43

-Mechanisms used to close CA deficit - 2 types: Trade Channel and Financial Channel

Question 44

What is the Trade Channel

Answer 44

-consume less than what is produced -run trade surplus

Question 45

What is the Financial Channel

Answer 45

-Make capital gains on NFA -higher return on foreign assets -default