Contrary to widespread presumption, a surprisingly large number of countries have been able to finance a significant fraction of their investment for extended periods using foreign finance. While many of these episodes are in countries where official finance is important, we also identify episodes where a substantial fraction of domestic investment is financed by private capital inflows. Although there is evidence of a positive growth effect of such inflows in the short run, that positive impact dissipates after 5 years and turns negative over longer horizons. Many such episodes end abruptly, with compression of the current account and sharp slowdowns in investment and growth. Summing over the inflow (current account deficit) episode and its aftermath, we find that growth is slower than when countries rely on domestic savings. The implication is that financing growth and investment out of foreign savings, while not impossible, is risky and too often counterproductive.
We show that an increase in aggregate uncertainty -measured by stock market volatility- reduces productivity growth more in industries that depend heavily on external finance. The mechanism at play is that during periods of high uncertainty, firms that are credit constrained switch the composition of investment by reducing productivity-enhancing investment- such as on ICT capital- which is more subject to liquidity risks (Aghion et al., 2010). The effect is larger during recessions, when financing constraints are more likely to be binding, than during expansions. Our statistical method-a difference-in-difference approach using productivity growth of 25 industries from 18 advanced economies over the period 1985–2010-mitigates concerns with omitted variable bias and reverse causality. The results are robust to the inclusion of other sources of interaction effects, instrumental variable approaches, and different datasets. The results also hold if economic policy uncertainty (Baker et al., 2016) is used instead of stock market volatility as a measure of aggregate uncertainty.
Using a cross-country panel of 925 banks from 19 advanced economies, for the period 1981-2016, I examine how the bank lending channel of monetary policy has evolved over time. I find that the sensitivity of lending to bank balance sheet liquidity declines over time, with nearly all the reduction occurring between the early 1990s and the early 2000s. Contrary to normal times, during recessions, more liquid banks reinforce the impact of monetary policy shocks on lending relative to their less liquid counterparts. The sensitivity of non-interest income to lending increases sharply from the late 1990s till the global financial crisis of 2008, and declines in the post-crisis period, indicating pro-cyclicality. Moreover, the relative ability of banks with higher non-interest income to mitigate monetary policy shocks increases sharply towards the end of the sample period, capturing the impact of the prolonged low inter- est rate environment on transmission process. These findings suggest that the structural changes in the banking industry and the state of the economy have a significant impact on the strength of the bank lending channel.
The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries' funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary's pre-existing currency exposure. Analysis of data on European banks' aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.
Using data for advanced and emerging economies, we show that there is a negative correlation between public debt and corporate investment. Industry-level regressions show that high levels of government debt are particularly damaging for industries that need more external financial resources. Firm-level regressions show that government debt increases the sensitivity of corporate investment to cash flow. These results indicate that the relationship between public debt and investment is likely to be causal and that public debt crowds out corporate investment by tightening credit constraints.
In this double issue of the Oxford Review of Economic Policy we publish a set of papers concerned with the mobilization of domestic and foreign capital in support of the United Nations' Sustainable Development Goals that were launched in September 2015. The papers were originally presented at a conference on 'Financing for Development' organized by the International Monetary Fund and the Centre for Finance and Development at the Graduate Institute in Geneva in April 2015.
This paper provides an empirical assessment of race-to-the-bottom unilateralism. It suggests that decades of unilateral tariff cutting in Asia‟s emerging economies have been driven by a competition to attract FDI from Japan. Using spatial econometrics, I show that tariffs on parts and components, a crucial locational determinant for Japanese firms, converged across countries following a contagion pattern. Tariffs followed those of competing countries if the latter were lower, if FDI jealousy was high, and when competing countries were at a similar level of development.
This paper provides an empirical assessment of race-to-the-bottom unilateralism. It suggests that decades of unilateral tariff cutting in Asia‟s emerging economies have been driven by a competition to attract FDI from Japan. Using spatial econometrics, I show that tariffs on parts and components, a crucial locational determinant for Japanese firms, converged across countries following a contagion pattern. Tariffs followed those of competing countries if the latter were lower, if FDI jealousy was high, and when competing countries were at a similar level of development.
This paper provides an empirical assessment of race-to-the-bottom unilateralism. It suggests that decades of unilateral tariff cutting in Asia‟s emerging economies have been driven by a competition to attract FDI from Japan. Using spatial econometrics, I show that tariffs on parts and components, a crucial locational determinant for Japanese firms, converged across countries following a contagion pattern. Tariffs followed those of competing countries if the latter were lower, if FDI jealousy was high, and when competing countries were at a similar level of development.
This paper provides an empirical assessment of race-to-the-bottom unilateralism. It suggests that decades of unilateral tariff cutting in Asia‟s emerging economies have been driven by a competition to attract FDI from Japan. Using spatial econometrics, I show that tariffs on parts and components, a crucial locational determinant for Japanese firms, converged across countries following a contagion pattern. Tariffs followed those of competing countries if the latter were lower, if FDI jealousy was high, and when competing countries were at a similar level of development.
