Essays on International Capital Flows
Open AccessThis dissertation consists of three essays that empirically investigate topics in international capital flows of advanced and emerging economies: volatility of capital flows, capital flows to periphery countries, and interactions between private and sovereign borrowing. The first chapter studies the time-varying volatility of international capital flows of 38 countries since 2000. Volatile international capital flows increase the risk of financial crises and reduce economic growth. The theoretical literature predicts that financial globalization will make capital flows more volatile. Importantly, the deepening of financial globalization has led to the emergence of the global financial cycle, making taming capital flows even more challenging. It is essential to measure capital flow volatility and examine what factors affect it. A set of panel regressions show that tighter global financial conditions and higher local financial development lead to higher capital flow volatility. I also find a threshold effect: financial volatility and risk in the global financial center trigger more volatility of the gross capital flow in the more financially developed countries. These empirical findings provide insights into international capital flow management.In the second chapter, with a novel database, we examine the evolution of capital flows to the periphery since the collapse of the Bretton Woods System in the early 1970s. We decompose capital flows into global, regional, and idiosyncratic factors. In contrast to previous findings, which mostly use data from the 2000s, we find that booms and busts in capital flows are mainly explained by regional factors and not the global factor. We then ask what drives these regional factors. Is it the leverage cycle in the financial center? What triggers the leverage cycle in the financial center? Is it a change in global investors’ risk appetite? Or, is it a change in the demand for capital in the periphery? Our estimations indicate that regional capital flows are driven in large part by supply shocks. Interestingly, we find that the leverage in the financial center has a time-varying behavior, with a movement away from lending to the emerging periphery in the 1970s to the 1990s towards lending to the advanced periphery in the 2000s.In the third chapter, we examine the capital flows to the periphery again from a different perspective by using the same database. Our focus is on the relationship between capital flows to the private and sovereign sectors. In particular, we examine whether sovereign issuance in international capital markets helps to create a market for private international issuance (crowding in) or sovereign international issuance reduces the ability of the private sector to borrow in the international market (crowding out). We examine whether the interactions between public and private international issuance vary in times of bonanzas (busts) in global liquidity, are affected by the level of the country's international public debt, or are impacted by the country’s sovereign risk. Our results indicate that the interactions do vary in different states.
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