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The External Wealth of Nations
Capital flows are closely monitored, but surprisingly little is known about the stocks of external assets and liabilities held by countries, especially in the developing world. This paper constructs estimates of foreign assets and liabilities and their equity and debt subcomponents for 66 industrial and developing countries for the period 1970-97. It explores the sensitivity of estimates of stock positions to the treatment of valuation effects not captured in balance of payments data. Finally, it characterizes the stylized facts of estimated stocks and asks whether there are trends in net foreign asset positions and differences in debt-equity ratios across countries.
International Financial Integration
In recent decades, the foreign assets and liabilities of advanced economies have grown rapidly relative to GDP, with the increase in gross cross-holdings far exceeding changes in the size of net positions. Moreover, the portfolio equity and FDI categories have grown in importance relative to international debt stocks. This paper describes the broad trends in international financial integration for a sample of industrial countries and seeks to explain the cross-country and time-series variation in the size of international balance sheets. It also examines the behavior of the rates of return on foreign assets and liabilities, relating them to "market" returns.
The Cross-Country Incidence of the Global Crisis
We examine whether the cross-country incidence and severity of the 2008-2009 global recession is systematically related to pre-crisis macroeconomic and financial factors. We find that the pre-crisis level of development, increases in the ratio of private credit to GDP, current account deficits, and openness to trade are helpful in understanding the intensity of the crisis. International risk sharing did little to shield domestic demand from the country-specific component of output declines, while those countries with large pre-crisis current account deficits saw domestic demand fall by much more than domestic output during the crisis.
Global Imbalances and External Adjustment after the Crisis
This paper has two objectives. First, it reviews the recent dynamics of global imbalances (both “flow” and “stock” imbalances), with a special focus on the shifting position of Latin America in the global distribution. Second, it examines the cross-country variation in external adjustment over 2008-2012. In particular, it shows how pre-crisis external imbalances have strong predictive power for post-crisis macroeconomic outcomes, allowing for variation across different exchange rate regimes. We emphasize that the bulk of external adjustment has taken the form of “expenditure reduction”, with “expenditure switching” only playing a limited role.
Cross-border Banking in Europe
This report argues that policy reforms in micro- and macro-prudential regulation and macroeconomic policies are needed for Europe to reap the important diversification and efficiency benefits from cross-border banking, while reducing the risks stemming from large cross-border banks.Available online as pdf at: http: //www.cepr.org/pubs/books/CEPR/cross-border_banking.pd
Current Account Reversals and Currency Crises
This paper studies large reductions in current account deficits and exchange rate depreciations in low- and middle-income countries. It examines which factors help predict the occurrence of a reversal or a currency crisis, and how these events affect macroeconomic performance. Both domestic factors, such as the low reserves, and external factors, such as unfavorable terms of trade, are found to trigger reversals and currency crises. The two types of events are, however, distinct; an exchange rate crash is associated with a fall in output growth and a recovery thereafter, while for reversals there is no systematic evidence of a growth slowdown.
Bilateral Financial Linkages and Global Imbalances
We present a novel and comprehensive dataset of bilateral gross and net external positions in various financial instruments for the main advanced and emerging economies and regions, designed to improve our understanding of cross-border financial linkages. The data show no strong correspondence between country or region pairs with the largest gross versus net external positions, and the importance of international financial centers, including offshore centers, in intermediating financial flows. We also highlight some important data gaps in completing a network of cross-border holdings, related to the limited available information on the size and geographical pattern of external claims and liabilities of offshore centers, oil exporters, and other mostly emerging markets.
Capital Controls
This paper examines country experiences with the use and liberalization of capital controls to develop a deeper understanding of the role of capital controls in coping with volatile capital flows, as well as the issues surrounding their liberalization. Detailed analyses of country cases aim to shed light on the motivations to limit capital flows; the role the controls may have played in coping with particular situations, including in financial crises and in limiting short-term inflows; the nature and design of the controls; and their effectivenes and potential costs. The paper also examines the link between prudential policies and capital controls and illstrates the ways in which better prudential practices and accelerated financial reforms could address the risks in cross-border capital transactions.
Reaping the Benefits of Financial Globalization
Financial globalization has increased dramatically over the past three decades, particularly for advanced economies, while emerging market and developing countries experienced more moderate increases. Divergences across countries stem from different capital control regimes, and factors such as institutional quality and domestic financial development. Although, in principle, financial globalization should enhance international risk sharing, reduce macroeconomic volatility, and foster economic growth, in practice its effects are less clear-cut. This paper envisages a gradual and orderly sequencing of external financial liberalization and complementary reforms in macroeconomic policy framework as essential components of a successful liberalization strategy.
The Valuation Channel of External Adjustment
International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the valuation channel, namely capital gains and losses on external assets and liabilities. We examine this valuation channel in a dynamic equilibrium portfolio model with international trade in equity. By separating asset prices and quantities, we can characterize the first-order dynamics of valuation effects and the current account in macroeconomic dynamics. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete.
