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2014 | OriginalPaper | Buchkapitel

12. Capital Flows: Perfectly and Imperfectly Mobile Capital

verfasst von : Farrokh Langdana, Peter T. Murphy

Erschienen in: International Trade and Global Macropolicy

Verlag: Springer New York

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Abstract

While most advanced Western countries allow the free movement of overseas capital in and out of their economies, many countries, particularly in the developing world, impose restrictions. In fact, the current dominance of freely floating rates is a relatively new historical development. Significant restrictions on capital mobility have been the norm until the globalization era which began in the 1980s. We apply the BOP equilibrium for Imperfectly Mobile Capital to the ISLM-BOP and examine how the results differ from those attained under Perfectly Mobile Capital. Here we see the applicability of the Keynesian multiplier. We move on to discuss fiscal budget sustainability and the Dornbusch model, which leads us into the history and evolution of the Euro. The current state and future of the Euro are discussed here. We discuss speculative currency attacks and their related phenomena of overshooting. We ask: how are private actors able to drive markets in the fact of powerful central banks? We explore the sources and limits of a central bank’s power.

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Vorheriges Kapitel Incorporating Inflation into the Model

Nächstes Kapitel The Global Monetary System

Christopher Neely, “An Introduction to Capital Controls,” Federal Reserve Bank of St. Louis Review (November/December 1999), 5

Economist James Tobin proposed the idea of a tax on spot currency conversions as a way to discourage short-term hot capital flows, which can be destabilizing. Tobin initially suggested the idea in 1971 and remained a proponent until his death in 2002. Such a tax would effectively decrease the value of the “α ₁” sensitivity, which increases the slope of the BOP line.

The most well-known implication of the Marshall–Lerner condition is that imports and exports are slow to respond to changing prices and exchange rates, and as a result, currency devaluations may or may not boost exports relative to imports in the short term depending on relative price elasticities.

Robert Barro finds a multiplier of between 0.4 and 0.7 in an empirical analysis covering several decades of data (Robert Barro, Macroeconomic effects from government purchases and taxes, Mercatus Center, Georgetown University, July 2010), and Cogan and Taylor find a multiplier of near-zero for the 2009 US stimulus plan due to misdirected spending (Cogan JF, Taylor JB What the government purchases multiplier actually multiplied in the 2009 stimulus package, October 2010).

On the other hand, using New Keynesian methodology, Michael Woodford finds a multiplier varying from less than one to much greater than one depending on the state of the economy, with a severely depressed economy being much more responsive (Michael Woodford, Simple analytics of the government expenditure multiplier, Columbia University, June 13, 2010). And, using Classical Keynesian analysis, Romer and Bernstein posit a multiplier of 1.4 (Romer C, Bernstein J The job impact of the American recovery and reinvestment plan, January 9, 2010).

Langdana F (1989) Sustaining domestic budget deficits in open economies. Routledge, Oxford, Chap. 11

The sovereign debt crisis in the Eurozone from 2009–(?) has illustrated this point. Countries with very high debt/GDP ratios (the b variable) suddenly found themselves entwined in a global recession, with extremely low or negative growth rates (g). Given the already-high debt ratios, Eurozone countries did not have the flexibility for their debt to grow during the downturn that they might have enjoyed were they starting from a lower debt/GDP ratio.

We will discuss Bretton Woods and the 1971 closing of the “gold window” in the next chapter.

Completing the Internal Market: White Paper from the Commission to the European Council (Milan, 28–29 June 1985) COM(85) 310, June 1985. (Brussels: Commission of the European Communities), June 1985

An old joke among workers in the Soviet Union and its satellite states went: “We pretend to work, they pretend to pay us.”

Regarding German reunification, British Prime Minister Margaret Thatcher reportedly told Soviet Premier Gorbachev: “All Europe is watching this not without a degree of fear, remembering very well who started the two world wars.”

The reason why this should be the case is not immediately obvious, as investors were certainly aware that despite externally imposed monetary prudence, each country within the Eurozone was in full control of its own fiscal policies. Confidence in mutual adherence to the Maastricht criteria, or perhaps that even in a crisis, the strong countries (Germany and France) would almost certainly “bail out” the weaker rather than permit a default, are plausible explanations.

Reportedly aided by the US investment banks, primarily Goldman Sachs. Beat Balzli, “How Goldman Sachs Helped Greece to Mask its True Debt,” Der Spiegel, February 8, 2010

The first rescue fund of €110 billion was implemented in May 2010 by the IMF, the ECB, and the Eurozone members, and a second fund of €130 billion, funded by the Eurozone countries, went into effect in February 2012. Additional rescue funds and mechanisms have been proposed.

This intervention included direct purchases of Spanish and Italian bonds starting in August 2011 and some €500 billion in long-term refinancing operations (LTRO) starting in December 2011, where the ECB provided the continent’s banks with 3-year loans and allowed the banks to use sovereign debt as collateral.

A concise contemporary debate on the euro’s future may be found in “The Euro’s Debatable Future,” Wall Street Journal, March 8, 2011.

In the 1800s, disputes often arose between the agrarian states, which preferred easier monetary policy that would lighten their burden of debt and support exports, and the eastern bankers and industrialists who preferred a “hard money” regime.

For example, the UK currency crisis of 1992–1993 was precipitated by German reunification, and the Russian Ruble crisis of 1998 was caused in part by a sharp drop in the price of oil.

As we have reviewed throughout, as domestic currency holders rush to convert their currency, their selling pressure which would otherwise weaken the exchange rate must be taken up by the Central Bank that purchases the domestic M with its reserves of FX.

This is not to say that overt coordination does not happen. In many of these instances, however, overt coordination is not required in order for active market participants to all see the same potential weakness in a given currency.

Aart Kray, “Do High Interest Rates Defend Currencies During Speculative Attacks?” World Bank, December 2001

Olson O, He M (1999) A model of balance of payment crisis: the strong currency as a determinant of exchange rate disequilibria. Nova Southeastern University, Fort Lauderdale

Burnside C, Eichenbaum M, Rebelo S (2000) Hedging and financial fragility in fixed exchange rate regimes, Financial Institutions & Market Research Center, Kellogg School of Management, Northwestern University, Evanston

Or at least out of electrons in the form of bytes of information in electronic transactions.

For the likening of central bankers to the Wizard of Oz we are indebted to John Hussman, Ph.D., who wrote that “Alan Greenspan isn’t ‘The Maestro.’ He’s Oz,” in Why the Federal Reserve is Irrelevant, Hussman Funds Research & Insight, August, 2001, accessed November 18, 2011, http://www.hussmanfunds.com/html/fedirrel.htm. See also “Superstition and the Fed”, October, 2006, accessed November 18, 2011. http://www.hussmanfunds.com/wmc/wmc061002.htm. Dr. Hussman’s writings, available at the aforementioned site, are indispensable to those seeking to understand contemporary financial markets from an analytical and historical perspective.

Artus P (2011) Do central banks withdraw liquidity they have created? Natixis Flash Markets Economic Research, February 4, 2011 (Paris: Natixis, 2011)

Marko Maslakovic, Fund Management 2010 (London: UK, October 2010_. See also BCG Report, Global Asset Management 2010: In Search of Stable Growth (Boston: Boston Consulting Group, July 2010).

Blackrock, “About Us,” accessed March 27, 2011. www2.blackrock.com. http://www2.blackrock.com/global/home/AboutUs/index.htm.

Global Wealth Databook, Credit Suisse Research Institute (Geneva: Credit Suisse Group AG), August 2010. Note: Figures for global wealth vary significantly depending on how the studies’ authors accounted for currency effects. While Credit Suisse arrives at a figure of $194 trillion for 2010, the Boston Consulting Group, using a methodology that eliminates certain currency effects, comes up with a figure of $114 trillion.

See James Bullard, “Seven Faces of ‘The Peril,” Federal Reserve Bank of St. Louis Review, September–October 2010 St. Louis: St. Louis Fed, 2010) for a thorough discussion of the effectiveness of monetary policy during and after the 2008–2009 crisis.

The similarity of these operations to counterfeiting has long been remarked upon. The counterfeiter, having his hands on the newly printed money before anyone else, gains real value; as the volume of his notes enter circulation, they add to the money stock and ultimately dilute everyone’s purchasing power. However, by the time this happens, the counterfeiter, like the legitimate currency issuer and those closest to it, has already made his gain. For a lengthy treatment from this perspective, see Murray N. Rothbard, The Case Against the Fed, Ludwig von Mises Institute, 2007.

The limit is a function of nominal interest rates, inflation, and GDP growth. A discussion may be found in Willem H. Buiter, “Can Central Banks Go Broke?” London: Centre for Economic Policy Research, May 2008.

As of 2008 per RaisePartner Quantitative Portfolio Management, “Global Macro Strategies: Fundamental Expertise and Quantitative Modeling,” The Quant Corner November 2008 (Paris: Raisepartner, 2008), accessed March 27, 2011, http://www.raisepartner.com/lexique/files/488344.pdf.

The best treatment ever on this subject is Charles Mackay’s 1841 classic Extraordinary Popular Delusions and the Madness of Crowds, which we mentioned in Chap. 11. A modern classic is Charles Kindleberger and Robert Aliber's Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition (Palgrave Macmillan, 2011).

The old adage applies: “If there is going to be a panic, it’s best to be first!”

Titel: Capital Flows: Perfectly and Imperfectly Mobile Capital
verfasst von: Farrokh Langdana
Peter T. Murphy
Verlag: Springer New York
Buch: International Trade and Global Macropolicy
Print ISBN: 978-1-4614-1634-0

Electronic ISBN: 978-1-4614-1635-7

Copyright-Jahr: 2014
DOI: https://doi.org/10.1007/978-1-4614-1635-7_12