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1、The International Financial Architecture and Emerging EconomiesINTERNATIONAL MONETARY AND FINANCIAL ECONOMICSThird EditionJoseph P. DanielsDavid D. VanHooseCopyright South-Western, a division of Thomson Learning. All rights reserved.International Financial ArchitectureThe international financial arc
2、hitecture is the set of international institutions, governmental and nongovernmental organizations, and the policies that govern activity in the international monetary and financial markets.2International Capital FlowsGrowth in foreign direct investment (FDI) is one of the most important development
3、s in international capital markets.An FDI inflow is an acquisition of domestic financial assets that results in foreign residents owning 10 percent or more of a domestic entity.An FDI outflow is an acquisition of foreign financial assets that results in domestic residents owning 10 percent or more o
4、f a foreign entity.3Mergers and AcquisitionsCross-border mergers and acquisitions are a driving force of recent growth in FDI in the developed economies.Cross-border mergers and acquisitions entail combining of firms located in different nations in which one firm absorbs the assets and liabilities o
5、f another firm (merger) or purchases the assets and liabilities of another firm (acquisition).4Cross-Border Mergers and AcquisitionsDuring 1990-2000, M&A inflows of the developed nations increased by more than 500 percent while inflows of the developing nations increased by nearly 600 percent. 5Net
6、Capital Flows to Emerging EconomiesDespite recent financial crises, private capital flows to the emerging economies have grown at a remarkable rate.6Emerging Economies of the Western HemispherePrior to the 1994 Mexican peso crisis, a large portion of FDI inflows consisted of portfolio capital. Since
7、 1994, FDI flows are a greater proportion of the total capital flows.7Emerging Economies of AsiaThough the emerging economies of East Asia attracted substantial FDI flows during the mid-1990s, they relied heavily on portfolio, bank loans, and other forms of short-term capital. 8Capital Allocations a
8、nd GrowthWith access to foreign capital, domestic residents and businesses can continue to save and invest during domestic economic downturns, thereby smoothing business cycles.Access to global capital can also reduce investment costs for a developing economy, thereby spurring greater investment spe
9、nding.9Financial-Sector DevelopmentBecause financial intermediaries perform an important role in channeling capital, financial-sector developmentthe strengthening and growth of the nations financial sector institutions, payments systems, and regulatory agenciescontributes to attracting global capita
10、l and promoting domestic saving.10Capital MisallocationsMarket imperfections, such as asymmetric information, adverse selection, herding behavior, and moral hazard (Chapter 6) may lead to capital misallocation.Policy-created distortionsgovernment policies that result in a market producing a level of
11、 output that is different from the economically efficient level of outputmay also result in capital misallocations.11Capital Market LiberalizationCapital market liberalizationpolicy actions designed to allow relatively open issuance and competition in a nations stock and bond marketentails seeking t
12、o maximize the benefits of capital inflows while minimizing the risk of financial instability and crisis.12Liberalization and Financial CrisesBoth portfolio flows and FDI flows have their benefits and risks.Portfolio Investment Involves the acquisition of foreign financial assets that results in les
13、s than a 10 percent ownership share in the entity. Hence, portfolio flows can reverse direction quickly, generating financial instability.Foreign Direct Investment (FDI)A long-term investment strategy in which the source of funds establishes financial control, making FDI a stabilizing influence on a
14、 nations economy. 13Capital ControlsSome economists advocate the use of capital controlslegal restrictions on the ability of a nations residents to hold and exchange assets denominated in foreign currencies.Most economists are skeptical of the effectiveness of capital controls because empirical stud
15、ies indicate that only temporary controls on capital inflows may prove to be effective.14Schools of Thought on Exchange Rate RegimesIn the 1990s, there were two schools of thought on exchange rate regimes.The first school of thought was that there should not be an explicit target for the exchange ra
16、te because small misses of the target could cause perception or credibility problems.The second school of thought was that without an explicit target, policymakers are unable to establish policy credibility.15The Corners HypothesisBy the end of the 1990s a third view, the corners hypothesis, emerged
17、.This view was that countries should not necessarily fix or float. Rather, they should have a firm commitment to one end of the spectrum or the other.In other words, policymakers should adopt either a rigid peg or a pure float.16DollarizationSince the collapse of Argentinas currency-board arrangemen
18、t, a growing number of economists have advocated dollarizationthe replacement of the domestic currency with the currency of another nation for emerging economies. Two possible problems are the loss of seigniorage revenues and the loss of discretionary monetary policy.Panama, El Salvador and Ecuador
19、are dollarized.17Which Regime?Today, prominent economists such as Frankel and Calvo, argue that it all three broad types of exchange-rate regimes, fixed, float and intermediate may be appropriate.The point is that it is the circumstances (business cycles and institutions) of the nation that are most
20、 important.18International Monetary FundThe International Monetary Fund: A multinational organization that promotes international monetary cooperation and that provides temporary financial assistance to nations experiencing balance-of-payments difficulties. Growth in IMF Membership: The number of me
21、mber nations in the IMF is now about six times larger than it was when the organization was founded.Conditionality: The limitations on the range of allowable actions of a government that is a recipient of IMF loans.19World Bank LendingEven though Africa has the worlds poorest nations, it has receive
22、d only 19 percent of total World Bank loans since 1990. 20Crisis Prediction and Early WarningFinancial Crisis Indicator: An economic variable that normally moves in a specific direction and by a certain relative amount in advance of a financial crisis, thereby helping to predict a coming crisis.Early Warning System: A mechanism that multinational institutions might use to track financial crisis indicators to determine that a crisis is on the horizon, thereby permitting a rapid response to head off the crisis.21
