Capital flows and geographically uneven economic dynamics: A monetary perspective

Abstract

This paper provides a monetary perspective on capital flows and their effects on geographically uneven economic dynamics. Contributing to debates on global imbalances and the international dimension of financialisation, the paper applies heterodox theories of endogenous money creation, asset pricing, and balance sheet fragility to capital flows across regions. Three theoretical claims are made and illustrated through coherent balance-sheet accounting and empirical examples. First, trade imbalances usually are financed endogenously by net inflows that need not originate from surplus regions. Second, bank inflows are not a precondition for local credit creation, but certain types of gross financial flows can contribute to destabilising financial booms through exchange rate appreciation and asset price inflation. Third, sudden stops in capital flows can be entirely unrelated to current account deficits but may trigger financial instability, resulting in negative gross flows rather than increased outflows. For debates in economic geography and heterodox economics, the arguments imply that the focus on surplus countries as originators of destabilising flows can be misleading and that global financial centres are likely to be more important. More attention is needed to gross portfolio and FDI flows into asset markets rather than bank flows and net flows.

Taking the spatialization of heterodox economics to the next level. States, cities and money

“…Heterodox monetary economics turns upside down mainstream thinking on the direct, causal relationships between budget deficits (draining away savings) and the crowding out of private investments. Moreover, as shown more recently by Kohler in this journal (2022), the direct association between domestic net savings and current account surpluses with foreign economies (i.e., indicating the outflow of domestic savings to finance foreign current account deficits), as suggested by a non-spatialized interpretation of national accounting statics, should be problematized. National accounting statistics not only cover up significant spatial international flows of funds between financial centres but, as importantly, provide an ex-post , balancing perspective on the overall flows of funds.…”

Capital Flows and the Eurozone's North-South Divide

“…Balance-sheet accounting shows that it is entirely possible for a country to finance another country's current account deficit without having a surplus. 35 The recycling metaphor narrows the attention to flows from surplus into deficit countries, which can also lead to misleading implications on the empirical side. Alexandr Hobza and Stefan Zeugner show that prior to the GFC, France provided large flows to the southern European deficit countries despite having a roughly balanced current account-contrary to what the recycling metaphor suggests.…”

The Dynamics of International Trade, Capital Flow, and Economic Growth in Developing Economies

“…Markets, and generated 􀅫low of capital in liberalized environment is not enough, and considerable. Kohler (2022) examined the 􀅫low regarding capital, and dynamics of economics uneven geographically. Coherent balance sheet accounting was used to observe the three theoretical claims.…”