Official Financial Flows, Capital Mobility, and Global Imbalances

Abstract

We use a cross-country panel framework to analyze the effect of net official flows (chiefly foreign exchange intervention) on current accounts. We find that net official flows have a large but plausible effect on current account balances. The estimated effects are larger with instrumental variables (42 cents to the dollar on average compared with 24 without instruments), reflecting a possible downward bias in regressions without instruments owing to an endogenous response of net official flows to private financial flows. We consistently find larger impacts of net official flows when international capital flows are restricted and smaller impacts when capital is highly mobile. A further result is that there is an important positive effect of lagged net official flows on current accounts that we believe operates through the portfolio balance channel. JEL Codes: E5, F3

What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature

“…Another useful distinction is by the economic sector that provides the capital as well as the sector using the capital. While capital provided by the private sector can be expected to be driven by risk‐return considerations, this may not be the case for official lending provided by international financial institutions like the World Bank and the International Monetary Fund or by bilateral official creditors (Gupta and Ratha, ; Bayoumi et al ., ). Alfaro et al .…”

Unveiling the Effects of Foreign Exchange Intervention: A Panel Approach

“…Another related strand of the literature has studied the impact of FXI (and more generally net official flows) on the current account. See for example, Bayoumi et al (2014), Gagnon (2012b) and Gagnon (2013). 4 In the case of the signaling channel, FXI serves as tool to convey information about policy intentions, and thus cannot be thought of as an independent policy instrument.…”

“…This is different from studies that focus on the effect of FXI on the current account, where the direction of the endogeneity bias is ambiguous. See, for example,Bayoumi et al (2014).16 Its statistic is built on the weighted sum of the residuals from the exclusion restrictions and follows a χ 2 in the number of overidentifying restrictions. For instruments to pass this test, the test statistic should be low enough not to reject the null hypothesis.17 The test is built on the F statistic of the first stage regression, but specifically tailored to weak instruments issues, and is therefore preferable to the often used rule of thumb of the first stage F statistic being larger than 10.…”

Unconventional Policies and Exchange Rate Dynamics

“…The magnitude of the exchange rate depreciation is similar to the one obtained by Blanchard et al (2015), who find evidence suggesting that FXI is effective in stemming appreciation pressures arising from global flow shocks. At the same time, Bayoumi et al (2016) and Gagnon et al (2017) find that an increase in FX reserves of 1 percent of GDP increases the current account balance in range around 0.5 percent.…”

“…characterizes the investment adjustment costs. 3 Capital good producers are owned by unrestricted households. Thus, the discount factor (Λ t,t+s ) corresponds to marginal rate of substitution of consumption between period t and t + s of unrestricted households:…”