Does Capital Account Liberalization Affect Income Inequality?
Oxford Bulletin of Economics and Statistics,
By adopting an identification strategy of difference‐in‐difference estimation combined with propensity score matching between liberalized and closed countries, this paper provides robust evidence that opening the capital account is associated with an increase in income inequality in developing countries. Specifically, capital account liberalization, in the long run, is associated with a reduction in the income share of the poorest half by 2.66–3.79% points and an increase in that of the richest 10% by 5.19–8.76% points. Moreover, directions and categories of capital account liberalization matter. The relationship is more pronounced when liberalizing inward and equity capital flows.
Surges and Instability: The Maturity Shortening Channel
IWH Discussion Papers,
Capital inflow surges destabilise the economy through a maturity shortening mechanism. The underlying reason is that firms tend to make their debt redeemable on demand in order to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both firm level and macro level, our main findings are threefold. First, corporate debt maturity shortens substantially during surges, especially for firms with foreign bank relationships. Second, surges change the shape of the interest rate term structure and lead to a more flattened yield curve. Third, the probability of a crisis following surges with a flattened yield curve is significantly larger than following surges without one. Our work suggests that debt maturity is key to understanding the consequences of capital inflow bonanzas.
Cross-border Transmission of Emergency Liquidity
Journal of Banking and Finance,
We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures, we identify banks in Germany with access to U.S. facilities. Using detailed interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of the average German bank with access. This reduction is mitigated for banks with more vulnerable balance sheets prior to the inception of emergency liquidity. We also find a significant pass-through in terms of lower corporate credit rates charged for banks with the lowest pre-crisis leverage, US-dollar funding needs, and liquidity buffers. Spillover effects from U.S. emergency liquidity provision are generally confined to short-term rates.
Within Gain, Structural Pain: Capital Account Liberalization and Economic Growth
New Structural Economics Working Paper No. E2018010,
This paper is the first to study the effects of capital account liberalization on structural transformation and compare the contribution of within term and structural term to economic growth. We use a 10-sector-level productivity dataset to decomposes the effects of opening capital account on within-sector productivity growth and cross-sector structural transformation. We find that opening capital account is associated with labor productivity and employment share increment in sectors with higher human capital intensity and external financial dependence, as well as non-tradable sectors. But it results in a growth-reducing structural transformation by directing labor into sectors with lower productivity. Moreover, in the ten years after capital account liberalization, the contribution share of structural transformation decreases while that of within productivity growth increases. We conclude that the relationship between capital account liberalization and economic growth is within gain and structural pain.
Polen vor der Middle-Income-Trap? Entwicklungsplan bis 2030 soll
den Aufholprozess beschleunigen
Wirtschaft im Wandel,
Polen hat seinen Abstand gegenüber den entwickelten Marktwirtschaften Westeuropas seit dem Beginn der 1990er Jahre bis heute gemessen am Pro-Kopf-Einkommen stark verringert. Galt das Land in den ersten zwei Jahrzehnten unter den mittelosteuropäischen Ländern als Vorreiter beim Wirtschaftswachstum, so hat sich das Aufholtempo in den letzten Jahren verlangsamt. Die polnische Regierung reagierte darauf mit einem strategischen Entwicklungsplan („Morawiecki“-Plan), der Maßnahmen und Ziele bis 2030 benennt und Polens Aufholprozess neuen Schwung verleihen soll. Für das wirtschaftsliberale Reformland bedeutet mehr staatlich gesteuerte Wirtschaftsplanung allerdings einen Paradigmenwechsel. Vom Erfolg dieser Strategie hängt es ab, ob Polen den Übergang in die zweite, innovationsorientierte Phase des Aufholprozesses schafft oder längerfristig auf dem bisherigen Niveau zu verharren droht.
Testing for Structural Breaks at Unknown Time: A Steeplechase
This paper analyzes the role of common data problems when identifying structural breaks in small samples. Most notably, we survey small sample properties of the most commonly applied endogenous break tests developed by Brown et al. (J R Stat Soc B 37:149–163, 1975) and Zeileis (Stat Pap 45(1):123–131, 2004), Nyblom (J Am Stat Assoc 84(405):223–230, 1989) and Hansen (J Policy Model 14(4):517–533, 1992), and Andrews et al. (J Econ 70(1):9–38, 1996). Power and size properties are derived using Monte Carlo simulations. We find that the Nyblom test is on par with the commonly used F type tests in a small sample in terms of power. While the Nyblom test’s power decreases if the structural break occurs close to the margin of the sample, it proves far more robust to nonnormal distributions of the error term that are found to matter strongly in small samples although being irrelevant asymptotically for all tests that are analyzed in this paper.
What Drives FDI in Central-eastern Europe? Evidence from the IWH-FDI-Micro Database
The focus of this paper is on the match between strategic motives of foreign investments into Central-Eastern Europe and locational advantages offered by these countries. Our analysis makes use of the IWH-FDI-Micro Database, a unique dataset that contains information from 2009 about the determinants of locational factors, technological activity of the subsidiaries, and the potentials for knowledge spillovers in the Czech Republic, Hungary, Poland, Romania, and Slovakia. The analysis suggests that investors in these countries are mainly interested in low (unit) labour costs coupled with a well-trained and educated workforce and an expanding market with the high growth rates in the purchasing power of potential buyers. It also suggests that the financial crisis reduced the attractiveness of the region as a source for localised knowledge and technology. There appears to be a match between investors’ expectations and the quantitative supply of unqualified labour, not however for the supply of medium qualified workers. But the analysis suggests that it is not technology-seeking investments that are particularly content with the capabilities of their host economies in terms of technological cooperation. Finally, technological cooperation within the local host economy is assessed more favourably with domestic firms than with local scientific institutions – an important message for domestic economic policy.
Foreign Subsidiaries in the East German Innovation System – Evidence from Manufacturing Industries
This paper analyses the extent of technological capability of foreign subsidiaries located in East Germany, and looks at the determinants of foreign subsidiaries’ technological sourcing behaviour. The theory of international production underlines the importance of strategic and regional level variables. However, existing empirical approaches omit by and large regional level factors. We employ survey evidence from the “FDI micro data- base” of the IWH, that was only recently made available, to conduct our analyses. We find that foreign subsidiaries are above average technologically active in comparison to the whole East German manufacturing. This can be partially explained by the industrial structure of foreign direct investment. However, only a limited share of foreign subsidiaries with R&D and/or innovation activity source technological knowledge from the East German innovation system. If a subsidiary follows a competence augmenting strategy or does local trade, it is more likely to source technological knowledge locally. The endowment of a region with human capital and a scientific infrastructure has a positive effect too. The findings suggest that foreign subsidiaries in East Germany are only partially linked with the regional innovation system. Policy implications are discussed.