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Hali J. Edison, Michael W. Klein, Luca Antonio Ricci, and Torsten Sløk

This paper surveys the literature on the effects of capital account openness and stock market liberalization on economic growth and provides a synthesis in which we reconcile some of the different results presented in the literature. Various empirical measures used to gauge the presence of controls on capital account transactions and the liberalization of equity markets are discussed. We compare detailed measures of capital account controls that attempt to capture the intensity of enforcement with other indicators that simply capture whether controls are present. A detailed review of the literature is followed by an empirical section in which we trace the divergence in published results to differences in country coverage, sample periods, indicators of liberalization, and control variables across studies. Specifically, we show that when an institutional variable such as government reputation is added to the specification, the significance of capital account openness vanishes. Also, we demonstrate that enriching the specification by allowing for nonlinearities helps explain why different studies that ignore the nonlinear nature of the relationship find different results. [JEL. F32, F33, F36]

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The global financial system has yet again gathered strength and resilience. As before, this trend has been fueled by continued balance sheet improvements in the financial and corporate sectors in most countries. The continuing global economic expansion, together with determined efforts to restructure and cut costs, has enabled many financial institutions and corporations to generate substantial, or even record, profits over the past three years. As a result, their balance sheets have strengthened to the extent that the financial and corporate sectors can absorb a significant degree of financial shock before coming under systemic stress. With global growth most likely to continue, inflation under control, and financial markets generally benign, we expect the resilience of the global financial system to improve even further. This improvement provides an important cushion in the event that any of the more medium-term risks discussed below were to materialize. This cushion against risks and vulnerabilities in the medium term may have expanded, but risks have not disappeared altogether.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

In the April 2005 Global Financial Stability Report (GFSR), we noted that financial conditions were quite positive, leading risks to be skewed on the down side. Financial market developments since then have reduced risks somewhat, at least for the near term. However, the same forces that have supported buoyant financial markets have also created larger global imbalances and higher levels of debt, thus storing up potential vulnerabilities for the future.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The factors that determine changes in asset allocation and, hence, capital flows across national borders and sectors have important implications for the conduct of surveillance of global financial markets. The fast growing importance of institutional investors, mostly in mature markets but increasingly in a number of emerging market economies, has two major consequences that are closely interrelated. On the one hand, these nonbank asset gatherers assume sizable market and credit risks, not the least through modern financial engineering, in the form of swaps, derivatives, and so on. Previous issues of the Global Financial Stability Report (GFSR) have examined the driving forces behind that development, potential vulnerabilities, and policies that could mitigate adverse consequences. On the other hand, institutional investors are not only exposed to market and credit risks emanating from financial markets, but their investment decisions increasingly “make markets.”

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The macroeconomic and financial dislocations experienced following the crises in emerging markets (EMs) in the late 1990s have led to increased efforts in these countries to develop local bond markets as an alternative source of debt financing for corporates. A well-functioning bond market can strengthen corporate and bank restructuring and thus accelerate the resolution of a crisis. At the same time, local bond issues facilitate the reduction of currency and maturity mismatches on their balance sheets and thus reduce the vulnerability of the corporate sector. Recent work by the IMF on the use of the balance sheet approach to detect vulnerabilities in EMs has highlighted the importance of corporate sector vulnerabilities and their linkages to other sectors and markets. In this context, the April 2005 Global Financial Stability Report (GFSR) demonstrated the importance of having alternative sources of funding for the corporate sector, both to finance growth and to strengthen balance sheets. In this chapter, we continue this line of work and focus on ways to further develop corporate bond markets in EMs.

EDUARDO LEVY-YEYATI and ANGEL UBIDE

This paper analyzes the behavior of closed-end country fund discounts, including evidence from the Mexican and East Asian crises. It finds that the ratio of fund prices to their fundamental value increases dramatically during a crisis, an anomaly that we denote the “closed-end country fund puzzle.” Our results show that the puzzle relates directly to the fact that international investors are less (more) sensitive to changes in local (global) market conditions than domestic investors. This asymmetry implies that foreign participation in local markets can help dampen the effect of a crisis in asset prices in the originating country, at the cost of amplifying contagion to noncrisis countries. [JEL G1, E3]

Mr. Andrew Berg, Mr. Paolo Mauro, Mr. Michael Mussa, Mr. Alexander K. Swoboda, Mr. Esteban Jadresic, and Mr. Paul R Masson

Abstract

This paper examines the consequences of heightened capital mobility and of the integration of developing economies in increasingly globalized markets for the exchange rate regimes of the industrial, developing, and transition economies. It builds upon previous studies by IMF staff on various aspects of the exchange rate arrangements of member countries, consistent with the IMF's role of surveillance over its members exchange rate policies.

International Monetary Fund. External Relations Dept.
This paper reviews the increasing private capital flows to less developed countries. The share of developing countries in the foreign direct investment is small, perhaps less than 30 percent of the total. The effects of this decline in the volume of foreign investment and the continued problem of capital flight have been aggravated by the serious fall in commercial bank lending to developing countries as a group and by a decline in official development assistance.