The Financial Action Task Force’s gray list publicly identiﬁes countries with strategic deﬁciencies in their AML/CFT regimes (i.e., in their policies to prevent money laundering and the ﬁnancing of terrorism). How much gray-listing aﬀects a country’s capital ﬂows is of interest to policy makers, investors, and the Fund. This paper estimates the magnitude of the eﬀect using an inferential machine learning technique. It ﬁnds that gray-listing results in a large and statistically signiﬁcant reduction in capital inﬂows.
Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen
Macro statistics on foreign direct investment (FDI) are blurred by offshore centers with
enormous inward and outward investment positions. This paper uses several new data
sources, both macro and micro, to estimate the global FDI network while disentangling real
investment and phantom investment and allocating real investment to ultimate investor
economies. We find that phantom investment into corporate shells with no substance and no
real links to the local economy may account for almost 40 percent of global FDI. Ignoring
phantom investment and allocating real investment to ultimate investors increases the
explanatory power of standard gravity variables by around 25 percent.
International Monetary Fund. Western Hemisphere Dept.
This paper takes stock of St. Lucia’s plans to manage climate change, from the perspective of their macroeconomic implications, and suggests macro-relevant reforms that could strengthen the likelihood of success of the national strategy. To meet its renewable energy plans, St. Lucia will need to mobilize private investment. External assistance will be needed to develop supporting infrastructure. Building capacity for project assessment and investment promotion is a high priority, to shape needed investments into bankable projects. Elsewhere, capacity-building would be most useful to help cost sectoral plans, complete the disaster-preparedness strategy, move toward carbon taxation, and strengthen skills in public investment management and public financial management.
Ms. Yevgeniya Korniyenko, Manasa Patnam, Rita Maria del Rio-Chanon, and Mason A. Porter
This paper studies the interconnectedness of the global financial system and its susceptibility
to shocks. A novel multilayer network framework is applied to link debt and equity
exposures across countries. Use of this approach—that examines simultaneously multiple
channels of transmission and their important higher order effects—shows that ignoring the
heterogeneity of financial exposures, and simply aggregating all claims, as often done in
other studies, can underestimate the extent and effects of financial contagion.The structure of
the global financial network has changed since the global financial crisis, impacted by
European bank’s deleveraging and higher corporate debt issuance. Still, we find that the
structure of the system and contagion remain similar in that network is highly susceptible to
shocks from central countries and those with large financial systems (e.g., the USA and the
UK). While, individual European countries (excluding the UK) have relatively low impact on
shock propagation, the network is highly susceptible to the shocks from the entire euro area.
Another important development is the rising role of the Asian countries and the noticeable
increase in network susceptibility to shocks from China and Hong Kong SAR economies.
Post-crisis dynamics show a shrinkage in the overall amount of crossborder bank lending,
which has been interpreted in the literature as a retreat in financial globalization. In this
paper, we argue that aggregate figures are not sufficient to support such a claim in terms of
the overall structure of the global banking network. Based on a systematic approach to
measuring, mapping and analyzing financial interconnectedness among countries using
network theory, we show that, despite the decline in aggregate lending volumes, the structure
of the network has developed increased connections in some dimensions. Some parts of the
network are currently more interlinked regionally than before the crisis, and less dependent
on major global lenders. In this context, at a more disaggregate level, we document the
characteristics of the increasing regionalization of lending flows, the different evolution of
linkages through bank affiliates and direct cross-border claims, as well as the shift in the
importance of key borrower and lender nodes. These changes in the banking network have
important insights in terms of policy implications since they indicate that the global banking
network has evolved, but it has not undergone a generalized retrenchment in financial
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper assesses the recent trends in The Bahamas’ offshore financial center (OFC) and their contribution to the real economy. The Bahamas hosts one of the largest OFCs in the world. International banks are the most important institutions in the Bahamian OFC. Despite a sharp contraction in the size of the offshore sector, the direct impact on the real economy appears to have been modest. The direct contribution of offshore banks to the real economy appears to have remained broadly stable, reflecting an orderly adjustment so far. Strong compliance with anti–money laundering and combating the financing of terrorism and tax transparency standards should help ensure that this orderly adjustment continues.
Mr. Sebastian Acevedo Mejia, Lu Han, Miss Marie S Kim, and Ms. Nicole Laframboise
This paper studies the role of airlift supply on the tourism sector in the Caribbean. The
paper examines the relative importance of U.S.-Caribbean airlift supply factors such as the
number of flights, seats, airlines, and departure cities on U.S. tourist arrivals. The possible
endogeneity problem between airlift supply and tourist arrivals is addressed by using a
structural panel VAR and individual country VARs. Among the four airlift supply
measures, increasing the number of flights is found to be the most effective way to boost
tourist arrivals on a sustained basis. As a case study, the possible crowding effect of
increasing the number of U.S. flights to Cuba is investigated and, based on past
observations, we find no significant impact on flights to other Caribbean countries. The
impact of natural disasters on airlift supply and tourist arrivals is also quantified.