Economics
Capital Mobility
Capital mobility refers to the ease with which financial capital can move across borders to seek the highest returns. It is influenced by factors such as interest rates, exchange rates, and government policies. High capital mobility can lead to increased investment and economic growth, but it can also make countries more vulnerable to financial crises and speculative movements.
Written by Perlego with AI-assistance
Related key terms
1 of 5
9 Key excerpts on "Capital Mobility"
eBook - PDFThe Financing of Foreign Direct Investment
A Study of the Determinants of Capital Flows in Multinational Enterprises
- Martin G. Gilman(Author)
- 2013(Publication Date)
- Bloomsbury Academic(Publisher)
Thus, a distinction was made between two types of mobility of capital — mobility in response to changes in income and the associated changes in the profitability of real investment (income mobility) and the mobility in response to changes in relative interest rates (interest mobility). Johnson provided a useful starting point for a re-examina-tion of the major determinants of capital flows, but the main stimulus for a dissatisfaction with the present body of litera-ture is provided by Learner and Stern. 41 They emphasize that a shift from an activity orientation to a transactor orientation may yield better results and better economics. Most existing models of international capital transactions are based upon a set of independent activities grouped together in the capital account of the balance of payments and broken down into short-term (trade, interest arbitrage, forward market speculation) and long-term (portfolio and direct investment). Most of the models which have been cited referred to short-term assets which were thought to respond primarily to interest-rate differentials and risk variables. The most recent portfolio-adjustment models have resolved many difficulties such as the stock vs. flow debate and yet this approach has important draw-backs; one stems from the static conception of portfolio adjustment, in which net worth is taken as given. Capital flows may be more the result of decisions that influence net worth than of the allocation of net worth among potential assets. The greatest shortcoming of the portfolio-adjustment models must surely be that there are some important economic 41 E. E. Learner and R. M. Stern, 'Problems in the Theory and Empirical Estimation of International Capital Movements', in F. Machlup, W. S. Salant, and L. Tarshis (eds.), International Mobility and Movement of Capital, NBER, New York: Columbia University Press, 1972.
eBook - PDF- A. Makin(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
Furthermore, some direct foreign investment may occur more for the purpose of overcoming goods and services trade restrictions than for strictly obtaining a higher rate of return on capital. There is also evidence that fund managers of large institutions have actively sought to diversify asset holdings internationally in order to minimise risk due to uncertain returns. Hence, in practice, consistent with standard portfolio theory, capital ¯ows may be driven to a large extent by the expected variance of returns on capital and not just the return itself. Though it was argued above, that the greater is Capital Mobility, the greater the macroeconomic welfare gains, there is a contrary view which suggests Capital Mobility has become `excessive'. Tobin (1978), for instance, echoing Keynes' (1936, ch. 13) views on the inherent irrationality of ®nancial markets, raises concerns about destabilising exchange rate movements which cause sustained deviations of real exchange rates from fundamentals with adverse implications for domestic in¯ation, output and employment. Intertemporal Trade, Capital Mobility and Interest Rates 83 As a remedy, Tobin proposed that international Capital Mobility be limited by throwing some `sand on the wheels' of the international ®nancial system; speci®cally, by imposing a worldwide ®nancial transactions tax of one percent on the value of any spot conversion of one currency into another. However, it would obviously be dif®cult to apply such a tax consistently world wide. The proposal also ignores the macroeconomic welfare losses that could result if foreign capital, irrespective of its maturity, is prevented from ¯owing to areas where it earns its highest risk adjusted rate of return. 4.4 Limitations In recent decades, greater Capital Mobility resulted from the increased global integration of capital markets in the wake of worldwide ®nancial liberalisation.
eBook - PDFWho Elected the Bankers?
Surveillance and Control in the World Economy
- Louis W. Pauly(Author)
- 2018(Publication Date)
- Cornell University Press(Publisher)
At the very least, there is broad acknowledgment of the increasing openness of financial channels across advanced industrial countries and recently across much of the emerging industrial world. National markets in foreign exchange, money market instruments, bank claims, bonds, and stocks are much more open now than they were even a decade ago. The actual magnitude of capital flows through those channels is, never- theless, still the subject of much empirical analysis and debate, and perfect Capital Mobility of the kind assumed in the simplest version of the Mundell-Fleming model has never existed. 20 By the 1990s, however, the perception that capital is much more mobile than it has ever been was firmly embedded in domestic pol- itics across a widening range of countries. In historical terms, as the next chapter demonstrates, this may have been an exaggeration, but there was no denying the political impact of capital market integra- tion in the years following the breakdown of the Bretton Woods exchange-rate system. In fact, the extent of that integration left a growing group of governments with an ever starker choice between exchange-rate stability and national monetary autonomy, a choice that brought to the fore basic concerns about politicallegitimacy. 21 "The globalization of finance," a phrase now commonly heard, connotes a number of changes in the world's leading and emerging capital markets. Among the more important are the reduction of direct controls and taxes on financial transactions, the liberalization of long-standing regulatory restrictions on financial intermediaries, the expansion of lightly regulated "offshore" financial markets, and the introduction of new technologies that speed up capital flows and stimulate the development of innovative financial products. All of these developments render capital potentially more mobile, both within and across national frontiers.
eBook - PDF- Elliot Posner(Author)
- 2009(Publication Date)
- Harvard University Press(Publisher)
89 C H A P T E R 5 Capital Mobility, Politics, and New Financial Interests, 1992–1994 A year can make all the difference. Between April 1994 and June 1995, national exchanges in Europe abruptly became market inno-vators, and this chapter focuses on the months before the turnaround. It addresses head-on the argument that Capital Mobility, as opposed to EU devel-opments, provides a better explanation for the outbreak of the competitive mimicry and the organizational forms of the resultant new stock markets. According to this line of reasoning, as levels of Capital Mobility rise, financial intermediaries, like venture capitalists, who manage investment portfolios de-velop preferences for more-efficient national arrangements and win battles with immobile local officials and stock exchanges. This proposition, as Chap-ter 2 discussed, rests on the notion that mobility gives venture capitalists, quoted companies, and other market participants alternatives to national fi-nancial centers, drawing exchanges into cross-border competition and pres-suring them to adopt models considered best suited for retaining customers. Two types of evidence demonstrate the insufficiency of cross-border capi-tal mobility as an explanation for the creation of venture capital preferences and their enhanced influence in altering domestic financial arrangements. First, by 1993 levels of Capital Mobility had already enabled cross-border financial activity in Europe for at least five years in a number of sectors, in-cluding the trading of large-company shares. If higher levels of Capital Mobility were responsible for the strengthened position of venture capital-ists, the creation of the new stock markets—or at least competition in the smaller company sector among Europe’s exchanges—would likely have occurred earlier.
eBook - PDFInternational Economics and Business
Nations and Firms in the Global Economy
- Sjoerd Beugelsdijk, Steven Brakman, Harry Garretsen, Charles van Marrewijk(Authors)
- 2013(Publication Date)
- Cambridge University Press(Publisher)
For the individual fi rm, however, the takeover decision is an investment decision. These examples illustrate that the macroeconomic model of the previous section is useful, but it also limits our understanding of international capital fl ows. Portfolio investment and risk sharing International Capital Mobility also permits a more e ff ective risk sharing or risk diversi fi cation. This second main advantage of Capital Mobility is best understood from the perspective of the individual portfolio investor and from the recognition that fi nancial transactions involve risk. International Capital Mobility allows for a better risk diversi fi cation than is possible in autarky. To see this, suppose that a portfolio investor can invest her savings in loans to fi rms in Home and to fi rms in Foreign. Suppose also that in both countries the Gains from international Capital Mobility 299 interest rate is r and that both countries do not di ff er in their country risk with respect to, for instance, political uncertainty. Finally, assume that the exchange rate between the two countries is irrevocably fi xed. Based on the macroeconomic approach of section 10.2 , it would seem that investors are indi ff erent between supplying funds to fi rms in Home or Foreign. This is not the case. Financial trans-actions are risky and the degree of risk between these two types of loans may still di ff er. Risk-averse investors can reduce their total risk by investing in Home as well as in Foreign. Why might the degree of risk di ff er? If Home and Foreign are specialized in the production of di ff erent goods, the associated risks of lending to fi rms in Home and Foreign will most likely be di ff erent. Suppose that the loan demand in Home comes exclusively from car manufacturers and in Foreign exclusively from wine producers.
eBook - ePubThe Science of Economic Development and Growth: The Theory of Factor Proportions
The Theory of Factor Proportions
- C.C. Onyemelukwe(Author)
- 2016(Publication Date)
- Routledge(Publisher)
For example, capital could leave a capital-abundant country, where it has lower rent, and migrate to a capital-scarce country, where it will achieve higher rent. Labor would, as a result, have become more abundant in the capital-abundant country. Therefore wages will fall. But the income of the owners of capital will rise to become equal to that in the capital-scarce country. The opposite will happen in the capital-scarce country. Capital Mobility, like trade, redistributes income from a country’s relatively scarce factor to the relatively abundant one. It is argued that factor mobility in this way makes a country better off because the “ability to exchange factors, like the ability to trade goods, widens opportunities.” 1 In effect, widened opportunities (whatever opportunities means in this case) are regarded as a requirement for economic growth. Today, the factors that are regarded as transferable are capital, labor, and technology. Of these, technology has not always been regarded as a mobile factor. The importance of technology and its mobility seem to have increased with the emergence of new growth theory. Land is said to be an immobile factor. Recall that the conventional literature does not recognize material as a factor because of traditional economic ambivalence about the role of material. Instead, material is often classed in a characteristically unscientific language as a kind of working capital. Yet material is historically the oldest of the mobile factors. Conventional economics takes the position that a country’s factor endowments do not provide it with the best combination to maximize welfare. So, it is thought, each country needs to export and import products or factors
- M. Watson(Author)
- 2007(Publication Date)
- Palgrave Macmillan(Publisher)
4 The Historical Conditions for Recent Increases in Capital Mobility Introduction International financial orders are historically produced and are created through direct political interventions (e.g., Langley 2002: 104–20). The dominant economic theories outlined in the previous chapter may well provide intellectual support for the maintenance of a liberal interna- tional financial order, and their continued acceptance amongst the economics profession almost certainly restricts the debate about feasible alternatives to such an order. However, they are not, in and of them- selves, directly responsible for its creation. The formally constitutive moment of any international financial order arises at the point at which deliberations about the preferred form of international economic rela- tions reach a temporarily definitive conclusion. Therefore, the process through which an international financial order is established must be seen as one of political struggle. It might appear to have intermittent periods of apparent resolution, but it can always be reactivated given the force of events. Political struggle over the financial structures of everyday life will persist for as long as there is political struggle over the type of society to be preferred. However, the current highly liberalised international financial order may prove to be an important exception to this rule, insofar as its reproduction only par- tially requires general societal consent and, as a result, it often appears to bypass the dynamics of political struggle. One point to ponder in this respect is the extent to which recent increases in the mobility of capital preempt much of the discussion about how best to organise international finance in line with agreed social priorities. This is an issue to which I return in the conclusion to the chapter. For now, it is sufficient to note that Capital Mobility acts 91 as a protective mechanism for a highly liberalised international financial order.
eBook - PDFInternational Macroeconomics
A Modern Approach
- Stephanie Schmitt-Grohé, Martín Uribe, Michael Woodford(Authors)
- 2022(Publication Date)
- Princeton University Press(Publisher)
Summarizing, in the presence of a borrowing externality free Capital Mobility ceases to be optimal. Households consume more and borrow more in period 1 than is socially optimal. Capital controls become desirable as a way to eliminate overborrowing and bring about the socially optimal allocation. 12.5 Capital Mobility in a Large Economy When a large economy like the United States, the eurozone, or China increases its demand for international funds, the world interest rate will in general experience upward pressure. Each individual household in the large economy takes the interest rate as given, but for the country as a whole, the interest rate is an endogenous variable. This means that the government of a large economy might be able to apply policies to manipulate world interest rates in the country’s favor. For example, if the country is running a current account deficit, the government could impose capital controls to curb the country’s aggregate external borrowing and induce a fall in the world interest rate. Before analyzing the ability of capital controls to manipulate the current account and the world interest rate, we will characterize the equilibrium in a large economy under free Capital Mobility. This analysis will serve as a useful benchmark to eval- uate national policies aimed at managing international capital flows, which we will take up in Section 12.7. The model of a large economy we present here builds on the two-country model introduced in Section 7.3 of Chapter 7. Consider a two-period economy composed of two countries—the home country, denoted h, and the foreign country, denoted f . The home country receives a constant endowment in both periods. By contrast, the foreign country receives a lower endowment in period 1 than in period 2. The two economies are identical in all other respects. In particular, both have the same pref- erences for consumption and start period 1 with no assets or debts. If both countries
- Hamid Beladi, Kwan Choi, Sugata Marjit, Eden S. H. Yu, Hamid Beladi, Kwan Choi, Sugata Marjit, Eden S. H. Yu(Authors)
- 2008(Publication Date)
- Elsevier Science Ltd(Publisher)
This extension allows us to analyze some issues that are not investigated in Jones (1980, 1994). First, I examine the role of the demand structure in determining the direction of international capital movements. The demand side as well as the supply side plays a role in determining the allocation of capital between countries. I show that the direction of capital movements crucially depends on the size of the relative demand for a commodity. Second, I analyze who gains and who loses from international capital movements. Capital flows affect the relative price of a commodity, which leads to a change in income distribution within countries. I examine whether or not the owners of capital and workers gain from capital flows relative to a free trade baseline. Finally, I investigate the effects of international capital movements on the pattern and value of goods trade. Capital flows affect the production pattern of each country, which may induce a change in the pattern of trade in goods. Given that the owners of capital do not move with capital across borders, I examine whether capital movements raise or reduce the value of trade in goods. 2 See Jones (2000) for recent developments in this topic. Morihiro Yomogida 330 The rest of this chapter is organized as follows. In Section 2, I develop the model. In Section 3, I examine free trade equilibrium in a regime in which capital is not allowed to move between countries. In Section 4, I allow capital to move internationally and examine how the direction of capital movements depends on the size of the relative demand for a commodity. I also analyze the effect of capital movements on income distribution within countries, and the pattern and value of trade in goods. In Section 5, I close this chapter with conclusions. 2. The model Let us consider a simple Ricardian setting. There are two sectors, X and Y . Sector X requires capital as well as labor in production.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
