AT ITS SEMIANNUAL MEETING in April 1997 the Interim Committee of the International Monetary Fund (IMF) proposed that the organization’s Articles of Agreement (the basic “constitution” of international financial relations among its 182 member countries) be amended to include currency convertibility for capital transactions among its fundamental objectives. Since the IMF was founded in 1946, currency convertibility for current transactions—goods, services, travel, interest, and dividend payments— enshrined in Article VIII, has been not only a fundamental objective of the organization but a condition for membership in good standing. But convertibility for capital transactions was pointedly excluded from the basic objectives; indeed, early proposals would have enjoined member countries, when requested, to help other members enforce such controls on international capital transactions as they might impose, although that provision was ultimately not adopted. Private international capital movements were badly disrupted by the extensive debt defaults of the 1930s and the ravages of World War II. Since the 1940s, however, they have grown rapidly, regaining the importance in international transactions that they had before World War I and in the 1920s. The world of international economic intercourse is thus very different today from that envisaged by the architects of the IMF. Shortly after the Interim Committee’s meeting, the Asian financial crises erupted. Some observers attributed these crises in part to unwise or excessive capital liberalization. Malaysia dramatically reimposed controls on outward capital movements in September 1998, while other countries tightened their existing controls. All these developments have made

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Should Capital Controls Be Banished

Publisher Summary This chapter discusses portfolio balance models with postulated asset demands, asset demands broadly consistent with but not directly implied by microeconomic theory. The demand for the sum of assets denominated in each currency is homogeneous of degree one in nominal wealth, and the demand for money in each country depends on the return on the security denominated in that country's currency but not on the return on securities denominated in other currencies. However, under these same assumptions the demand for money depends on real wealth. Because the conclusions of macroeconomic analysis often depend crucially on the form of asset demand functions, it is important to continue to explore the implications of the microeconomic theory and other microeconomic approaches. The chapter discusses that the consumer arrives at his or her asset demands by maximizing his or her utility given interest rates and the parameters of the distributions of prices and exchange rates. The distributions of prices and exchange rates are not invariant to changes in the distributions of policy variables and stochastic components of tastes and technology. It has been recognized that a very important item on the research agenda is imbedding consumer's asset demands based on utility maximization in a general equilibrium model in which the distributions of prices and exchange rates are determined endogenously.

Chapter 15 The specification and influence of asset markets

An Analysis of Credit Terms in the Eurodollar Market

Foreword E.de Almeida, X.Lu , A.Rangnekar & D.Schizer Preface T.H.Moran Acknowledgements FDI by Emerging Market Multinationals and the Impact of the Financial Crisis and Recession K.P.Sauvant , W.A.Maschek & G.McAllister The Global Challenges Facing Emerging Markets J.D.Sachs THE LAY OF THE LAND Reflections on Multinationals in a Globally Interdependent World Economy Y.Aharoni Towards a Re-newed Stages Theory for BRIC Multinationals? R.van Tulder The Theory and Regulation of Emerging Market Multinationals A.M.Rugman Comment: Do We Need a New Theory to Explain Emerging Market MNEs? A.Durnev GAINING GROUND: THE EXPANSION OF EMERGING MARKET MULTINATIONALS Transnationalization of Brazilian Companies P.Resende , A.de Almeida & J.Ramsey Take-off and Turbulence in the Foreign Expansion of Russian Multinationals K.Kalotay Global Players from India: A Political Economy Perspective A.Noelke & H.Taylor How Different are Chinese Foreign Acquisitions? Adding an Indian Comparison H.Rui , G.S.Yip & S.Prashantham Unknown Multinationals: Leading Multinationals from Slovenia A.Jaklic & M.Svetlicic THE POLICY LANDSCAPE: OUTWARD FDI FROM EMERGING MARKETS What Can Emerging Countries Learn from the Outward Direct Investment Policies of Advanced Countries? P.J.Buckley , J.Clegg , A.R.Cross & H.Voss Changing Policy Regimes in Outward Foreign Direct Investment: from Control to Promotion F.de Beule & D.van den Bulcke The Role of Government Policies in Promoting Outward FDI of Emerging Markets: China's Experience X.Qiuzhi & H.Bingjie "South-South" FDI and Political Risk Insurance Multilateral Investment Guarantee Agency World Bank Group Multinational Enterprises from Emerging Markets H.G.Broadman THE POLICY LANDSCAPE: INWARD FDI FROM EMERGING MARKETS Is the EU Ready for FDI from Emerging Markets? J.Clifton & D.Diaz-Fuentes Is the US Ready for FDI from Emerging Markets: the Case of China K.P.Sauvant The Policy Landscape: Inward FDI from Emerging Market A.O'Sullivan THE PATH AHEAD The Rise of Emerging Market Multinationals H.Loewendahl The Rise of Emerging Market Multinationals J.E.Alvarez The Rise of Emerging Market Multinationals G.Hufbauer & M.Adler Thinking Outward: Global Players from Emerging Markets S.Thomsen

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Foreign direct investments from emerging markets : the challenges ahead

In scholarly and political circles, the economic gains to a country of attracting inward foreign direct investment (IFDI) are now largely uncontested. Such investments are generally perceived to bring a number of benefits to a host economy, not least in relation to employment, productivity levels, organizational and managerial practices, backward and forward linkages, technology, and greater participation in the international division of labor (Buckley and Casson 1998). In recognition of these benefits, much of the policy debate concerning foreign direct investment (FDI) has revolved around IFDI policies and international investment agreements (IIAs), with capital exporting countries usually seeking greater market access, nondiscriminatory treatment, and investment protection in host countries that improves the competitiveness of their own multinational enterprises (MNEs), and developing countries offering increasingly attractive investment policy regimes (UNCTAD 1995). One outcome is that policies toward IFDI have now become relatively well established, wide ranging, and transparent among both developed and developing countries. At the same time, our understanding of the relationship between policy and inward investing firm behavior is reasonably well advanced (Rugman and Brewer 2001).

What Can Emerging Markets Learn from the Outward Direct Investment Policies of Advanced Countries

This paper presents a portfolio approach to the question of the Eurodollar deposit multiplier and estimates the multiplier on this basis. This approach is offered as an alternative to the more conventional fixed-coefficient version of the multiplier model, which tends to ignore explicit portfolio choice on the part of Euro-banks and the non-Euro-bank public. While it is conceded that the "fixed-coefficient" multiplier model may be useful as a simple approximation to the money supply process in a domestic banking system, where banking regulations are often quite important, it is suggested that such a model is not appropriate for an unregulated competitive situation like that of the Euro-dollar market. A general equilibrium portfolio model of the Euro-dollar market is used to derive an expression for the Euro-dollar deposit multiplier. It is shown that, unlike the "fixed-coefficient" multiplier, which has a minimum value of unity, the Euro-dollar multiplier for a primary inflow of deposits--from, for example, the United States--would be between zero and unity in the absence of redepositing in the market by the central banks. The initial shift of deposits would be offset by what is called net interest leakages, which would occur as portfolios are adjusted in response to the changes in relative interest rates that follow the primary deposit inflow. The precise value of the multiplier would depend on the interest elasticities of the relevant functions in the model. Finally, it is argued that when central banks hold part of their reserves on deposit in the Euro-dollar market the value of the multiplier would fall between zero and 1/(1 -- cd), where cd is the ratio of the central banks' holdings of Euro-dollar deposits to their total foreign reserves. To arrive at a figure for the Euro-dollar multiplier, deposit and loan functions are estimated for the United States and Canada and for Western Europe, using monthly data for the period 1968-72. From the estimation of the responsiveness of loans and deposits to changes in the Euro-dollar interest rate and from an estimate of the central bank Euro-dollar deposit ratio (cd), it is concluded that the Euro-dollar deposit multiplier was slightly greater than unity (1.4) in the period 1968-72. However, this estimate for the multiplier should be considered as a maximum, because of the assumptions made and because of the possibility that the figure for the extent of redepositing in the market by the central banks is on the high side. /// La prA©sente A©tude expose une mA©thode qui prend en considA©ration le choix des placements dans le calcul du multiplicateur des dA©pA´ts en euro-dollars et permet, par lA , d'estimer ce multiplicateur. Cette mA©thode est proposA©e comme pouvant remplacer la version plus traditionnelle du modA¨le de multiplicateur A coefficients fixes qui tend A ne pas tenir compte de la structure des portefeuilles explicitement adoptA©e par les euro-banques et les investisseurs autres que les euro-banques. Alors que le modA¨le du multiplicateur "A coefficients fixes" peut Aatre utile pour donner une simple approximation de l'A©volution de l'offre monA©taire d'un systA¨me bancaire interne souvent soumis A un grand nombre de rA©glementations bancaires, ce modA¨le ne convient pas A un marchA© non rA©glementA© tel que celui de l'euro-dollar. L'expression du multiplicateur des dA©pA´ts en euro-dollars est obtenue A partir du modA¨le d'A©quilibre des portefeuilles sur le marchA© de l'euro-dollar. Il est dA©montrA© que, A la diffA©rence du multiplicateur "A coefficients fixes" dont la valeur minimum est A©gale A l'unitA©, la valeur du multiplicateur des euro-dollars pour un flux initial des dA©pA´ts -- en provenance des Etats-Unis par exemple -- serait comprise entre zA©ro et un si les banques centrales ne redA©posaient pas leurs fonds sur ce mAame marchA©. Le flux initial des dA©pA´ts serait compensA© par ce que l'on appelle les fuites nettes dues aux A©carts entre taux d'intA©rAat intervenant au fur et A mesure des ajustements de portefeuille effectuA©s pour rA©pondre aux variations des taux d'intA©rAat relatifs qui se produisent aprA¨s les dA©pA´ts initiaux. La valeur prA©cise du multiplicateur dA©pendrait de l'A©lasticitA© des fonctions appropriA©es du modA¨le par rapport au taux d'intA©rAat. Enfin, il est dA©montrA© que lorsque les banques centrales placent une partie de leurs rA©serves sur le marchA© de l'euro-dollar, la valeur du multiplicateur se situe entre zA©ro et 1/(1 -- cd), expression dans laquelle cd reprA©sente le rapport entre les avoirs des banques centrales sous forme de dA©pA´ts en euro-dollars et leurs rA©serves totales en devises. Pour obtenir une valeur du multiplicateur des euro-dollars, on a estimA© des fonctions de prAats et de dA©pA´ts pour les Etats-Unis, le Canada et l'Europe occidentale en utilisant les donnA©es mensuelles sur la pA©riode 1968-72. Il ressort de l'estimation de la rA©action des prAats et des dA©pA´ts aux variations du taux d'intA©rAat de l'euro-dollar et d'une estimation du coefficient des dA©pA´ts en euro-dollars des banques centrales (cd) que le multiplicateur des dA©pA´ts en euro-dollars A©tait lA©gA¨rement supA©rieur A l'unitA© (1,4) au cours de la pA©riode 1968-72. Toutefois, il faut voir dans cette estimation du multiplicateur un maximum, en raison des hypothA¨ses adoptA©es et du fait que l'on a sans doute choisi un chiffre A©levA© pour indiquer la proportion des fonds redA©posA©s par les banques centrales sur le marchA©. /// Este artA­culo expone un enfoque de cartera con respecto a la cuestiA³n del multiplicador de depA³sitos en eurodA³lares y estima el multiplicador sobre esta base. Se ofrece este enfoque como alternativa a la versiA³n mAis convencional del modelo de multiplicador de "coeficiente fijo", que tiende a dejar de lado la elecciA³n explA­cita de cartera por parte de los eurobancos y el pAoblico no eurobancario. Si bien se admite que el modelo de multiplicador de coeficiente fijo podrA­a ser Aotil como simple aproximaciA³n al proceso de la oferta de dinero en un sistema bancario nacional, en el que las regulaciones bancarias suelen ser muy importantes, se sugiere que tal modelo es inapropriado para una situaciA³n competitiva no reglamentada como es la del mercado del eurodA³lar. Se usa un modelo de equilibrio general de cartera del mercado del eurodA³lar para derivar una expresiA³n del multiplicador de depA³sitos en eurodA³lares. Se demuestra que, a diferencia del multiplicador de coeficiente fijo que tiene un valor mA­nimo igual a la unidad, el multiplicador del eurodA³lar para entradas primarias de depA³sitos --provenientes, por ejemplo, de Estados Unidos-- tendrA­a un valor entre cero y la unidad, caso de que los bancos centrales no redepositaran en el mercado. El desplazamiento inicial de los depA³sitos serA­a compensado por lo que se denomina filtraciones netas de interA©s, que se producirA­an al reajustarse las carteras debido a las variaciones de las tasas relativas de interA©s resultantes de la entrada primaria de depA³sitos. El valor concreto del multiplicador dependerA­a de las elasticidades con respecto a la tasa de interA©s en las funciones pertinentes del modelo. Por Aoltimo, se aduce que cuando los bancos centrales mantienen parte de sus reservas en depA³sitos en el mercado del eurodA³lar, el valor del multiplicador se encontrarA­a entre cero y 1/ (1 -- cd), donde cd es la razA³n entre las tenencias de depA³sitos en eurodA³lares de los bancos centrales y el total de sus reservas externas. Con el fin de llegar a una cifra para el multiplicador de eurodA³lares, se estiman funciones de depA³sitos y prA©stamos para Estados Unidos, CanadAi y Europa occidental, usando datos mensuales del perA­odo 1968-72. Partiendo de la estimaciA³n de la reacciA³n de los prA©stamos y depA³sitos a los cambios de las tasas de interA©s del eurodA³lar y del valor estimado del porcentaje de los depA³sitos en eurodA³lares de los bancos centrales (cd), se concluye que el multiplicador de depA³sitos en eurodA³lares fue poco mayor que la unidad (1,4) en el perA­odo 1968-72. Sin embargo, este valor del multiplicador debe considerarse como un mAiximo, en vista de los supuestos adoptados y de la posibilidad de que la cifra de los redepA³sitos de los bancos centrales en el mercado sea mAis bien alta.

The Euro-Dollar Deposit Multiplier: A Portfolio Approach (Le multiplicateur des dÃ©pÃ´ts en euro-dollars: mÃ©thode du choix des placements) (El multiplicador de depÃ³sitos en eurodÃ³lares: un enfoque de cartera)

One of the most significant international developments in recent years has been the rapid growth of the Eurocurrency markets as part of the general internationalization and liberalization of banking operations that traditionally have been closely controlled by the national authorities. These developments have had a significant impact on the basic structure of international financial markets and greatly increased the interdependence between domestic money markets. As Brimmer has noted:

A General Equilibrium Approach to the Eurodollar Market

The Eurocurrency Markets and Their Implications.

IN THE EARLY TO MIDDLE 1960s the U. S. authorities adopted three main measures in an attempt to reduce capital outflows and to strengthen the U. S. balance of payments: the Interest Equalization Tax (IET), which applied to purchases by U. S. residents of foreign stocks, bonds, and other equity and debt securities; the Voluntary Foreign Credit Restraint (VFCR) program, which established ceilings on loans to foreigners by U. S. financial institutions, banks, and nonbanks; and the Foreign Direct Investment (FDI) program, which regulated the supply of funds from U. S. nonfinancial corporations to their overseas affiliates. These controls were terminated on January 29, 1974.1

The Impact of U.S. Controls on Capital Outflows on the U.S. Balance of Payments: An Exploratory Study (Effets sur la balance des paiements des Etats-Unis des contrÃ´les amÃ©ricains sur les sorties de capitaux: etude exploratrice) (Estudio exploratorio del impacto en la balanza de pagos de Estados Unidos de ciertas medidas de control de salida de capitales)

Die Wirksamkeit der deutschen Kapitaleinfuhrkontrollen. —In diesem Aufsatz werden die Wirkungen der deutschen Ma\nahmen zur Kontrolle von Kapitalimporten auf die kurzfristigen Kapitalbewegungen in der deutschen Zahlungsbilanz geschAtzt. Der Untersuchung wird ein allgemeines Portfolio-Gleichgewichtsmoden fur internationale Kapitalbewegungen zugrunde gelegt, das die Autoren bei anderer Gelegenheit entwickelt haben. Mit Hilfe eines solchen Modells ist es moglich zu prufen, ob die Wirkungen der Kapitaleinfuhrkontrollen auf die Zahlungsbilanz nicht vielleicht durch Bewegungen von Posten ausgeglichen werden, die keiner unmittelbaren Kontrolle unterliegen. Es ist die GrundprAmisse der Analyse, da\ diese ausgleichenden Bewegungen fur die Beurteilung der allgemeinen Wirksamkeit einer bestimmten Methode der Kapitalverkehrskontrolle wesentlich sind.

Eisuke Sakakibara

Papers

The Euro-Dollar Deposit Multiplier: A Portfolio Approach (Le multiplicateur des dÃ©pÃ´ts en euro-dollars: mÃ©thode du choix des placements) (El multiplicador de depÃ³sitos en eurodÃ³lares: un enfoque de cartera)

A General Equilibrium Approach to the Eurodollar Market

The Eurocurrency Markets and Their Implications.

The effectiveness of German controls on capital inflow