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date: 18 April 2024

International Capital Flowslocked

International Capital Flowslocked

  • Yanshuo ChenYanshuo ChenThe Economics Department, University of California Santa Cruz
  •  and Galina HaleGalina HaleThe Economics Department, University of California Santa Cruz

Summary

International capital flows have challenged economists’ models for decades. They exhibit a number of patterns that standard economic theories have struggled to explain. Over time, global capital flows go through boom and bust cycles, sudden stops, and unprecedented bonanzas. Determinants of capital flows include “pull factors,” recipient countries’ economic and structural characteristics, and “push factors” or “global factors,” which mostly depend on the global financial cycle and U.S. monetary policy. The relative importance of global factors has increased since the early 2000s.

The rise in international capital flows that has accompanied the wave of globalization in the early 21st century has helped to deliver crucial capital resources that facilitated development of many economies and helped transmit technologies across borders. On the flip side, international capital flows also increased transmission of financial shocks and policy changes across countries, most prominently experienced during the global financial crisis of 2008–2009. On balance, is it beneficial for small open economies to allow for free capital flows? Mainstream economists’ and policymakers’ answer to this question has evolved from an unequivocal “yes” to a much more nuanced view.

Subjects

  • International Economics

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