Tag Archives: Capital flow

Redrawing the Map of Global Capital Flows

Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens, by Antonio Coppola, Matteo Maggiori, Jesse Schreger, and Brent Neiman:

We start with the dataset of global mutual fund and exchange traded fund (ETF) holdings provided by Morningstar and assembled in Matteo Maggiori, Brent Neiman and Jesse Schreger (2019a, henceforth MNS). For each position in the data, we link the security’s immediate issuer to its ultimate parent. The resulting data can then be used to create a mapping that transforms cross-border positions from a residency to nationality basis and that sheds light on how global firms finance themselves. …

First, in the case of bonds, positions are almost always reallocated away from Bermuda, the Cayman Islands, and other tax havens. Under nationality, these positions are often associated with developing countries like Brazil, China, India, and Russia, which may reflect the fact that developing countries find it easier to issue offshore than onshore, where the legal system and institutional quality may be of concern to foreign investors. Reallocating positions from tax havens to developed countries is also common, though, perhaps because tax havens allow them to access international investors with less onerous rules governing the withholding of taxes on interest payments. These patterns may also reflect tax-driven profit-shifting, whereby one unit of a company raises money at a low interest rate in a low-tax regime and loans it at a higher interest rate to an affiliated unit in a high-tax regime.

Second, in the case of equities, we find that many developed-country investments in tax havens are actually associated under nationality with China. Many of these positions are in securities issued through Variable Interest Entities (VIE), a structure designed to avoid China’s capital controls and the legality of which may rest on tenuous ground. Relatedly, we see a large share of equities reallocated by our algorithm away from Ireland and to developed countries, an adjustment reflecting the popularity of “tax inversions” there.

Third, in the case of asset-backed securities, for several investor countries, we find large reallocations toward the domicile of the investor, often because the underlying assets are found there. For example, our reallocation matrix records that 73.4 percent of U.S. investment in Cayman Islands’ asset-backed securities should instead be thought of as U.S. domestic investment, largely because those securities are backed by U.S. mortgages.

Triple Coincidence in International Finance

On VoxEU, Stefan Avdjiev, Robert McCauley, and Hyun Song Shin discuss how a focus on net capital flows between countries can mislead policy analysts if they neglect heterogeneity between sectors in a country and/or non-congruence of economic and currency area that is, if they assume the “triple coincidence” between economic area, decision-making unit, and currency area.

The triple coincidence misleads

because it obscures gross flows, …

in that it gives insufficient weight to international funding currencies that are extensively borrowed outside the borders of their home countries …

if it glosses over the relevant decision-making unit by aggregating too much.

The German View of The Crisis

On VoxEU, representatives of the German Council of Economic Experts outline the German crisis narrative. In disagreement with the ‘consensus view’ outlined in Baldwin et al. (2015) the German economists including Lars Feld, Christoph Schmidt, Isabel Schnabel and Volker Wieland do not want to

implicate the ‘intra-Eurozone capital flows that emerged in the decade before the crisis’ as the ‘real culprits’. … [Rather] it is the government failures and the failures in regulation and supervision leading to those excessive developments that should take centre-stage in the Crisis narrative.

Consequently, their assessment of the policy response to the crisis is positive:

While the alleged consensus summary concludes that ‘the whole situation was made much worse by poor crisis management’, our view is that the ‘loans for reforms’ rationale underlying the rescue approach was not only sensible, since it was the only way to successfully address the underlying causes of the Crisis. It also worked and substantially improved matters.

Sensibly, the writers favor the

objective of retaining the unity of liability and control in all relevant fields of economic policy.

They promote the ‘Maastricht 2.0’ framework proposed earlier by the German Council.


Low Interest Rates

In the 17th Geneva Report on the World Economy (Low for Long? Causes and Consequences of Persistently Low Interest Rates), Charles Bean, Christian Broda, Takatoshi Ito and Randall Kroszner take up the theme of a recent report by the White House Council of Economic Advisors (see previous blog post). In the abstract, some of the authors’ conclusions are summarized as follows:

… aggregate savings propensities should fall back as the bulge of high-saving middle-aged households moves through into retirement and starts to dissave; this process has already begun. And though Chinese financial integration still has some way to run, the net flow of Chinese savings into global financial markets has already started to ebb as the pattern of Chinese growth rotates towards domestic demand rather than net exports. Finally, the shifts in portfolio preferences may partially unwind as investor confidence slowly returns. But … the time scale over which such a rebound in real interest rates will be manifest is highly uncertain and will be influenced by longer-term fiscal and structural policy choices.

One chapter in the report discusses the Japanese experience.

Capital Flows To and From Switzerland

In a Vox column, Pinar Yeşin argues that

abnormally low values of net flows were not necessarily driven by surges of private capital inflows. In fact, declined capital outflows that are less correlated with capital inflows appear to be the main factor. These findings suggest that the financial crisis generated a breaking point for capital flows to and from Switzerland.