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Questions and Answers
What is one reason why capital flows to developing countries are often small and in the wrong direction?
What is one reason why capital flows to developing countries are often small and in the wrong direction?
What is the expected benefit of financial integration for investors?
What is the expected benefit of financial integration for investors?
Why do investors often hold a larger share of assets geographically close to their own market?
Why do investors often hold a larger share of assets geographically close to their own market?
What effect do portfolio home biases have on international asset holdings?
What effect do portfolio home biases have on international asset holdings?
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What is a consequence of capital poor countries not accessing capital from capital rich countries?
What is a consequence of capital poor countries not accessing capital from capital rich countries?
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What does UIP perform better than when looking at horizons of 1 to 12 months?
What does UIP perform better than when looking at horizons of 1 to 12 months?
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Which phenomenon is associated with the existence of risk premiums that are non-observable?
Which phenomenon is associated with the existence of risk premiums that are non-observable?
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What does the covered interest parity condition relate to?
What does the covered interest parity condition relate to?
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Which of the following is NOT a condition for the empirical validity of Covered Interest Parity (CIP)?
Which of the following is NOT a condition for the empirical validity of Covered Interest Parity (CIP)?
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In the long run, nominal exchange rates primarily reflect differences in what?
In the long run, nominal exchange rates primarily reflect differences in what?
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Which of the following factors does NOT influence the demand for money?
Which of the following factors does NOT influence the demand for money?
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What is the main reason that prices are considered sticky in the short term?
What is the main reason that prices are considered sticky in the short term?
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What is the opportunity cost of holding money as a liquid asset?
What is the opportunity cost of holding money as a liquid asset?
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What primarily determines today's exchange rate?
What primarily determines today's exchange rate?
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Which assumption is NOT required for the empirical validity of the uncovered interest parity (UIP) condition?
Which assumption is NOT required for the empirical validity of the uncovered interest parity (UIP) condition?
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How does an unexpected increase in the interest rate differential affect the euro?
How does an unexpected increase in the interest rate differential affect the euro?
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What is the best predictor of the future exchange rate?
What is the best predictor of the future exchange rate?
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What characterizes the risk premium when agents are risk averse?
What characterizes the risk premium when agents are risk averse?
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Which of the following does NOT relate to rational expectations?
Which of the following does NOT relate to rational expectations?
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If the share of euro assets increases in an investor's portfolio, what must happen?
If the share of euro assets increases in an investor's portfolio, what must happen?
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The empirical relation derived from uncovered interest parity indicates that if $r€ - r$ increases unexpectedly, what is the immediate effect on the euro?
The empirical relation derived from uncovered interest parity indicates that if $r€ - r$ increases unexpectedly, what is the immediate effect on the euro?
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What is the relationship between money supply and interest rates in an expansionary monetary policy?
What is the relationship between money supply and interest rates in an expansionary monetary policy?
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What effect does a decrease in interest rates in the Eurozone have on investment in dollar assets?
What effect does a decrease in interest rates in the Eurozone have on investment in dollar assets?
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What is the primary goal of unconventional monetary policy?
What is the primary goal of unconventional monetary policy?
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What is the main consequence of a recession in the Eurozone on money demand?
What is the main consequence of a recession in the Eurozone on money demand?
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How does the depreciation of the euro affect Eurozone exports?
How does the depreciation of the euro affect Eurozone exports?
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Under what condition can unconventional monetary expansion be considered non-inflationary?
Under what condition can unconventional monetary expansion be considered non-inflationary?
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What occurs as a result of less demand for money during a recession?
What occurs as a result of less demand for money during a recession?
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What is a potential risk of unwinding quantitative easing too quickly?
What is a potential risk of unwinding quantitative easing too quickly?
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What is the expected long-term effect of an increase in money supply on prices and nominal exchange rates?
What is the expected long-term effect of an increase in money supply on prices and nominal exchange rates?
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Which factors make adjustments to monetary policy more painful in specific countries?
Which factors make adjustments to monetary policy more painful in specific countries?
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How do unconventional monetary policies aim to stimulate an economy when interest rates are at zero?
How do unconventional monetary policies aim to stimulate an economy when interest rates are at zero?
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What is a primary expectation regarding the impact of a change in monetary policy on expected exchange rates initially?
What is a primary expectation regarding the impact of a change in monetary policy on expected exchange rates initially?
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Why does decreasing interest rates stimulate investment and consumption?
Why does decreasing interest rates stimulate investment and consumption?
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What is the relationship between credit increases and inflationary pressures during recovery?
What is the relationship between credit increases and inflationary pressures during recovery?
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Which scenario would likely contribute to a more recessionary effect globally?
Which scenario would likely contribute to a more recessionary effect globally?
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What is a key concern regarding rising inflation when unwinding quantitative easing?
What is a key concern regarding rising inflation when unwinding quantitative easing?
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What is meant by monetary policy neutrality in the long run?
What is meant by monetary policy neutrality in the long run?
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What is the effect of a permanent increase in the money supply on the exchange rate dynamics?
What is the effect of a permanent increase in the money supply on the exchange rate dynamics?
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What does Dornbush’s overshooting result illustrate?
What does Dornbush’s overshooting result illustrate?
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How does an increase in money supply affect interest rates in the short run?
How does an increase in money supply affect interest rates in the short run?
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What is the implication of Purchasing Power Parity in the long run?
What is the implication of Purchasing Power Parity in the long run?
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What is indicated by rational agents knowing that the exchange rate will increase in the future?
What is indicated by rational agents knowing that the exchange rate will increase in the future?
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What does the slow adjustment of prices signify in the context of an increased money supply?
What does the slow adjustment of prices signify in the context of an increased money supply?
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Why does depreciation of the domestic currency increase the expected return in foreign currency investments?
Why does depreciation of the domestic currency increase the expected return in foreign currency investments?
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Study Notes
Financial Globalization and Capital Flows
- Financial globalization is not the same as trade globalization
- Measures of trade openness include tariffs and regulations on free trade, and are calculated as [(Exports + Imports)/GDP]
- Measures of financial globalization are the extent of cross-border financial transactions, including measures like de jure and de facto financial openness.
- De jure measures look at restrictions to international capital flows based on the IMF's annual reports
- De facto measures estimate the amount of international trade in financial assets, such as equity, debt, foreign direct investment (ownership >10%), bank loans, trade credit, and derivatives (futures, options)
Characteristics of Financial Assets
- Mean to transfer purchasing power across time periods
- Portfolio investments: equity or debt
- Foreign direct investment: > 10% ownership
- Other investments: bank loans, trade credit
- Derivatives: futures, options
- Reserves: held by central banks
Flows and Stocks
- Flows: value of assets traded in a given year
- Stocks: value of assets held in a given year
- Stocks = cumulative flows (At = At-1 + at).
Measures of Financial Globalization
- Stocks: Calculated as [(Domestic assets held by foreigners + foreign assets held by domestic agents)/GDP]
- Flows: Calculated as [(capital inflows/GDP) and (outflows/GDP)]
- Capital inflows: net purchases of domestic assets by foreign investors.
- Capital outflows: net purchases of foreign assets by domestic investors.
Marginal Productivity of Capital (MPK)
- Capital falls as K increases
- MPK is the additional output produced by adding one more unit of capital, holding other factors (like labor) constant.
- MPK typically decreases as more capital is added (diminishing returns).
- MPK = additional unit of output per unit of capital
The First Financial Globalization
- World capital markets were very integrated at the end of the 19th century.
- Large share of British wealth invested overseas.
- Similar integration in France and Germany.
- Capital outflows from the UK were primarily to the New World.
- The main causes of 1st financial globalization were transportation and communication advancements and global banking institutions.
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Description
Test your knowledge on financial globalization and the intricacies of capital flows. This quiz explores measures of trade and financial openness, as well as characteristics of various financial assets, from equity to derivatives. Understand the differences between trade and financial globalization.
