Coping with capital inflows

B.Sc. seminars

The aim of the seminar is to equip students with tools that allow to conduct an individual project and to prepare an undergraduate thesis.

The last 20 years have witnessed a dramatic increase in the integration of developing economies with international financial markets. Volatile capital inflows create many challenges for emerging market countries. The semnar deals with tailoring capital flow management and liberalization strategies to national circumstances.

Students will overview capital-flow experience of emerging countries with special attention paid to the volatility of private inflows, their magnitude, and their composition. Students will investigate what forces drive capital flows to these economies. Finally, the challenges posed by inflows as well as how to avoid capital-flow reversals will be studied.

A. Methodology of writing a thesis. Formulation and verification of a research hypothesis.

B. Discussion of research areas providing a basis for the selection of the thesis topics:

1. Principal component analysis: calculating principal components, their use in the analysis of stock market indices and internal vs. external determinants of capital flows.

2. Cluster analysis: basic concepts and algorithms, K-means clustering technique.

3. The bilateral capital flows databases: IMF Coordinated Portfolio Investment Survey and Coordinated Direct Investment Survey.

4. The evolution of capital flows to emerging countries: volatility, magnitude and composition.

5. Internal vs. external factors driving capital flows.

6. Challenges associated with capital flows: excessive external borrowing, asset bubbles, overheating, exchange rate appreciation., sudden stops and reversals.

7. Policy responses to capital flows: restrictions on the magnitude, capital controls and exchange rate management, monetary policy and reserves accumulation.

Bayoumi, T and F Ohnsorge (2013), Do Inflows or Outflows Dominate? Global Implications of Capital Account Liberalization in China, IMF Working Paper WP/13/89.

Cardarelli, R., Elekdag, S. and Kose, M.A., 2009, Capital Inflows: Macroeconomic Implications and Policy Responses, IMF Working Paper No. 09/40.

Forbes, Kristin J., and Francis E. Warnock, 2012, “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment,” Journal of International Economics, Vol. 88, No. 2, pp. 235–51

IMF (2013), The Yin and Yang of capital flow management: balancing capital inflows with capital outflows, World Economic Outlook, October, chapter 4.

Levchenko, A., and Mauro, P. (2006), Do Some Forms of Financial Flows Help Protect from Sudden Stops? IMF Working Paper No. 06/202.

Montiel, P.J. (2014), Capital Flows: Issues and Policies, Open Economy Review25, p. 595-633

Ostry, J., Ghosh, A., Chamon, M., and Qureshi, M. (2012), “Tools for Managing Financial-Stability Risks from Capital Inflows”, Journal of International Economics, 88: 407–421.

Upon the completion of the seminar, the student

Knowledge:

Understands the determinants of capital flows to emerging countries.

Knows the consequences of sudden stops and capital reversals.

Skills:

Is able to use the principal component method.

Is able to use the K-means clustering technique.

Interprets the policy responses to capital flows.

Is able to use and analyze data collected in Coordinated Portfolio Investment Survey and Coordinated Direct Investment Survey.

Social skills:

is able to meet time-constrained targets through effective planning and organization.

is able to combine information from different sources to deepen the knowledge of the factors behind capital movements and their consequences.

KW01, KW02, KW03, KU01, KU02, KW03, KK01, KK02, KK03

The progress in the preparation of the thesis is the sole assessment criterion. During the fall semester students, assisted by the supervisor, select the topic of the thesis, prepare a detailed plan of the thesis and a preliminary version of the thesis. During the spring semester students conduct their own research project and complete the thesis.

To pass the second semester, students have to submit the complete theses.