Capital market liberalization and globalization connect global financial markets to allow an ocean of money to flow through them.

Becky Berkman

2018-06-17 10:35:00 Sun ET

In the past decades, capital market liberalization and globalization have combined to connect global financial markets to allow an ocean of money to flow through them. In emerging-economies, the gross foreign financial position can be as large as annual GDP. In rich economies, the ratio can rise even more. Given the sheer size of cross-border capital flows, these co-movements can have enormous effects on local economic conditions. 

The capital flows across borders is good since financial openness allows investors in rich countries to seek out large returns in capital-scarce emerging-economies. Yet, capital flows may not always follow this peculiar pattern. Money can often flow in the other direction. Less mature emerging-economies often save to safeguard against fickle global financial markets and hence amass large quantities of foreign-exchange reserves. This global savings-glut suggests that an ocean of money can swamp individual economies. The U.S. Federal Reserve determines the turn of the tide. American monetary policy shapes the global appetite for risk because of the dollar's exorbitant privilege in global finance. When the Fed changes course, asset prices, returns, and market volatilities move in its wake, with all sorts of inadvertent consequences for other countries.

Most economies face a fundamental dilemma: these economies can choose open capital markets to attract the foreign investment that emerging markets need to reinvigorate their economic climate, but only if these economies can accept losing domestic control over the global business cycle. For many emerging-economies, this inexorable trade-off seems to be a fair price to pay in global finance. However, when the Fed eventually raises its interest rate, the trade-off will then tilt toward a capital exodus from emerging-economies back to America. When push comes to shove, the law of inadvertent consequences counsels caution.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

U.S. regulatory agencies may consider broader economic issues in their antitrust probe into Amazon, Apple, Facebook, and Google.

Joseph Corr

2019-07-03 11:35:00 Wednesday ET

U.S. regulatory agencies may consider broader economic issues in their antitrust probe into Amazon, Apple, Facebook, and Google.

U.S. regulatory agencies may consider broader economic issues in their antitrust probe into tech titans such as Amazon, Apple, Facebook, and Google etc. Hou

+See More

America faces income inequality, political polarization, and dysfunctional governance.

Rose Prince

2018-05-17 07:41:00 Thursday ET

America faces income inequality, political polarization, and dysfunctional governance.

Has America become a democratic free land of crumbling infrastructure, galloping income inequality, bitter political polarization, and dysfunctional governa

+See More

President Trump refreshes American fiscal fears and sovereign debt concerns through the One Big Beautiful Bill Act.

Jacob Miramar

2025-06-21 05:25:00 Saturday ET

President Trump refreshes American fiscal fears and sovereign debt concerns through the One Big Beautiful Bill Act.

President Trump refreshes American fiscal fears, worries, and concerns through the One Big Beautiful Bill Act. The Congressional Budget Office (CBO) estimat

+See More

Warren Buffett points out that American children will be better off than their parents in the next decades.

Dan Rochefort

2018-01-05 07:37:00 Friday ET

Warren Buffett points out that American children will be better off than their parents in the next decades.

Warren Buffett cleverly points out that American children will not only be better off than their parents, but the former will also enjoy higher living stand

+See More

Management consultants can build sustainable trust-driven client relations through the accelerant curve of business value creation.

Monica McNeil

2020-11-17 08:27:00 Tuesday ET

Management consultants can build sustainable trust-driven client relations through the accelerant curve of business value creation.

Management consultants can build sustainable trust-driven client relations through the accelerant curve of business value creation. Alan Weiss (2016)

+See More

With prescient clairvoyance, Bill Gates predicted the recent rise of Facebook and Netflix.

Monica McNeil

2017-02-07 07:47:00 Tuesday ET

With prescient clairvoyance, Bill Gates predicted the recent rise of Facebook and Netflix.

With prescient clairvoyance, Bill Gates predicted the recent sustainable rise of Netflix and Facebook during a Playboy interview back in 1994. He said th

+See More