Brassieres of Atlantis

CAPITAL FLOWS

Long held to be essential for development, capital flows have come under increasing scrutiny for their impact on the financial stability and autonomy of low and middle income countries.

A recent paper by Karsten Müller and Emil Verner fuels the debate. Using a novel database of private credit in 116 countries since 1940, and drawing on more than 600 sources, it analyzes how the sectoral allocation of credit impacts financial stability in recipient countries. The findings suggest that credit to the non-tradeable sector (where goods cannot be sold internationally, such as construction, repairs, food services, and real estate) predicts lower medium-run growth, while tradable sector credit leads to higher growth in the medium-run.

From the text:

“Why does credit to households and non-tradable sectors, but not to the tradable sector, foreshadow lower future economic growth? First, credit growth to non-tradables and households may reflect that credit finances a demand boom, which may sow the seeds of a future bust. Consistent with this prediction, we find that household and non-tradable credit expansions are associated with a relative expansion in consumption relative to GDP, increasing shares of the non-tradable sector in output and employment, an appreciation of the real exchange rate, and an increase in house prices.

Second, lending to non-tradables and households can increase financial fragility if these sectors face tighter (ex-ante) financing constraints or are more sensitive to changes in credit supply. We document that non-tradable sector firms are, on average, smaller and more reliant on loans collateralized by real estate compared to tradable sector firms. Credit expansions to the non-tradable sector are associated with a considerably higher likelihood of future systemic banking crises. In contrast, lending to the tradable sector has essentially no relationship with banking crises and also falls less after the onset of crises. Third, credit booms may lead to a misallocation of resources away from more productive sectors. Because the level and growth rate of productivity is generally higher in tradable industries, a reallocation away from tradables can cause lower aggregate productivity growth in the medium run. Taken together, the patterns we document suggest that credit expansions are not created equal. They highlight that “good” and “bad” booms can be differentiated based on what the borrowed money is used for along dimensions emphasized by economic theory.”

Link to the text.

  • In a panel for the Center for Global Development, Atif Mian and Jing Cai discuss “The Peril and Promise of Financial Markets For Developing Countries.” Link. (For a summary of the discussion, see Mian’s excellent thread from earlier this year. Link.)
  • “The global financial cycle transforms the macroeconomic trilemma into a dilemma: independent monetary policies are possible if and only if the capital account is managed.” An essential piece by Hélène Rey examines how the global financial cycle shapes developing countries’ capacity for independent monetary policy. Link.
  • A 2019 paper by Yanliang Miao and Tuo Deng assess changes in China’s capital flow management since 1978. Link. And from 2003, Gerald Epstein, Ilene Grabel, and Jomo Kwame Sundaram compares capital management techniques in Chile, Colombia, Taiwan Province of China, India, China, Singapore and Malaysia during the 1990s. Link.

(pinboard: captital_flows, finance, globalization)

NEW RESEARCHERS

YIMBYs & Financialization

Renee Tapp is a postdoctoral fellow in urban planning and policy at the University of Illinois at Chicago. In a recent paper, she examines YIMBY groups in Los Angeles.

From the abstract:

“This paper advances debates around the financialization of housing with a case study of Los Angeles’s yes-in-my-back-yard (YIMBY) groups. In response to the post-2008 affordable housing crisis, YIMBYs have emerged in support of orthodox economic policies that deregulate land use, expedite construction, and intensify financial accumulation in rental housing. Using detailed empirical analysis collected from YIMBY housing activists, this paper examines how the market-based logics they advance take root in local land use issues. It focuses specifically on the impact of YIMBYs on existing divisions within urban politics, including the scale at which housing is contested. By conceptualizing the YIMBY position as one that facilitates financialization, this paper reveals the ways financialization is more than a mode of accumulation: it is a political process embedded in the state from the bottom up and inside out.”

Link to the article.

Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations: editorial@jainfamilyinstitute.org.

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  • “Our analysis conservatively estimates that upwards of 6.4 million eligible children will not receive the CTC benefit.” In a new policy brief, JFI Fellow Jack Landry and Lead Researcher on Guaranteed Income Stephen Nuñez estimate the non-filer rates of the American Rescue Plan’s expanded childhood tax credit and investigate implications for reductions in childhood poverty. Link.
  • “We find that the Great Recession significantly increased student indebtedness, delinquency and default on student debt, and other forms of non-repayment of student loans.” A new working paper by JFI Fellow Sérgio Pinto and Senior Fellow Marshall Steinbaum on long-run impacts of the Great Recession. Link. And link to a PW essay on the subject.
  • “How much ability does the Fed have to stimulate the economy by cutting interest rates?” David Berger, Konstantin Milbradt, Fabrice Tourre, and Joseph Vavra examine recent interest rate paths by looking at mortgage prepayments. Link.
  • Fenaba R. Addo and William A. Darity, Jr. examine the racial disparities in the wealth holdings of American working class families after the recession. Link.
  • Matt Barlow and Alejandro Milcíades Peña look at emergency taxes following the 2001 debt default crisis in Argentina under Kirchnerism. Link.
  • “Competing coalitions of liberal and conservative philanthropists used their wealth and influence to define the parameters of the policy debate over the future of Detroit’s schools” Dan Cohen on philanthropy as a response to municipal government austerity. Link.
  • Lyn Ossome and Sirisha C. Naidu examine the links between gender and land ownership by evaluating the Fast Track Land Reform Program in Zimbabwe. Link.
  • Alejandra Salas-Porras and Martí Medina-Hernández trace changes in the Mexican corporate network over the last four decades. Link.
  • “Maize developed in parallel as a commodity serving the settler farmers, and an anti-commodity, or escape crop, providing subsistence to marginalised smallholders.” Klara Fischer on GM maize and the green revolution in South Africa. Link.
  • “Credit was scarce and expensive in colonial India. Existing explanations assume a lack of market competition let moneylenders charge high interest rates. The article challenges this view. Using new evidence from the Madras Presidency, the study finds that the interconnected issues of climate volatility and enforcement costs shaped the supply and prices of credit. Moneylenders rationed credit and imposed inflexible enforcement terms in the dry regions that faced higher climatic risk, but used contracts and flexible pricing strategies in the irrigated zones where risks were lower.” By Maanik Nath. Link.

Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations: editorial@jainfamilyinstitute.org.

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