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International capital flows and domestic financial stability
Thesis (PhD)--Stellenbosch University, 2024.
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Stellenbosch : Stellenbosch University
2025
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| _version_ | 1867614112292274176 |
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| access_status_str | Open Access |
| author | De Villiers, David James |
| author2 | Hollander, Hylton |
| author_browse | De Villiers, David James Hollander, Hylton |
| author_facet | Hollander, Hylton De Villiers, David James |
| author_sort | De Villiers, David James |
| collection | Thesis |
| dc_rights_str_mv | Stellenbosch University |
| description | Thesis (PhD)--Stellenbosch University, 2024. |
| format | Thesis |
| id | oai:scholar.sun.ac.za:10019.1/131636 |
| institution | Stellenbosch University (South Africa) |
| language | en_ZA |
| last_indexed | 2026-06-10T12:46:51.765Z |
| license_str | Other — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from SUNScholar — Stellenbosch University Repository |
| publishDate | 2025 |
| publishDateRange | 2025 |
| publishDateSort | 2025 |
| publisher | Stellenbosch : Stellenbosch University |
| publisherStr | Stellenbosch : Stellenbosch University |
| record_format | dspace |
| source_str | SUNScholar — Stellenbosch University Repository |
| spelling | oai:scholar.sun.ac.za:10019.1/131636 International capital flows and domestic financial stability De Villiers, David James Hollander, Hylton Van Lill, Dawie Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Economics. Capital movements International finance Financial crises Investments, Foreign UCTD Thesis (PhD)--Stellenbosch University, 2024. ENGLISH SUMMARY: International capital flows are meant to augment domestic resource mobilisation and amplify economic activities that increase welfare. However, capital flows also carry risks characterised by heightened macroeconomic volatility and vulnerability to crises. Financial openness in the absence of adequate financial regulation and supervision therefore magnifies the space for risks to flourish since it potentially creates incentives for financial institutions to take excessive risks, leading to more volatile flows that are prone to sudden reversals. This dissertation studies how international capital flows can lead to domestic financial instability and, in turn, how these flows influence the real economy. I focus on episodes of extreme capital movements in emerging markets using data that differentiates activity by foreign and domestic residents. I explore how various capital flow management techniques – ranging across macroprudential policies, capital controls, and foreign exchange interventions – can be used to create an institutional structure to promote financial stability and tame the negative consequences of extreme capital flow episodes. In doing so, I ascertain how countries can realise the benefits of capital flows and limit the costs of capital flow management techniques to support key economic policy objectives. The thesis comprises three research papers that successively investigate these issues. In Chapter 2, I assess the role of heterogenous international capital mobility in shaping the dynamics of domestic credit cycles. Within this context, I also assess the effectiveness of macroprudential policies and capital controls in supporting financial stability (that is, limiting the impact of capital flows on credit boom and bust cycles). Using a probit model, I show that both foreign and domestic capital flows provide valuable information about the likelihood of credit booms and credit busts. I find that capital flow episodes have asymmetric effects on the phases of the credit cycle, which differs across advanced and emerging market economies. In emerging market economies, credit booms are more likely to occur and are longer and more frequent. Credit busts in advanced economies tend to be longer. The results suggest that countries should curb surges (such as debt inflows) to safeguard macroeconomic and financial stability. In this regard, I find that capital controls are more effective at regulating inflows and reducing the likelihood of credit busts, whereas macroprudential policies are more likely to reduce the probability of credit booms. In Chapter 3, I examine the proliferation of macroprudential tools and their contribution to a globally lower incidence of volatile capital flows following the 2007/2008 global financial crisis. I use a propensity score matching model to measure how the imposition of capital flow management tools (macroprudential policy, capital controls, and foreign exchange interventions) impact the occurrence of extreme capital flow episodes (surges, stops, flight, and retrenchments). The results show that when two countries have the same likelihood of allowing free movement of capital, the country that activates a macroprudential tool has a lower likelihood of experiencing an extreme capital flow episode. Tools with broad financial stability objectives (such as capital and reserve requirements, liquidity instruments, credit instruments, and tools targeting systemically important institutions) are more likely to be effective at mitigating surges and retrenchments, than stops and flights. Furthermore, there are benefits for financial stability through capital market liberalisation (easing of capital controls) or intervening in foreign exchange markets. Since the activation of the same tool may differ across advanced and emerging economies, emerging markets need clearly identified strategies to manage capital flows. In Chapter 4, I use quantile regressions to establish how macroprudential policies and capital controls can be used to minimise spillovers of financial stress on future economic growth in emerging markets. Across the growth distribution, I find that there is an intertemporal trade-off whereby implementing a macroprudential policy dampens economic growth in the short run but facilitates economic growth over longer horizons. Capital controls do not have such a trade-off and are effective in economies experiencing strong positve economic growth over longer horizons. The implication is that shrinking economies should focus on domestic stability, whereas growing economies need to safegaurd against instabilities arising from outside their economy. The thesis ultimately concludes that an economy’s resilience to shocks arising from volatile international capital flows can be improved by using macroprudential actions to address excessive credit expansion, thereby reducing amplification mechanisms of systemic risk and vulnerabilities related to systemically important financial institutions. Capital controls can also be used to complement macroprudential policy and buttress financial stability. But given the proliferation and varying effects of capital flow management techniques, policymakers must carefully consider the trade-offs for each instrument between maintaining financial stability and supporting sustainable economic growth. AFRIKAANSE OPSOMMING: Internasionale kapitaalvloei versterk binnelandse hulpbronmobilisering en versterk ekonomiese aktiwiteite wat welsyn verhoog. Kapitaalvloei hou egter ook risiko’s in wat gekenmerk word deur verhoogde makro-ekonomiese wisselvalligheid en kwesbaarheid vir krisisse. Finansiele openheid in die afwesigheid van voldoende finansiele regulering en toesig vergroot die ruimte vir risiko’s om te floreer aangesien dit potensieel aansporings skep vir finansiele instellings om buitensporige risiko’s te neem, wat lei tot meer wisselvallige vloeie wat geneig is tot skielike ommekeer. Hierdie proefskrif bestudeer hoe wisselvallige internasionale kapitaalvloei tot binnelandse finansiele onstabiliteit kan lei en weer hoe hierdie vloei die reele ekonomie beinvloed. Ek fokus op episodes van uiterste kapitaalbewegings in ontluikende markte deur data te gebruik wat aktiwiteit deur buitelandse en binnelandse inwoners onderskei. Ek ondersoek hoe verskeie kapitaalvloeibestuurstegnieke, soos makrovoorsorgbeleide en kapitaalbeheer, gebruik kan word om ’n institusionele struktuur te skep om finansiele stabiliteit te bevorder en die negatiewe gevolge van wisselvallige kapitaalvloeiepisodes te tem. Ek vra hoe lande die voordele van kapitaalvloei kan realiseer, afstand kan doen van die koste van kapitaalvloeibestuurstegnieke en sleutel ekonomiese doelwitte kan ondersteun. Die tesis bestaan uit drie navorsingsreferate wat agtereenvolgens hierdie kwessies ondersoek. In Hoofstuk 2 beoordeel ek die rol van heterogene internasionale kapitaalmobiliteit in die vorming van die dinamika van binnelandse kredietsiklusse. Ek evalueer ook die doeltreffendheid van makrovoorsorgbeleide en kapitaalbeheer om finansiele stabiliteit te ondersteun. Ek gebruik spesifiek ’n probit-model om aan te toon dat beide buitelandse en binnelandse kapitaalvloei waardevolle inligting verskaf oor die waarskynlikheid van kredietoplewing en kredietopnames. Ek vind dat kapitaalvloei-episodes asimmetriese uitwerking op die fases van die kredietsiklus het en dat dit verskil oor gevorderde en ontluikende markekonomiee. In ontluikende markekonomiee is dit meer geneig om kredietoplewings te voorkom en is dit langer en meer gereeld. Kredietaanvalle in gevorderde ekonomiee is geneig om langer te wees. Die resultate dui daarop dat lande stygings (soos skuldinvloei) moet bekamp om makro-ekonomiese en finansiele stabiliteit te beskerm. In hierdie verband vind ek dat kapitaalbeheer meer doeltreffend is om invloei te reguleer en die waarskynlikheid van kredietverliese te verminder terwyl makro-omsigtigheidsbeleide meer geneig is om die waarskynlikheid van kredietoplewing te verminder. In Hoofstuk 3 ondersoek ek die verspreiding van makrovoorsigtigheidsinstrumente en hul bydrae tot ’n wereldwye laer voorkoms van uiterste kapitaalvloei na die 2007/2008 finansiele krisis. Ek gebruik ’n geneigdheidspunt-passingsmodel om te meet hoe die oplegging van kapitaalvloeibestuursinstrumente (makropudensiele beleid, kapitaalbeheer en buitelandse valuta-intervensies) die voorkoms van uiterste kapitaalvloei-episodes (stygings, stops, vlug en afleggings) beinvloed. Die resultate toon dat wanneer twee lande dieselfde waarskynlikheid het om vrye beweging van kapitaal toe te laat, het die land wat ’n makro-omsigtigheidsinstrument aktiveer, ’n laer waarskynlikheid om ’n wisselvallige kapitaalvloei-episode te ervaar. Instrumente met bree doelwitte vir finansiele stabiliteit versag oplewings en afleggings op soortgelyke wyse. Teikenspesifieke instrumente word benodig om stops en vlugte te versag. Verder is daar voordele vir finansiele stabiliteit deur kapitaalmarkliberalisering (verligting van kapitaalbeheer) of ingryping in buitelandse valutamarkte. Aangesien die aktivering van dieselfde instrument tussen gevorderde en ontluikende ekonomiee kan verskil, benodig ontluikende markte duidelik geidentifiseerde strategiee om kapitaalvloei te bestuur. In Hoofstuk 4 konstrueer ek ’n finansiele stresaanwyser vir ontluikende markte en gebruik kwantielregressies om vas te stel hoe makrovoorsigtigheidsbeleide en kapitaalbeheer gebruik kan word om uitvloeisels van finansiele stres op toekomstige ekonomiese groei in ontluikende markte te minimaliseer. Na my wete is dit die eerste vraestel om ‘groei-in-risiko’ vir ontluikende markte te kwantifiseer. Oor die groeiverspreiding vind ek dat daar ’n intertemporele afweging is waardeur die implementering van ’n makro-omsigtigheidsbeleid ekonomiese groei op kort termyn demp, maar ekonomiese groei oor langer horisonne vergemaklik. Kapitaalbeheer het nie so ’n afweging nie en is effektief in ekonomiee wat sterk positiewe ekonomiese groei oor langer horisonne ervaar. Die implikasie is dat krimpende ekonomiee op binnelandse stabiliteit moet fokus, terwyl groeiende ekonomiee moet beskerm teen onstabiliteite wat van buite hul ekonomie ontstaan. Die tesis kom uiteindelik tot die gevolgtrekking dat ’n ekonomie se veerkragtigheid teen skokke wat voortspruit uit wisselvallige internasionale kapitaalvloei verbeter kan word deur makro-voorsigtige aksies te gebruik om oormatige kredietuitbreiding aan te spreek, wat versterkingsmeganismes van sistemiese risiko en kwesbaarhede wat verband hou met sistemies belangrike finansiele instellings verminder. Kapitaalbeheer kan gebruik word om makro-omsigtigheidsbeleid aan te vul en finansiele stabiliteit te ondersteun. Kapitaalvloeibestuurstegnieke kan die ruimte sluit waar sistemiese risiko floreer en sodoende volhoubare ekonomiese groei ondersteun. Doctoral 2025-02-03T06:34:39Z 2025-02-03T06:34:39Z 2024-12 Thesis https://scholar.sun.ac.za/handle/10019.1/131636 en_ZA Stellenbosch University xvi, 336 pages : illustrations, includes annexures application/pdf Stellenbosch : Stellenbosch University |
| spellingShingle | Capital movements International finance Financial crises Investments, Foreign UCTD De Villiers, David James International capital flows and domestic financial stability |
| title | International capital flows and domestic financial stability |
| title_full | International capital flows and domestic financial stability |
| title_fullStr | International capital flows and domestic financial stability |
| title_full_unstemmed | International capital flows and domestic financial stability |
| title_short | International capital flows and domestic financial stability |
| title_sort | international capital flows and domestic financial stability |
| topic | Capital movements International finance Financial crises Investments, Foreign UCTD |
| url | https://scholar.sun.ac.za/handle/10019.1/131636 |
| work_keys_str_mv | AT devilliersdavidjames internationalcapitalflowsanddomesticfinancialstability |