Foreign capital inflows (FCI) play an important role in the economic development of the recipient country as they fund investments and promote growth. However, the size and composition of such inflows are determined on the basis of country specific requirements. The study investigates the impact of capital inflows on the economy of Kenya at a time when the government implemented economic reform measures to stabilize the economy and restore sustainable growth. More specifically, the study examines the impact of foreign capital flows remittances such as overseas workers remittance, official development aid, and external debt, on selected macro-economic variables using monthly time series data and a single-equation empirical approach. The study findings reveal that some forms of FCI are not influenced by the macro economic variables in the country but by other factors such as political stability and policy variables.

This dissertation explores several aspects of financial globalization, inequality and economic growth. In the first two essays, we show that cross-border capital inflows raise the domestic credit volumes and lead to higher bank risk-taking. In particular, capital inflows are related to an increased credit supply towards ex-ante risky and low performing firms. These results are amplified when the financial system is more prone to agency problems—problems that rise in the financial system’s size/concentration and undercapitalization. Therefore, from a policy perspective, we gauge that the regulation of the financial sector shapes the allocation of global liquidity to the real economy. Turning our attention towards firms’ real activities, we show that capital inflows are negatively linked with the ex-post performance of firms. Consequently, foreign capital is not only allocated overproportionally to firms with a low ex-ante profitability; additionally, low performing firms display further decreases in their future profitability, constituting long-run hazards for the aggregate economic performance. This result helps to explain the difficulties of the empirical literature to identify a distinct positive relationship between cross-border capital flows and aggregate economic growth. In the third essay, we identify the growth effects of another macroeconomic variable that has been shown to increase with financial globalization—income inequality. We find that higher income inequality increases the growth rates of industries that are dependent on physical capital. In contrast, human capital intense industries grow less in countries with a more unequal distribution of income. We further gauge that higher aggregate investments (in financially more closed economies) and devaluations of the real exchange rate (in financially more open economies) drive the positive growth effects of inequality. The negative growth effects are an implication of lower human capital investments. Consequently, policy makers should keep in mind the potential negative implications of inequality for aggregate economic growth in case their country’s industrial structure relies to a great extent on human capital.

This research explores the impact of various forms of capital flows on economic growth and development for a group of 120 countries from 1980-2007. Traditional growth literature as well as the textbook theory of economic growth looks at capital flows as playing a vital role in fostering economic growth and development. The textbook theories, as well as the existing approaches to study the capital flows and economic development connection, use growth and development interchangeably. This analysis, examines the consequences of different capital flows on growth and development separately because the determinants of growth may not be the same as the determinants of development. This distinction becomes even more applicable when observing the cases of countries that have experienced economic growth during certain periods but were unable to translate the increase in economic growth to development. To investigate the impact of various forms of capital flows, this dissertation utilizes life expectancy in addition to economic growth, as a measure of development. The results from using the two measures show that capital flows have dissimilar impact on life expectancy as well as economic growth. The central proposition of this dissertation is that not all forms of capital flows are created equal. Furthermore, countries at different levels of development may differ in their absorptive capacity of the capital. Thus, the ability of a country to harness capital for development depends upon its absorptive capacity, presence of domestic resources and the capabilities of national governments. This study therefore not only looks at the role played by various forms of capital flows on growth and development, but also takes into account the role of political performance of national governments that can play an important role in maximizing the efficiency of the investments. To investigate what kinds of flows are beneficial at different levels of development, this analysis further divides the dataset into three samples of developed countries, emerging markets and less developed countries. The results indicate that the impact of different capital flows varies across the three subsamples. By categorizing capital flows into categories of international capital flows, domestic capital, and remittances, this research also finds that the type of investment, as well as the source of investment (foreign vs. domestic), indeed does matter. The analysis suggests that the key to harnessing capital for development lies with capable governments and efficient use of domestic resources. In absence of capable governments, influx of foreign capital flows can manifest itself in ways that are harmful to the progress of developing societies.

This thesis aims to investigate the impact of state fragility on capital inflows and economic growth in Nigeria over the period 1980-2015. In line with existing studies, it adopts an augmented neoclassical growth model where capital is divided into domestic and foreign capital inflows (FDI, ODA and Remittances). Using an autoregressive distributed lag (ARDL) bounds testing approach to co-integration, significant long-run relationship was confirmed between state fragility, capital flows and economic growth. The results reveal domestic capital to be very significant and contribute positively to economic growth. Similarly it was observed that remittances remain a very crucial form of capital flow to Nigeria and that the presence of state fragility makes it more significant. For ODA a positive contribution to economic growth was observed, however, the presence of state fragility renders it insignificant. In the case of FDI, the study found a negative relationship between FDI and economic growth albeit insignificant. However, the presence of state fragility makes it significant but still negative. A negative relationship was also observed between state fragility and economic growth. These findings, implies that while the issue of state fragility needs to be addressed and concerted efforts put into building state resilience, not just for the direct impact of state fragility on the economy, but also its impact on the economy through other channels such as capital flows.

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Since the transition from the gold standard to the fiat monetary regime in the 1970s, both international and national financial markets have undergone substantial changes. Consequently, the role of money and finance has become a central catalyst for the development of the real economy. This dissertation addresses four key macroeconomic challenges faced by Japan and Europe from a monetary and financial perspective. Chapter 2 deals with the role of Japan's persistent low-, zero- and negative-interest rate environment on commercial banks and the real economy. The development of the Japanese economy since the early 1990s has been shaped by the bursting of the Japanese bubble economy. Since then, the Bank of Japan has not only lowered the policy interest rate to unprecedented levels, but also implemented a series of unconventional monetary policy measures. Nevertheless, the long-term stagnation of the Japanese economy continued, with the Japanese commercial banks being under consolidation pressure. Chapter 2 examines how Japan’s persistent monetary easing has affected the banking system and their consequences for the real economy. Chapter 3 focuses on Japan's decades-long struggle with low consumer price inflation. Despite the concerted efforts of monetary and fiscal expansions over more than three decades, the Japanese policymakers failed to produce consumer price inflation. Within Japanese policy and academic circles, skepticism has grown regarding Milton Friedman’s quantity theory on the money-price relationship. This skepticism led to the widespread belief that Japan's low inflation is not a monetary phenomenon, but a real economic phenomenon driven by structural problems, inter alia a rapidly aging society. Chapter 3 reveals the limitations of Friedman’s quantity theory of money from the viewpoint of the (original) quantity theory of money pioneered by Irving Fisher. Based on Fisher’s quantity theory of money, Chapter 3 shows that Japan’s prolonged low inflation is indeed a monetary phenomenon. Chapter 4 addresses the development of intra-euro area current account imbalances. Historically, there has been a clear disparity in policy stances between northern and southern European countries. In particular, the uncoordinated fiscal policies within the euro area have played a central role for the development of international capital flows, which in turn influenced the current account dynamics within the euro area. Chapter 4 provides insights into the role of the common monetary policy and uncoordinated fiscal policies for the development of intra-euro area current account imbalances. Chapter 5 turns attention to Germany’s persistent large current account surpluses which have been a frequent source of political conflicts in Europe and beyond. This chapter examines the causal relationship between the current account and financial account. To be specific, the impact of domestic capital outflows and foreign capital inflows on Germany’s current account surpluses. Evidence obtained from the Toda-Yamamoto causality model suggests that, for Germany, the causality runs from international capital flows (the financial account) to international real resource flows (the current account), and not vice versa. In summary, this dissertation aims to analyze the interplay between macroeconomic policymaking and real economic phenomena from a monetary and financial perspective. It demonstrates that the monetary and financial developments driven by monetary and fiscal policies play a pivotal role for the real economic development. By focusing on Japan and Europe, this dissertation illuminates the underlying causes of several macroeconomic challenges from a financial and monetary viewpoint, offering valuable insights for policymakers, academics and practitioners.:Table of Contents Chapter 1 5 Introduction 5 Chapter 2 7 The Japanese Banks in the Lasting Low-, Zero- and Negative-Interest Rate Environment 7 1. Introduction 7 2. The Origin and the Macroeconomic Environment of the Persistent Banking Crisis 8 2.1. The Japanese Bubble Economy 8 2.2. Macroeconomic Responses to the Lasting Crisis 9 2.3. Credit Guarantees and Public Credit 10 3. Development of the Japanese Banking Sector in the Persistent Crisis 11 3.1. Credit Crunch and Increasing Deposits 11 3.2. Interest Margins 12 3.3. Net Interest Income 14 4. Adjustment to Declining Net Interest Incomes 15 4.1. New Business Models, Increasing Fees and Commissions 15 4.2. Cost Reductions 17 4.3. Mergers 17 5. Outlook 18 Chapter 3 22 Japan’s Low Inflation from a Quantity Theory Perspective 22 1. Introduction 22 2. The Quantity of Money in Japan 23 2.1. Definition of Money 23 2.2. Money Creation and Banking Sector 26 2.3. Money Creation and Nonbanking Sector 28 3. Two Versions of the Quantity Theory of Money 30 3.1. From the Transactions Version to the Income Version 30 3.2. Problems with the Income Version 32 3.3. The Quantity Theory of Money and the Japanese Economy 33 4. Transactions Version of the Quantity Theory of Money and Japan’s Low Inflation 36 4.1. The Quantity of Money and the General Price Level in Japan 36 4.2. Japan’s Low Money Growth from Private and Government Debt Perspective 39 4.3. Japan’s Low Money Growth and Inflation from Macroeconomic Policy Perspective 41 5. Outlook for Japan’s Inflation from a Quantity Theory Perspective 44 Chapter 4 55 Macroeconomic Policy Making and Current Account Imbalances in the Euro Area 55 1. Introduction 55 2. Pre-Crisis Divergence of Fiscal Policies and Current Account Imbalances 56 2.1. German Reforms as an Asymmetric Shock for the Euro Area 58 2.2. Current Account Deficits in the Southern Euro Area and Beyond 61 3. Crisis, Emergency Credit and Fiscal Rescue Packages 64 3.1. Monetary Rescue Measures 64 3.2. Fiscal Rescue Funds 68 4. Post-crisis Macroeconomic Policy Mix 70 4.1. Fiscal and Monetary Policy Mix 70 4.2. ECB Unconventional Monetary Policy 72 5. Post-crisis Macroeconomic Policy Mix 76 Chapter 5 82 The Relationship between the German Current Account and Financial Account: Evidence from Toda-Yamamoto Causality Approach 82 1. Introduction 82 2. The Relationship between the Current Account and Financial Account 83 2.1. Recording of Balance-of-Payments Transactions 83 2.2. Standard Approaches to the Current Account Determination 84 2.3. Gross Capital Flow Approach 86 3. Empirical Analysis 87 3.1. Data Description and Estimation Procedure 87 3.2. Model Description and Results of Unit Root and Cointegration Tests 89 3.3. Results of Toda-Yamamoto Test for Multivariate Granger Causality 92 4. The German Current Account Surplus from a Gross Capital Flow Perspective 94 4.1. Bonanzas of Foreign Capital Inflows and Current Account Deficits in the 1990s 94 4.2. Surges of German Capital Outflows, Stops of Foreign Capital Inflows and Current Account Surpluses in the early 2000s 97 4.3. Gross Capital Flows and Persistent Current Account Surpluses from the late 2000s 100 5. Outlook 106

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This dissertation comprises three essays on macroeconomic impacts of foreign direct investment (FDI). The first essay analyses the impact of FDI on the growth rate of total factor productivity of host countries. The essay focuses on 77 low- and middle-income countries and is based on balanced panel data for the period 1980-2008. The system GMM and common correlated effects (CCE) panel data methods are applied to estimate the models. Estimated coefficients show that FDI does not have any significant impact on the growth rate and the levels of TFP. The second essay investigates the relationship between FDI and domestic investment focusing on low- and middle-income countries, and using panel data for the period 1980-2012. It applies common parameter and heterogeneous parameter, static and dynamic, single equation and simultaneous equation panel data econometric techniques to study the relationship. Empirical findings suggest that FDI crowds our domestic investment. Our estimated coefficients also suggest that countries that have weak institutions, less developed financial systems, less human capital, less developed infrastructure, or economies that are more open, are more exposed to foreign competition and experience stronger crowding out from inward FDI. In the third essay, the influence of capital flows on the real exchange rate of recipient countries is analysed. The influence of three important capital flows, viz. foreign direct investment (FDI), foreign aid, and remittances, are assessed on the real exchange rate, using data for 45 middle- and low-income countries for the period 1980–2013. Both heterogeneous and homogeneous panel data methods are applied to estimate the real exchange rate models. The estimated coefficients of these models imply that foreign direct investment (FDI) and remittances do not influence the real exchange rate. Aid tends to depreciate the real exchange rate. Findings also suggest that financial development does not influence the exchange rate impact of aid in our sample countries. The study further finds that while aid tends to increase real exchange rate volatility, FDI and remittances do not have any robust influence on volatility. / February 2017

[pt] O objetivo deste trabalho é investigar empiricamente uma possível relação de causalidade entre fluxos de capitais (e abertura financeira de um modo geral) e o crescimento econômico de longo prazo dos países. Utilizando uma amostra de 70 países para o período de 1970-2004 foram realizadas uma série de estimações econométricas em painel em vista de se medir o impacto de um fluxo mais elevado de capitais sobre a produtividade das economias. Uma vez que a literatura documenta uma possível assimetria neste efeito, no sentido de que capitais externos devem ser benéficos somente para países que já possuem uma capacidade absorciva mínima, ou seja, que são capazes de converter de forma eficaz esses capitais para investimentos produtivos que alavancam o crescimento, utilizamos termos de interações nas regressões. Mais especificamente testou-se o papel que o aprofundamento financeiro de um país, medido como a razão do volume de crédito doméstico privado sobre o PIB, desempenha nesta relação entre fluxos de capitais e crescimento. Os resultados obtidos indicam que, para economias com razão crédito/PIB maior que um nível de threshold que varia entre 25 e 30%, o impacto de maiores fluxos de capitais é positivo e significante. Para abaixo desse threshold o impacto é negativo. Uma vez que fluxos excessivos de capitais externos exercem forte pressão de apreciação da taxa real de câmbio de um país, e que tal apreciação pode ser maléfica ao crescimento da produtividade uma vez que impõe perdas significantes aos setores de bens tradables, pode ocorrer que países com baixo aprofundamento financeiro cresceram a taxas menores em resultado de maiores fluxos de capitais devido a uma apreciação excessiva do câmbio real. No entanto, as estimações das regressões entre desalinhamentos da taxa real de câmbio e crescimento apontam um efeito significante e negativo do ponto de vista estatístico, porém insignificante do ponto de vista econômico. / [en] The objective of this paper is to investigate empirically a possible causal relation between capital flows (and financial openess in a widely fashion) and long run economic growth. With a sample of 70 countries in the period ranging from 1970 to 2004 we estimated econometric panels to test for the presence of a productivity growth enhancing effect of higher capital flows. Since the literature points out an assimetric effect in the sense that foreign capital is desirable only for countries which have attained a certain level of absorptive capacity, that means, which are more able to convert them to productive capital, interactive terms were included in the regressions. More specifically, we tested the role of the financial depth, measured as the ratio of domestic private credit over GDP, on the relationship between capital flows and growth. The results obtained show that economies which have already attained a certain ratio of credit over GDP greater than a threshold that varies between 25% and 30% has a positive and significant impact of capital flows on growth. Below this threshold, this impact is negative. Since excessive capital flows exerts a pressure of strong appreciation of the real exchange rate of a country and that appreciation may be negative to productivity growth since it imposes significant losses to tradables sectors, it is possible that countries with a low financial depth had grown less because of the effects of appreciation of the exchange rate caused by capital flows. However, the regression estimates between real exchange rate misalignments and growth show a negative significant effect by a statistical standpoint but insignificant by an economic standpoint.

Made available in DSpace on 2016-04-26T20:48:41Z (GMT). No. of bitstreams: 1 Fernando Gdikian.pdf: 1585526 bytes, checksum: 4b937d6d1d508a3a63c84234542e5606 (MD5) Previous issue date: 2014-06-09 / This work aims to analyze the evolution of the external vulnerability of the Brazilian economy in the range 2001 to 2011, specifically from the perspective of monetary-financial sphere. The hypothesis is that external vulnerability tends to intensify in the long run when the current account deficits are financed with foreign capital and could become a barrier to economic development. Was observed with the data analysis of the balance of payments and international investment position of an improvement in the situation above external vulnerability by accumulating reserves. However, with the acceleration of economic growth in the mid-2000s, the structural external vulnerability manifested by deteriorating current account and the increase in net foreign liabilities / Este trabalho tem como objetivo analisar a evolução da vulnerabilidade externa da economia brasileira no intervalo de 2001 até 2011, especificamente sob a ótica da esfera monetário-financeira. A hipótese é que a vulnerabilidade externa tende a intensificar-se no longo prazo quando os déficits em transações correntes são financiados com capital estrangeiro, podendo vir a transformar-se numa barreira ao desenvolvimento econômico. Observou-se com a análise dos dados do balanço de pagamentos e da posição internacional de investimentos que houve melhora na vulnerabilidade externa conjuntural sobretudo pelo acúmulo de reservas. Entretanto, com a aceleração do crescimento econômico em meados dos anos 2000, a vulnerabilidade externa estrutural manifestou-se através da deterioração das transações correntes e do aumento do passivo externo líquido