The Response of Capital Flows to Interest Rate Differentials: The Case of South Africa

Time-varying character for short-term capital flow from the interest rate aspect in China

“…Hence, there were pronounced interest rate differentials between China and the U.S., which led to capital inflow surges and currency appreciation episodes (Zoega, 2016). Ahmed and Zlate (2014) and Makhetha-Kosi et al (2016) proved the persistent effect of interest rate differentials on capital flows. Ahmed and Zlate (2014) further demonstrate that there have been significant changes in the behaviour of SCF since before the global financial crisis to the post-crisis period, which are partly explained by the greater sensitivity to interest rate differentials.…”

“…However, in the periods 2011:M01-2012:M02, 2012:M09-2015:M03 and 2015:M10-2018:M12, IRD has no significant impact on SCF, which is mainly because other factors exceed IRD to become the main factors that influence SCF. Chari and Kehoe (2003), Cho and Rhee (2013), Chen and Kong (2014) and Makhetha-Kosi et al (2016) give their aspects from quantitative easing policy, exchange rate and other factors. This phenomenon may be explained by other factors in different time intervals.…”

“…Carvalho and Fidora (2015) prove that foreign capital inflow would lower long-term interest rate. Makhetha-Kosi et al (2016) argue that the capital flows and interest rate differentials can affect each other, and the latter especially shows persistent influences on capital flow during stress periods. Barroso, Da Silva, and Sales (2016) analyse the short-term international capital flows of Brazil and find that U.S. quantitative easing monetary policy triggers capital inflow.…”

“…The IRD is computed as the difference between the Shanghai Interbank Offered Rate and London Interbank Offered Rate, which represent domestic and foreign interest rate, respectively. The IRD reflects dynamic changes in monetary policies between home and abroad, which can reflect Chinese and global economic conditions (Makhetha-Kosi et al, 2016). In China, the measurement of SCF is based on the position of Forex purchase of a financial institution (FPFI), actual utilisation of foreign capital (FDI), trade surplus (TS) and trade misinvoicing (TM), which can be written as SCF ¼ -(FPFI -FDI -TS þ TM).…”

“…Conversely, the policy responses of emerging economies were more subdued owing to fewer influences from the crisis. Consequently, there were obvious interest rate differentials (IRD) between developed and less-developed countries, which resulted in capital inflow surges (Makhetha-Kosi, Mishi, & Ngonyama, 2016). However, when the U.S. economy faced recovery and the Federal Reserve quit quantitative easing policies, emerging markets witnessed a slowdown in capital inflows and, in the worst cases, reversal of capital (Zoega, 2016).…”