Uncertainty, capital flows, and maturity mismatch

How COVID-19 drives connectedness among commodity and financial markets: Evidence from TVP-VAR and causality-in-quantiles techniques

“…Very recent years have seen to the increased concern about uncertainty and how it affects economic indicators. This has attracted a handful of studies on the impact of various forms of uncertainty on economic activities and different markets (see Converse, 2017 ; Rodrik, 1991 ; Handley and Limao, 2015 , etc.). For instance, Pástor and Veronesi (2012) use the political uncertainty to establish a negative influence of uncertainty on stock markets.…”

“…This is definitely expected as economic and market uncertainties affect the trio of investors, consumers and corporate organizations. Individual investors and corporate firms could be discouraged from investing in new projects while consumers could be led to imbibing conservative spending habits (see Handley and Limao, 2015 ; Converse, 2017 ). Similarly, uncertainties raise investors’ sentiments which make them to want to shift attention from the most adversely affected markets to another for safety.…”

Findings of the recent literature on international capital flows

“…Risks can be contained when foreign currency borrowing is driven by trade finance and FDI motivations. This is also the case when foreign currency borrowing finances fixed asset investments in domestic tradable sectors, although in that case NFC external financing can generate maturity mismatch on corporate balance sheets and increase volatility (Converse, 2015). However, risks increase when foreign currency borrowing finances fixed asset investments in the non-tradable sector, as seems to be somewhat the case (IMF, 2015a).…”

“…On a sample of 53 EMEs over 1980, Gosh and Qureshi (2016 have confirmed previous evidence that debt flows are more likely to result in economic overheating and domestic credit boom than equity flows 21 while Eichengreen et al (2017) and Pagliari and Ahmed Hannan (2017) have shown that debt flows remain the most volatile type of flows. Moreover, Igan et al (2016) 22 , Hoggarth et al (2016 and Converse (2015) 23 have found evidence that debt inflows are associated with higher output growth volatility than equity inflows (even though debt inflows are associated with stronger growth in financially constrained sectors). This research points to the role of well-functioning domestic financial markets and banking systems to deal with the volatility of associated with debt flows.…”

Output impacts of the interaction between foreign direct investment and domestic credit

“…Some studies such as Anwar and Cooray (2012), Alfaro et al (2004Alfaro et al ( , 2009, Hermes and Lensink (2003), Choong et al (2004Choong et al ( , 2005Choong et al ( , 2010, Durham (2004), Lee and Chang (2009) and Suliman and Elian (2014) suggest that the financial sector development and FDI play a complementary role in promoting economic growth, and therefore their interaction is positively related with economic growth. In contrast, studies such as Rebelo and Vegh (1995), Gourinchas et al (2001), Tornell and Westermann (2002), Mendoza and Terrones (2008), Reis (2013), Converse (2014), Benigno and Fornaro (2014), Benigno et al (2015), Rajan and Zingales (2001) and Hsu et al (2014) suggest that FDI and domestic credit are substitutional in promoting economic growth; hence, the interactive effect is likely to be negative. Particularly, in economies with limited investment opportunities and small markets, inflows of FDI are likely to displace domestic investment and direct domestic credit to less productive activities such as consumption, and hence, FDI is likely to retard returns of domestic credit lending.…”