The Mechanisms Of International Short-term Capital Movements

The doctoral dissertation is meant to be a modern microeconomic analysis and empirical study on the mechanisms of international short-term capital movements. With the globalization of international financial markets since 1980s,the short-term capital movements have been playing a more and more important role in world economy. They have launched continually drastic shocks on international capital markets,particularly in emerging market economies. The existing literature has tried to explain many of the phenomena associated with recent financial crises. However,they did not shed light on financial operations that take place in international financial markets and the precise mechanisms thereof,which,as I believe,is crucial to understanding the essence and principle of globalizing capital flows. This dissertation attempts to fill this gap in this area by incorporating historical institutional analysis,game theory and dynamics into international monetary economics,analyzing the anatomy of institutional structure of international capital markets and mechanics of international speculation,interest rate arbitrage and capital flight combined with empirical studies that the traditional literature has failed to address satisfactorily.The first chapter is an introduction to specific methodology and contributions of the dissertation,together with some well-defined terminologies as well.Chapter Two makes a historical institutional analysis on the relationship between international short-term capital movements and international monetary institutions from a brand-new theoretical perspective,which reveals that any account of the change of international monetary institutions is also necessarily an account of the evolvement of international short-term capital movements. It is the "institutional vacuum" that determines underlyingly the chaos of modern globalizing capital flows.Chapter Three shows a survey of the determinants of international short-term capital movements. The flow theory assumes that a given interest rate differential will result in a continuous flow of capital from one country to the other. The stock theory based on modern portfolio theory,however,argues that a change in the interest ratedifferential will only lead to an adjustment in portfolios of assets as a new stock equilibrium is established. The modem international capital assets theory makes a further study thereon subject to market imperfection and investor's heterogeneities. The dynamic portfolio theory explains the intertemporal assets structures. Recent years economists have realized again that for some initial conditions,"animal spirits" can determine the course of investment and capital flows. A limit cycle may occur around one of the welfare-inferior equilibria.Chapter Four,Five and Six are devoted respectively to the mechanics of international speculation,interest arbitrage and capital flight,which,as I define,are three types of short-term capital movements classified by investor's motivations. Chapter Four elaborates the reality of speculation space,deduces the speculative profiles and dividing lines between spot and forward exchange markets with transaction costs,expounds the effects of speculation under floating exchange rate regimes and speculative currency attacks on fixed exchange rate regimes. A new model of speculative attacks is proposed in the empirical studies on Southeast Asian financial crisis in terms of the activation of hot money. Chapter Five is concerned with the source of interest arbitrage and the development of interest rate parity theory. Empirical findings show the mechanisms of risk-free interest arbitrage for lack of resilience in China's exchange rate arrangements. Chapter Six focuses on capital flight from China. It develops a new measurement approach of capital flight and models the underlying motivations,conduits and vehicles engaged in capital flight.The seventh chapter approaches the management of international short-term capital movements,probes into the mechanics of sterilized foreign exchange...