Extreme Flows Of Cross-Border Capital And Global Financial Safety Net

The financial liberalization of developed and emerging market economies has greatly increased the scale of cross-border capital flow with the explosive growth of economy since the 1990 s,The cross-border flow of capital optimizes the allocation efficiency of economic resources worldwide and promotes the development of the global economy.But at the same time,cross-border capital inflow may cause asset price bubbles,resulting in increased financial instability and closer economic ties.Once the systemic risk has an impact on the economic fundamentals and the capital flow is interrupted or even reversed,it may cause great damage to the domestic economy.Behind the recent major financial crises,we can find the fuel of cross-border capital flows.The outbreak of COVID-19 in 2020 has impact on the economic stability of various countries,and the mode and scale of cross-border capital flows have also changed.Under the background of increasing global risks,how to reduce extreme flows of cross-border capital and prevent cross-border risk infection is an urgent problem for governments to solve.With the development of financial globalization,central banks of non reserve currency countries have limited ability to obtain reserve currency in response to financial crisis.Thus they can not fully perform the function of "lender of last resort".Drawing lessons from crisis,countries have carried out a series of reforms,including accumulating foreign exchange reserves,striving for IMF loan lines,signing central bank currency swap agreements with reserve currency countries,etc.This series of measures is known as the "global financial safety net".Especially since the outbreak of the international financial crisis,countries have further strengthened the global financial safety net.On the other hand,statistics show that after the international financial crisis,the occurrence of extreme flows of cross-border capital has decreased,and the surge,stop,flight and withdrawal of global cross-border capital inflows have changed from "wave" to "ripple".So,what factors have led to the significant reduction of extreme changes in global cross-border capital after the international financial crisis? Does the strengthening and use of the global financial safety net have an impact on extreme flows of cross-border capital? Further,has the strengthening and use of the global financial safety net played an important role in preventing and resolving cross-border financial risk contagion? This paper focuses on the global financial safety net,extreme flows of cross-border capital and financial crisis,tries to solve the above problems,and puts forward policy suggestions for China’s financial opening and financial risk prevention.Firstly,starting from the evolution and characteristics of the global financial safety net,this paper makes a detailed analysis of four parts: foreign exchange reserves,IMF loans,central bank currency swaps and regional financial arrangements.The study found that the total amount of global reserves and the IMF Quotas have increased significantly after the international financial crisis,which is mainly brought by emerging markets and developing economies.These non reserve currency countries mainly deal with the financial risks brought by cross-border capital flow by enhancing the ability to obtain reserve currency.Developed countries solve the global liquidity problem through central bank currency swap.At the same time,regional financial arrangements have become an important choice for countries to deal with risk shocks because they are faster than the IMF.Secondly,by introducing the liquidity spiral mechanism,this paper constructs a theoretical model to analyze drivers of extreme flow of cross-border capital,and explores the role of exchange rate and capital control on extreme flows of cross-border capital under the impact of global risk.Based on the new push-pull framework,this paper studies whether the global financial safety net can buffer extreme flows of cross-border capital under different global financial risk levels,both from the perspective of capital flow data of multinational banks and balance of payments data.This paper distinguishes four types: the surge and stop of cross-border capital inflow,the flight and withdrawal of capital outflow.This paper found that the four extreme changes of cross-border capital in various countries not only have certain linkage characteristics,but also show certain heterogeneity characteristics.The linkage characteristics of stop and withdrawal are significantly stronger than surge and flight,that is,the negative impact has stronger linkage than the positive impact.Second,the global financial risk factors have a strong ability to explain the extreme changes of cross-border capital in various countries.Third,the global financial safety network can reduce the probability of extreme flows of cross-border capital,but this mitigation effect is weakened when the global financial risk is high.Fourth,in the global financial safety net,the central bank’s swaps play a relatively strong role in alleviating extreme flows of cross-border capital,followed by reserves and IMF loans.Last,the economic growth rate significantly affects the probability of extreme flows of cross-border capital,which means that a strong economic fundamentals has played an important role in mitigating the risk of extreme flows of cross-border capital.Thirdly,based on channel of extreme changes in cross-border capital,this paper explores the impact of the global financial safety net on the financial crisis.It is found that the global financial safety net can significantly reduce the probability of systemic banking crisis and currency crisis,but has no significant impact on sovereign debt crisis;Some of the above impacts are realized by affecting the stop of cross-border capital inflows.The impact on the systemic banking crisis is mainly realized through the stop of bank capital and equity capital inflow,and the impact on the currency crisis is mainly realized through the stop of bond portfolio,FDI capital and equity portfolio capital inflows.In addition,though the global financial safety net can reduce the probability of cross-border capital outflows,but it does not affect the occurrence of financial crises through flight of cross-border capital outflows.Finally,this paper believes that in order to prevent and resolve cross-border financial risk infection,countries need to commit to the stable and healthy development of domestic economy.On the other hand,they also need to use and improve the global financial safety network and implement appropriate capital control policies at the right time,so as to help alleviate the impact of adverse foreign shocks.In addition,since the global financial safety net can affect the financial crisis through the channels of extreme flows of cross-border capital,further refining the measurement of extreme flows of cross-border capital and establishing the corresponding dynamic index monitoring system are also of great significance for China’s practice of preventing cross-border risk infection.