Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence

The empirical relationship between capital controls and the financial development of credit and equity markets is examined. We extend the literature on this subject along a number of dimensions. Specifically, we (1) investigate a substantially broader set of proxy measures of financial development; (2) create and utilize a new index based on the IMF measures of exchange restrictions that incorporates a measure of the intensity of capital controls; and (3) extend the previous literature by systematically examining the implications of institutional (legal) factors. The results suggest that the rate of financial development, as measured by private credit creation and stock market activity, is linked to the existence of capital controls. However, the strength of this relationship varies with the empirical measure used, and the level of development. These results also suggest that only in an environment characterized by a combination of a higher level of legal and institutional development will the link between financial openness and financial development be readily detectable. A disaggregated analysis indicates that in emerging markets the most important components of these legal factors are the levels of shareholder protection and of accounting standards.

What Matters for Financial Development? Capital Controls, Institutions, and Interactions

We extend our earlier work, focusing on the links between capital account liberalization, legal and institutional development, and financial development, especially that in equity markets. In a panel data analysis encompassing 108 countries and twenty years ranging from 1980 to 2000, we explore several dimensions of the financial sector. First, we test whether financial openness can lead to equity market development when we control for the level of legal and institutional development. Then, we examine whether the opening of the goods sector is a precondition for financial opening. Finally, we investigate whether a well-developed banking sector is a precondition for financial liberalization to lead to equity market development and also whether bank and equity market development complements or substitutes. Our empirical results suggest that a higher level of financial openness contributes to the development of equity markets only if a threshold level of general legal systems and institutions is attained, which is more prevalent among emerging market countries. Among emerging market countries, a higher level of bureaucratic quality and law and order, as well as the lower levels of corruption, increases the effect of financial opening in fostering the development of equity markets. We also find that the finance-related legal/institutional variables do not enhance the effect of capital account opening as strongly as the general legal/institutional variables. In examining the issue of the sequencing, we find that the liberalization in cross-border goods transactions is found to be a precondition for capital account liberalization. Our findings also indicate that the development in the banking sector is a precondition for equity market development, and that the developments in these two types of financial markets have synergistic effects.

Current Account Balances, Financial Development and Institutions: Assaying the World "Savings Glut"

We investigate the medium-term determinants of the current account using a model that controls for factors related to institutional development, with a goal of informing the recent debate over the existence and relevance of the "savings glut." The economic environmental factors that we consider are the degree of financial openness and the extent of legal development. We find that for industrial countries, the government budget balance is an important determinant of the current account balance; the budget balance coefficient is 0.21 in a specification controlling for institutional variables. More interestingly, our empirical findings are not consistent with the argument that the more developed financial markets are, the less saving a country undertakes. We find that this posited relationship is applicable only for countries with highly developed legal systems and open financial markets. For less developed countries and emerging market countries we usually find the reverse correlation; greater financial development leads to higher savings. Furthermore, there is no evidence of "excess domestic saving" in the Asian emerging market countries; rather they seem to have suffered from depressed investment in the wake of the 1997 financial crises. We also find evidence that the more developed equity markets are, the more likely countries are to run current account deficits.

The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma

This paper extends our previous paper (Aizenman, Chinn, and Ito 2008) and explores some of the unexplored questions. First, we examine the channels through which the trilemma policy configurations affect output volatility. Secondly, we investigate how trilemma policy configurations affect the output performance of the economies under severe crisis situations. Thirdly, we look into how trilemma configurations have evolved in the aftermath of economic crises in the past. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of international reserves (IR). Greater financial openness helps reduce real exchange rate volatility. These results indicate that policymakers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. We also find that the crisis economies could end up with smaller output losses if they entered the crisis situation with more stable exchange rates or if they continue to hold a high level of IR and maintain greater exchange rate stability during the crisis period. Lastly, we find that developing countries are often found to have decreased the level of monetary independence and financial openness, but increased the level of exchange rate stability in the aftermath of a crisis, especially for the last two decades. This finding indicates how vulnerable developing countries, especially emerging market ones, are to volatile capital flows as a result of global financial liberalization.economic crisis, financial crisis, trilemma, financial openess, exchange rate stability

Quantum description for a chiral condensate disoriented in a certain direction in isospace

We derive a quantum state of the disoriented chiral condensate dynamically, considering small quantum fluctuations around a classical chiral condensate disoriented in a certain direction $\vec n$ in isospace. The obtained nonisosinglet quantum state has the characteristic features; (i) it has the form of the squeezed state, (ii) the state contains not only the component of pion quanta in the direction $\vec n$ but also the component in the perpendicular direction to $\vec n$ and (iii) the low momentum pions in the state violate the isospin symmetry. With the quantum state, we calculate the probability of the neutral fraction depending on the time and the pion's momentum, and find that the probability has an unfamiliar form. For the low momentum pions, the parametric resonance mechanism works with the result that the probability of the neutral fraction becomes the well known form approximately and that the charge fluctuation is small.Comment: 19 page

Parametric resonance at the critical temperature in high energy heavy ion collisions

Parametric resonance in soft modes at the critical temperature ($T_{c}$) in high energy heavy ion collisions is studied in the case when the temperature ($T$) of the system is almost constant for a long time. By deviding the fields into three parts, zero mode (condensate), soft modes and hard modes and assuming that the hard modes are in thermal equilibrium, we derive the equation of motion for soft modes at $T=T_{c}$. Enhanced modes are extracted by comparing with the Mathieu equation for the condensate oscillating along the sigma axis at $T=T_{c}$. It is found that the soft mode of $\pi$ fields at about 174 MeV is enhanced.Comment: 8 pages, 1 figure Some statements and equations are modified to clarif

Cookie Clicker

Cookie Clicker is a popular online incremental game where the goal of the game is to generate as many cookies as possible. In the game you start with an initial cookie generation rate, and you can use cookies as currency to purchase various items that increase your cookie generation rate. In this paper, we analyze strategies for playing Cookie Clicker optimally. While simple to state, the game gives rise to interesting analysis involving ideas from NP-hardness, approximation algorithms, and dynamic programming

Parametric amplification with a friction in heavy ion collisions

We study the effects of the expansion of the system and the friction on the parametric amplification of mesonic fields in high energy heavy ion collisions within the linear $\sigma$ model . The equation of motion which is similar to Mathieu equation is derived to describe the time development of classical fields in the last stage of a heavy ion collision after the freezeout time. The enhanced mode is extracted analytically by comparison with Mathieu equation and the equation of motion is solved numerically to examine whether soft modes will be enhanced or not. It is found that the strong peak appears around 267 MeV in the pion transverse momentum distribution in cases with weak friction and high maximum temperature. This enhancement can be extracted by taking the ratio between different modes in the pion transverse momentum distribution.Comment: 10 pages, 9 figures LaTeX: appendix adde

Description of a domain by a squeezed state in a scalar field theory

The author attempted to describe a domain by using a squeezed state in quantum field theory. An extended squeeze operator was used to construct the state. In a scalar field theory, the author described a domain that the distributions of the condensate and of the fluctuation are Gaussian. The momentum distribution, chaoticity and correlation length were calculated. It was found that the typical value of the momentum is about the inverse of the domain size, and that the chaoticity reflects the ratio of the size of the squeeze region to that of the coherent region. The results indicate that the quantum state of a domain is surmised by these quantities under the assumption that the distributions are Gaussian. As an example, this method was applied to a pion field, and the momentum distribution and the chaoticity were shown.Comment: 10 pages, 5 figures, a typographical error in the reference is correcte

Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations and external finances affect output volatility through the investment or trade channel depending on the openness of the economies. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be offset by holding higher levels of IR. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.