Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins

The capital flows network has changed substantially, bringing new investors and target economies into play. Related, a recent intensification of capital flows to low income countries (LICs) has posed a number of questions. Most importantly, the very nature of those flows and important factors affecting foreign investors decision which can ultimately affect growth prospects of low income countries (together with an issue of sustainability) remain open for an academic probe. Due to an existence of a share of costs which is fixed in nature, there is a need to analyze capital flows and their evolution at two margins: intensive and extensive. This paper presents a parsimonious theoretical account that is consequently mapped into an econometric framework where we allow for two-tier decisions and cross-sectional dependence. Results indicate that market entry costs affect investment decisions pertinent to the LICs, consistently with the static theory. However, persistence in extensive margin eliminates this effect once dynamics is allowed for.Heterogeneous Panel

Strategies for Deeper Integration: Case Study of the Baltics

When we talk about international integration, trade and investment, the it’s-all-about-geographic-proximity is a tempting argument to make. While the importance of geographic closeness cannot be denied, empirical evidence suggests existence of other, perhaps equally significant factors that bring countries closer together. The aim of this paper is to sketch some light on an often overlooked aspect of international integration, recently introduced as the ‘new regionalism’ paradigm. Based on the proposed ‘mentoring’ and ‘the training ground’ concepts we analyze such integration within the Baltic Sea region, suggesting an alternative approach to international economic convergence

Global Impacts of US Monetary Policy Uncertainty Shocks

We build a new empirical model, which admits time-varying variances of local structural shocks, to estimate the global impact of an increase in the volatility of US monetary policy shocks. By allowing for rich dynamic interaction between the endogenous variables and time-varying volatility in the global setting, we find that US interest rate uncertainty not only drives local output and inflation volatility, but also causes declines in output, inflation, and the interest rate. Moreover, we document strong global impacts, making the world move in a very synchronous way. Crucially, spillback effects are found to be significant even for the US economy