Globalization of Capital Movements: Potential Disadvantages and their Effect on Israel

34 Pages Posted: 12 Nov 2012

See all articles by Yoav Friedmann

Yoav Friedmann

Bank of Israel

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Date Written: December 2004

Abstract

This study examines a number of brief models that demonstrate potential disadvantages in the process of globalization of capital movements. Using Israeli data, we examine the extent to which Israel suffers from these disadvantages. One disadvantage is related to the transfer of negative shocks between countries by means of capital movements, when these result solely from diversification of the asset portfolio among several economies. The second disadvantage involves the currency exposure that could arise due to the utilization of foreign currency loans for financing income-earning projects in the local currency. The third disadvantage is related to the risk inherent in shortening the period of debt contracts, which could be accompanied by foreign investors’ entry to the local economy. The conclusion arising from the empirical analysis is that alongside the advantages involved, Israel does indeed suffer from at least part of the negative aspects of the globalization process: The correlation between capital movements to the economy and capital movements to the emerging markets since 1995 is creating a pass-through mechanism for the import of shocks from abroad to Israel. This mechanism was apparent at the time of the currency crises during the years 1997 and 1998. The proportion of foreign currency credit to total and restricted credit, in exports and GDP, increased during the second half of the 1990’s without borrowers purchasing suitable hedging instruments against depreciation. However, foreign currency credit was usually a replacement for shekel credit, which is mostly short-term. From this aspect therefore, liberalization processes and globalization did not create a new problem.

Suggested Citation

Friedmann, Yoav and Goldstein, Itay, Globalization of Capital Movements: Potential Disadvantages and their Effect on Israel (December 2004). Israel Economic Review, Vol. 2, No. 2, pp. 45-78, 2004. Available at SSRN: https://ssrn.com/abstract=2174354

Yoav Friedmann (Contact Author)

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907
Israel

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

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