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Substitutes or complements? The interactions between components of capital inflows for Asia

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  • Cavoli, Tony

Abstract

Despite an emerging and interesting literature on the pecking order of capital flows that might arise from asymmetric information and financing constraints, the dynamics of the interactions between the various components of capital flows, namely FDI, portfolio equity, portfolio debt and bank flows appear a little under-researched. This paper presents an empirical examination of this issue for a sample of East Asian countries – looking only at the inflows of capital – by asking the following questions: Are the respective components of capital flows substitutes or complements? Does one type of capital flow enhance or inhibit the others? Is this effect mitigated or exacerbated during crises? What effect does the volatility of each of the components of flows have on the level of each flow? The policy implications of this analysis can be viewed in terms of countries financial liberalisation policies. If two types of flows are substitutes, then a policy of liberalising, or indeed restricting, one type of flow may actually crowd out the other. This may well be an unintended consequence of a country's financial liberalisation policy.

Suggested Citation

  • Cavoli, Tony, 2014. "Substitutes or complements? The interactions between components of capital inflows for Asia," Journal of Asian Economics, Elsevier, vol. 31, pages 32-41.
    • Handle: RePEc:eee:asieco:v:31-32:y:2014:i::p:32-41
    DOI: 10.1016/j.asieco.2014.03.002
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    Cited by:

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    2. Sur, Abhisek & Ray, Partha & Nandy, Amarendu, 2019. "India’s external commercial borrowing: Pulled by domestic fundamentals or pushed by global conditions?," Journal of Asian Economics, Elsevier, vol. 61(C), pages 65-77.

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    More about this item

    Keywords

    Capital inflows; Foreign direct investment; Components of capital flows; East Asia;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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