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The output effect of gross foreign investment reversals

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  • Thorsten Janus
  • Daniel Riera-Crichton

Abstract

A large literature links currency crashes and reversals in a country’s net external borrowing to output losses. In this article, we find that contractions in the stock of gross foreign claims on a country—a phenomenon we call gross foreign investment reversals (GIRs)—are also associated with output declines. GIRs are specially harmful during currency, current account, and sudden stop crises in emerging markets. Instrumental variables estimation suggests that this relationship is causal, running from GIR to output. Meanwhile, financial development and stocks of foreign assets can buffer emerging markets against the negative output effects of GIR. Jointly these findings suggest that changes in the composition of the current account, and not just its level or rate of change, can have first-order output effects. Thus, it may be important for future research to identify the determinants of GIR, a subject we only briefly touch on.

Suggested Citation

  • Thorsten Janus & Daniel Riera-Crichton, 2015. "The output effect of gross foreign investment reversals," Oxford Economic Papers, Oxford University Press, vol. 67(2), pages 356-379.
    • Handle: RePEc:oup:oxecpp:v:67:y:2015:i:2:p:356-379.
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    File URL: http://hdl.handle.net/10.1093/oep/gpu048
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    Cited by:

    1. Serpil Kahraman Akdogu & Mehmet Umutlu, 2014. "The Link between Financial System and Economics: Functions of the Financial System, Financial Crises, and Policy Implications," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(4), pages 52-66, October.
    2. Mariam Camarero & Jesús Peiró-Palomino & Cecilio Tamarit, 2017. "External imbalances and growth," Working Papers 2017/02, Economics Department, Universitat Jaume I, Castellón (Spain).
    3. Inbin Hwang & Deokjong Jeong & Hyungsoon Park & Sunyoung Park, 2017. "Which Net Capital Flows Matter?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(2), pages 289-305, February.
    4. Camarero, Mariam & Peiró-Palomino, Jesús & Tamarit, Cecilio, 2019. "Growth in a time of external imbalances," Economic Modelling, Elsevier, vol. 79(C), pages 262-275.
    5. Thorsten Janus & Daniel Riera-Crichton, 2016. "Banking crises, external crises and gross capital flows," Globalization Institute Working Papers 273, Federal Reserve Bank of Dallas.
    6. Janus, Thorsten & Riera-Crichton, Daniel, 2013. "International gross capital flows: New uses of balance of payments data and application to financial crises," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 16-28.

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