Capital Inflows and Booms in Assets Prices: Evidence From a Panel of Countries

Policymakers and academics often associate large capital inflows with booms in asset prices. To date, however, methodical evidence of this association is still limited. This paper provides a systematic empirical analysis of the link between capital inflows and booms in asset prices. Using a panel of 40 countries from 1990 to 2010 and controlling for other macroeconomic factors, the paper finds that the link varies across capital inflow categories and across countries. In particular, emerging countries are more likely to experience booms in asset prices during periods of large capital inflows. In line with leading theories of financial crises the paper finds that financial development, the quality of institutions and the exchange rate regime can potentially influence the association between capital inflows and booms in asset prices. In contrast, this paper does not find evidence to support the view that capital controls help reduce this association.