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The real effects of capital inflows in emerging markets

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  • Igan, Deniz
  • Kutan, Ali M.
  • Mirzaei, Ali

Abstract

We examine the association between capital inflows and industry growth in a sample of 22 emerging market economies from 1998 to 2010. We expect more external-finance-dependent industries, in countries that host more capital inflows, to grow disproportionately faster. This is indeed the case in the pre-crisis period of 1998–2007. In a panel regression analysis using annual changes, this relationship is driven by debt, rather than equity inflows. But when we consider the long-run effects using panel cointegration tests, equity inflows are those that contribute to growth. Further, we observe a reduction in output volatility, and this association is more pronounced for equity, rather than debt inflows. These relationships, however, break down during the crisis, indicating the importance of an undisrupted global financial system for emerging markets, if they are to harness the growth benefits of capital inflows. In line with this observation, we also document that the inflows-growth nexus is stronger in countries with well-functioning banks and better institutional quality.

Suggested Citation

  • Igan, Deniz & Kutan, Ali M. & Mirzaei, Ali, 2020. "The real effects of capital inflows in emerging markets," Journal of Banking & Finance, Elsevier, vol. 119(C).
  • Handle: RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301953
    DOI: 10.1016/j.jbankfin.2020.105933
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    More about this item

    Keywords

    Capital flows; Financial dependence; Industry growth; Emerging market economies;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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    Access and download statistics

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