The dynamic effects of debt and equity inflows: Evidence from emerging and developing countries

This paper shows that inflows of foreign debt and equity have different (asymmetric) effects on consumption, investment, and GDP growth in emerging and developing economies. By using panel VAR analysis based on quarterly macroeconomic data from 1995Q1 to 2015Q4, my results indicate that debt inflows increase consumption, investment and GDP growth on impact, but decrease investment and GDP growth in later periods (i.e., after around a year) for several quarters. Equity inflows, on the other hand, do not have a significant impact on consumption, investment, and GDP growth in emerging and developing countries on average. I also account for cross-country heterogeneity by splitting my sample into two groups based on their (i) real GDP per capita and (ii) governance quality. I find that countries with lower governance quality benefit from debt inflows in terms of increased consumption, investment and GDP growth in the short run, but are hurt by reduction in all of these indicators in the medium run. The findings regarding equity inflows indicate that, although their effects are not so much destabilizing as those of debt inflows, policymakers in higher income emerging countries might still need to be attentive, since an equity inflow shock in these countries seems to have a somewhat negative effect on investment and GDP growth in later periods following a positive impact effect on consumption and GDP growth.