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Capital flows: Catalyst or Hindrance to economic takeoffs?

  • Aizenman, Joshua
  • Sushko, Vladyslav

This paper applies a probit estimation to assess the relationship between economic takeoffs during 1950-2000 and inflows of portfolio debt, portfolio equity, and FDI, controlling for country’s stock of short-termexternal debt and commodity terms of trade. Average level of FDI inflows is associated with a 23 percenthigher takeoff probability relative to a zero FDI inflow benchmark, and this effect is highest for the LatinAmerica subsample, with a 65 rise in takeoff probability. Higher stock of short term external debt hasbeen associated with a substantial negative effect on the probability of a takeoff, and the effect of theshort terms debt overhang is largest for Latin American countries. Yet, virtually all the takeoffs wereassociated with a rise in portfolio debt inflows. At the sample mean, inflow of portfolio debt is associatedwith approximately 25 percent higher probability of a takeoff. In contrast, a one standard deviationincrease in equity outflows (inflows) is associated with a 47 percent (17 percent) decline in the probabilityof a takeoff. A one standard deviation improvement in commodity terms of trade is associated with 28percent higher takeoff probability.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt79f5144f.

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Date of creation: 05 Jul 2011
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Handle: RePEc:cdl:ucscec:qt79f5144f
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  1. Dollar, David & Kraay, Aart, 2001. "Trade, growth, and poverty," Policy Research Working Paper Series 2615, The World Bank.
  2. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
  3. International Monetary Fund, 2009. "Commodity Terms of Trade; The History of Booms and Busts," IMF Working Papers 09/205, International Monetary Fund.
  4. Joseph Joyce, 2011. "Financial Globalization and Banking Crises in Emerging Markets," Open Economies Review, Springer, vol. 22(5), pages 875-895, November.
  5. Luca Antonio Ricci & Jaewoo Lee & Gian-Maria Milesi-Ferretti, 2008. "Real Exchange Rates and Fundamentals; A Cross-Country Perspective," IMF Working Papers 08/13, International Monetary Fund.
  6. Benjamin F. Jones & Benjamin A. Olken, 2005. "Do Leaders Matter? National Leadership and Growth Since World War II," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 835-864, August.
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