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Capital flows: Catalyst or Hindrance to economic takeoffs?

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  • Aizenman, Joshua
  • Sushko, Vladyslav

Abstract

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.

Suggested Citation

  • Aizenman, Joshua & Sushko, Vladyslav, 2011. "Capital flows: Catalyst or Hindrance to economic takeoffs?," Santa Cruz Department of Economics, Working Paper Series qt79f5144f, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt79f5144f
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    References listed on IDEAS

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    1. Joshua Aizenman & Jaewoo Lee & Vladyslav Sushko, 2012. "From the Great Moderation to the Global Crisis: Exchange Market Pressure in the 2000s," Open Economies Review, Springer, vol. 23(4), pages 597-621, September.
    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. Joshua Aizenman & Vladyslav Sushko, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," NBER Working Papers 17228, National Bureau of Economic Research, Inc.
    4. Barro, Robert J. & Lee, Jong-Wha, 1993. "International comparisons of educational attainment," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 363-394, December.
    5. repec:cdl:ucscec:qt8c75z2pt is not listed on IDEAS
    6. Aizenman, Joshua & Sushko, Vladyslav, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," Santa Cruz Department of Economics, Working Paper Series qt3fb716f8, Department of Economics, UC Santa Cruz.
    7. David Dollar & Aart Kraay, 2004. "Trade, Growth, and Poverty," Economic Journal, Royal Economic Society, vol. 114(493), pages 22-49, February.
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    Citations

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    Cited by:

    1. Forbes, Kristin & Fratzscher, Marcel & Kostka, Thomas & Straub, Roland, 2016. "Bubble thy neighbour: Portfolio effects and externalities from capital controls," Journal of International Economics, Elsevier, vol. 99(C), pages 85-104.
    2. repec:cdl:ucscec:qt9j53m1tp is not listed on IDEAS
    3. Marcel Fratzscher, 2014. "Capital Controls and Foreign Exchange Policy," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 7, pages 205-253, Central Bank of Chile.
    4. Pierre-Louis Vezina, 2017. "Resource discoveries and FDI bonanzas: An illustration from Mozambique," OxCarre Working Papers 199, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    5. Aizenman, Joshua & Pinto, Brian & Sushko, Vladyslav, 2012. "Financial Sector Ups and Downs and the Real Sector: Up by the Stairs and Down by the Parachute," Santa Cruz Department of Economics, Working Paper Series qt81p0j667, Department of Economics, UC Santa Cruz.
    6. Simone Salotti & Carmine Trecroci, 2018. "Cross-country evidence on the distributional impact of fiscal policy," Applied Economics, Taylor & Francis Journals, vol. 50(51), pages 5521-5542, November.
    7. Aizenman, Joshua & Pinto, Brian & Sushko, Vladyslav, 2013. "Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute," Emerging Markets Review, Elsevier, vol. 16(C), pages 1-30.
    8. Simone Salotti & Carmine Trecroci, 2012. "Even worse than you thought: The effects of government debt on investment and productivity," EcoMod2012 4200, EcoMod.
    9. Kristin J. Forbes & Marcel Fratzscher & Thomas Kostka & Roland Straub, . "Bubble thy neighbor: portfolio effects and externalities from capital controls," Proceedings, Federal Reserve Bank of San Francisco.
    10. Simone Salotti & Carmine Trecroci, 2016. "The Impact of Government Debt, Expenditure and Taxes on Aggregate Investment and Productivity Growth," Economica, London School of Economics and Political Science, vol. 83(330), pages 356-384, April.
    11. Simone Salotti & Carmine Trecroci, 2012. "Even Worse than You thought: The Impact of Public Debt on Aggregate Investment and Productivity," DEGIT Conference Papers c017_020, DEGIT, Dynamics, Economic Growth, and International Trade.
    12. Vivek Arora & Karl Habermeier & Jonathan D. Ostry & Rhoda Weeks-Brown, 2013. "La liberalización y el manejo de los flujos de capital: una visión institucional," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 15(28), pages 205-255, January-J.
    13. Didier, Tatiana & Pinat, Magali, 2013. "How Does Trade Cause Growth?," Conference papers 332421, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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