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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. Luca Antonio Ricci & Gian Maria Milesi‐Ferretti & Jaewoo Lee, 2013. "Real Exchange Rates and Fundamentals: A Cross‐Country Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 845-865, August.
    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. Joseph Joyce, 2011. "Financial Globalization and Banking Crises in Emerging Markets," Open Economies Review, Springer, vol. 22(5), pages 875-895, November.
    4. International Monetary Fund, 2009. "Commodity Terms of Trade; The History of Booms and Busts," IMF Working Papers 09/205, International Monetary Fund.
    5. Benjamin F. Jones & Benjamin A. Olken, 2005. "Do Leaders Matter? National Leadership and Growth Since World War II," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 835-864.
    6. 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. 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.
    2. 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.
    3. 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.
    4. 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.
    5. Simone Salotti & Carmine Trecroci, 2012. "Even worse than you thought: The effects of government debt on investment and productivity," EcoMod2012 4200, EcoMod.
    6. 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.
    7. Aizenman, Joshua & Pinto, Brian, 2011. "Managing Financial Integration and Capital Mobility— Policy lessons from the past two decades," Santa Cruz Department of Economics, Working Paper Series qt9j53m1tp, Department of Economics, UC Santa Cruz.
    8. 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.
    9. 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.
    10. Joshua Aizenman & Brian Pinto & Vladyslav Sushko, 2011. "Financial Sector Ups and Downs and the Real Sector: Up by the stairs, down by the parachute," NBER Working Papers 17530, National Bureau of Economic Research, Inc.
    11. Aizenman, Joshua & Pinto, Brian & Sushko, Vladyslav, 2011. "Financial sector ups and downs and the real sector : big hindrance, little help," Policy Research Working Paper Series 5860, The World Bank.

    More about this item

    Keywords

    Social and Behavioral Sciences;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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