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The Macroeconomic Effects of Debt- and Equity-Based Capital Inflows

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  • Scott Davis

    (Hong Kong Institute for Monetary Research and Federal Reserve Bank of Dallas)

Abstract

This paper will consider whether debt- and equity-based capital inflows have different macroeconomic effects. Using external instruments in a structural VAR, we first identify the component of capital inflows that is driven not by domestic economic and financial conditions but by conditions in the rest of the world. We then estimate the response to an exogenous shock to debt or equity-based capital inflows in a structural VAR model that includes domestic variables like GDP, inflation, the exchange rate, stock prices, credit growth, and interest rates. An exogenous increase in debt inflows leads to a significant increase in GDP, inflation, stock prices and credit growth and an appreciation of the exchange rate. An exogenous increase in equity-based capital inflows has almost no effect on the same variables. Thus the macroeconomic effects of exogenous capital inflows are almost entirely due to changes in debt, not equity-based, capital inflows.

Suggested Citation

  • Scott Davis, 2014. "The Macroeconomic Effects of Debt- and Equity-Based Capital Inflows," Working Papers 282014, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:282014
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    Cited by:

    1. Maja Bukovšak & Gorana Lukinić Čardić & Nina Pavić, 2020. "Structure of capital flows and exchange rate: the case of Croatia," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 113-146, February.
    2. Scott Davis, 2016. "Economic fundamentals and monetary policy autonomy," Globalization Institute Working Papers 267, Federal Reserve Bank of Dallas.
    3. Juan Carlos Cuestas & Karsten Staehr, 2017. "The Great Leveraging in the European crisis countries: Domestic credit and net foreign liabilities," Journal of Economic Studies, Emerald Group Publishing, vol. 44(6), pages 895-910, November.
    4. 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).
    5. Jonathan Scott Davis, 2017. "External debt and monetary policy autonomy," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 35(82), pages 53-63, April.
    6. Robert Dekle & Cheng Hsiao & Siyan Wang, 2001. "The Real Effects of Capital Inflows on Emerging Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 165-202.
    7. 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).
    8. repec:bdr:ensayo:v:35:y:2017:i:82:p:96-105 is not listed on IDEAS

    More about this item

    Keywords

    Capital Inflows; Debt; Equity; Macroeconomic Effects;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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