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When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies

  • Graciela L. Kaminsky
  • Carmen M. Reinhart
  • Carlos A. Vegh

Based on a sample of 104 countries, we document four key stylized facts regarding the interaction between capital flows, fiscal policy, and monetary policy. First, net capital inflows are procyclical (i.e., external borrowing increases in good times and falls in bad times) in most OECD and developing countries. Second, fiscal policy is procyclical (i.e., government spending increases in good times and falls in bad times) for the majority of developing countries. Third, for emerging markets, monetary policy appears to be procyclical (i.e., policy rates are lowered in good times and raised in bad times). Fourth, in developing countries - and particularly for emerging markets - periods of capital inflows are associated with expansionary macroeconomic policies and periods of capital outflows with contractionary macroeconomic policies. In such countries, therefore, when it rains, it does indeed pour.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10780.

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Date of creation: Sep 2004
Date of revision:
Publication status: published as When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies , Graciela L. Kaminsky, Carmen M. Reinhart, Carlos A. Végh. in NBER Macroeconomics Annual 2004, Volume 19 , Gertler and Rogoff. 2005
Handle: RePEc:nbr:nberwo:10780
Note: IFM
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