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Macro-financial effects of portfolio flows: Malaysia’s experience

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Abstract

This paper studies the causes and effects of portfolio flows in Malaysia. We use Structural Vector Autoregression (SVAR) and Autoregressive Distributed Lag (ARDL) models to analyse the interactions among portfolio flows, global and domestic macro and financial variables within a common empirical framework. Three findings emerge: First, the SVAR estimations show that global and domestic factors play transitory roles in driving Malaysia’s net portfolio flows. A subsample analysis from the ARDL model highlights that domestic factors play an increasingly important role in attracting portfolio inflows as Malaysia liberalised its exchange rate regime and capital flow restrictions. Second, higher net portfolio flows lead to exchange rate appreciation, higher equity prices and credit expansion. The effects are visible in the exchange rate, followed by equity prices and credit. Third, in the transmission of higher portfolio flows to growth, the positive effects from higher equity prices and credit are partially offset by the dampening effect from the appreciating exchange rate on output. While the contribution of portfolio flow’s effects on output variance is low, the impulse responses of output does change to portfolio flow shocks, suggesting that portfolio flows are tail risks to growth and that the risks magnify when the flows are large and volatile.

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  • Hwa, Tng Boon & Raghavan, Mala & Huey, Teh Tian, 2017. "Macro-financial effects of portfolio flows: Malaysia’s experience," Working Papers 2017-07, University of Tasmania, Tasmanian School of Business and Economics.
  • Handle: RePEc:tas:wpaper:23512
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    More about this item

    Keywords

    international portfolio flows; open economy; financial economics; SVAR model;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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