Are Capital Inflows Expansionary or Contractionary in the Philippines?

This paper sets out to assess whether gross capital inflows to the Philippines are expansionary or contractionary in line with the model predictions and empirical findings of Blanchard et al. (2015). The results indicate that gross inflows are expansionary to output and credit growth. But contrary to the model predictions and empirical findings of Blanchard et al. (2015), we find that private bond inflows to the Philippines are expansionary. Bond inflows may have expansionary impact on output and credit growth if the exchange rate is managed, if the domestic capital market is underdeveloped, if the country receives small bond inflows, and if proceeds from debt issuance are channelled to productive investments. Similar to Blanchard et al. (2015), non-bond inflows have a positive overall impact on output and credit growth despite receiving relatively small foreign direct investment inflows.