The Effect of Capital Flows Composition on Output Volatility
A large literature has argued that different types of capital flows have different consequences for macroeconomic stability. By distinguishing between foreign direct investment and portfolio and other investments, this paper studies the effects of...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/03/17458211/effect-capital-flows-composition-output-volatility http://hdl.handle.net/10986/13184 |
| Summary: | A large literature has argued that
different types of capital flows have different consequences
for macroeconomic stability. By distinguishing between
foreign direct investment and portfolio and other
investments, this paper studies the effects of the
composition of capital inflows on output volatility. The
paper develops a simple empirical model which, under certain
conditions that hold in the data, yields three key testable
implications. First, output volatility should depend
positively on the volatilities of both foreign direct
investment and portfolio and other inflows. Second, output
volatility should be an increasing function of the
correlation between both kinds of inflows. Third, output
volatility should be a decreasing function of the share of
foreign direct investment in total capital inflows, for low
values of that share. The data provide strong support for
all three implications, even after controlling for other
factors that may influence output volatility, and after
dealing with potential endogeneity problems. These findings
call attention to the importance of taking into account the
synchronization and composition of capital flows for output
stabilization purposes, as opposed to just focusing on the
volatility of each component of capital flows. |
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