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...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2013/03/17458211/effect-capital-flows-composition-output-volatility http://hdl.handle.net/10986/13184 |
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okr-10986-131842021-04-23T14:03:07Z The Effect of Capital Flows Composition on Output Volatility Federico, Pablo Vegh, Carlos A. Vuletin, Guillermo ADVANCED ECONOMIES AFFILIATED ORGANIZATIONS AMERICAN DEVELOPMENT BANK BENCHMARK BOND BUDGET CONSTRAINTS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOWS CAPITAL INFLOWS CAPITAL STOCK COMMODITY COMMODITY PRICES COST OF CAPITAL COUNTRY RISK CURRENCY DATA AVAILABILITY DEBT DERIVATIVE DERIVATIVES DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DISCOUNTED VALUE DIVIDENDS DOMESTIC SAVING DUMMY VARIABLE ECONOMIC GROWTH ECONOMIC INSTABILITY ECONOMIC OUTLOOK ECONOMIC RESEARCH EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EMPIRICAL GROWTH LITERATURE EQUAL SHARE EXPECTED VALUE EXTERNAL FUNDING EXTERNAL SHOCKS FINANCIAL DEREGULATION FISCAL POLICY FOREIGN ASSETS FOREIGN DIRECT INVESTMENT FOREIGN DIRECT INVESTORS FOREIGN INVESTORS FOREIGN OWNERSHIP FORMAL ANALYSIS GOVERNMENT SPENDING HIGHER VOLATILITY HOLDING INCOME INDUSTRIAL COUNTRIES INDUSTRIAL ECONOMIES INSTRUMENT INSTRUMENTAL VARIABLES INSURANCE INTERACTION TERMS INTEREST RATES INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL COUNTRY RISK GUIDE INTERNATIONAL ECONOMICS INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL INVESTORS INTERNATIONAL SETTLEMENTS INVESTMENT RISK LENDERS LOAN LONG-TERM INTEREST LONG-TERM INTEREST RATES MACROECONOMIC POLICIES MACROECONOMIC STABILITY MACROECONOMIC VARIABLES MACROECONOMICS MARGINAL PRODUCTIVITY NATIONAL BANK NET FOREIGN ASSETS OPEN ECONOMY OUTPUT OUTPUT VOLATILITY OVERALL VOLATILITY POLICY RESPONSE PORTFOLIO PORTFOLIO CAPITAL PORTFOLIO DEBT PORTFOLIO INVESTMENT PORTFOLIO THEORY PRIVATE CAPITAL PRIVATE CAPITAL FLOWS PRODUCTION FUNCTION REAL GDP REPAYMENT REPAYMENT OF PRINCIPAL REVIEW OF ECONOMICS RISK SHARING SAVINGS SHORT-TERM BORROWING STANDARD DEVIATION STANDARD ERRORS TRADE CREDITS VOLATILE ECONOMIES VOLATILITIES VOLATILITY VOLATILITY MEASURES WEALTH WORLD MARKET WORLD MARKET INTEGRATION 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. 2013-04-12T17:16:01Z 2013-04-12T17:16:01Z 2013-03 http://documents.worldbank.org/curated/en/2013/03/17458211/effect-capital-flows-composition-output-volatility http://hdl.handle.net/10986/13184 English en_US Policy Research Working Paper;No. 6386 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |
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Digital Repository |
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Foreign Institution |
| institution |
Digital Repositories |
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World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
ADVANCED ECONOMIES AFFILIATED ORGANIZATIONS AMERICAN DEVELOPMENT BANK BENCHMARK BOND BUDGET CONSTRAINTS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOWS CAPITAL INFLOWS CAPITAL STOCK COMMODITY COMMODITY PRICES COST OF CAPITAL COUNTRY RISK CURRENCY DATA AVAILABILITY DEBT DERIVATIVE DERIVATIVES DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DISCOUNTED VALUE DIVIDENDS DOMESTIC SAVING DUMMY VARIABLE ECONOMIC GROWTH ECONOMIC INSTABILITY ECONOMIC OUTLOOK ECONOMIC RESEARCH EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EMPIRICAL GROWTH LITERATURE EQUAL SHARE EXPECTED VALUE EXTERNAL FUNDING EXTERNAL SHOCKS FINANCIAL DEREGULATION FISCAL POLICY FOREIGN ASSETS FOREIGN DIRECT INVESTMENT FOREIGN DIRECT INVESTORS FOREIGN INVESTORS FOREIGN OWNERSHIP FORMAL ANALYSIS GOVERNMENT SPENDING HIGHER VOLATILITY HOLDING INCOME INDUSTRIAL COUNTRIES INDUSTRIAL ECONOMIES INSTRUMENT INSTRUMENTAL VARIABLES INSURANCE INTERACTION TERMS INTEREST RATES INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL COUNTRY RISK GUIDE INTERNATIONAL ECONOMICS INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL INVESTORS INTERNATIONAL SETTLEMENTS INVESTMENT RISK LENDERS LOAN LONG-TERM INTEREST LONG-TERM INTEREST RATES MACROECONOMIC POLICIES MACROECONOMIC STABILITY MACROECONOMIC VARIABLES MACROECONOMICS MARGINAL PRODUCTIVITY NATIONAL BANK NET FOREIGN ASSETS OPEN ECONOMY OUTPUT OUTPUT VOLATILITY OVERALL VOLATILITY POLICY RESPONSE PORTFOLIO PORTFOLIO CAPITAL PORTFOLIO DEBT PORTFOLIO INVESTMENT PORTFOLIO THEORY PRIVATE CAPITAL PRIVATE CAPITAL FLOWS PRODUCTION FUNCTION REAL GDP REPAYMENT REPAYMENT OF PRINCIPAL REVIEW OF ECONOMICS RISK SHARING SAVINGS SHORT-TERM BORROWING STANDARD DEVIATION STANDARD ERRORS TRADE CREDITS VOLATILE ECONOMIES VOLATILITIES VOLATILITY VOLATILITY MEASURES WEALTH WORLD MARKET WORLD MARKET INTEGRATION |
| spellingShingle |
ADVANCED ECONOMIES AFFILIATED ORGANIZATIONS AMERICAN DEVELOPMENT BANK BENCHMARK BOND BUDGET CONSTRAINTS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOWS CAPITAL INFLOWS CAPITAL STOCK COMMODITY COMMODITY PRICES COST OF CAPITAL COUNTRY RISK CURRENCY DATA AVAILABILITY DEBT DERIVATIVE DERIVATIVES DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DISCOUNTED VALUE DIVIDENDS DOMESTIC SAVING DUMMY VARIABLE ECONOMIC GROWTH ECONOMIC INSTABILITY ECONOMIC OUTLOOK ECONOMIC RESEARCH EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EMPIRICAL GROWTH LITERATURE EQUAL SHARE EXPECTED VALUE EXTERNAL FUNDING EXTERNAL SHOCKS FINANCIAL DEREGULATION FISCAL POLICY FOREIGN ASSETS FOREIGN DIRECT INVESTMENT FOREIGN DIRECT INVESTORS FOREIGN INVESTORS FOREIGN OWNERSHIP FORMAL ANALYSIS GOVERNMENT SPENDING HIGHER VOLATILITY HOLDING INCOME INDUSTRIAL COUNTRIES INDUSTRIAL ECONOMIES INSTRUMENT INSTRUMENTAL VARIABLES INSURANCE INTERACTION TERMS INTEREST RATES INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL COUNTRY RISK GUIDE INTERNATIONAL ECONOMICS INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL INVESTORS INTERNATIONAL SETTLEMENTS INVESTMENT RISK LENDERS LOAN LONG-TERM INTEREST LONG-TERM INTEREST RATES MACROECONOMIC POLICIES MACROECONOMIC STABILITY MACROECONOMIC VARIABLES MACROECONOMICS MARGINAL PRODUCTIVITY NATIONAL BANK NET FOREIGN ASSETS OPEN ECONOMY OUTPUT OUTPUT VOLATILITY OVERALL VOLATILITY POLICY RESPONSE PORTFOLIO PORTFOLIO CAPITAL PORTFOLIO DEBT PORTFOLIO INVESTMENT PORTFOLIO THEORY PRIVATE CAPITAL PRIVATE CAPITAL FLOWS PRODUCTION FUNCTION REAL GDP REPAYMENT REPAYMENT OF PRINCIPAL REVIEW OF ECONOMICS RISK SHARING SAVINGS SHORT-TERM BORROWING STANDARD DEVIATION STANDARD ERRORS TRADE CREDITS VOLATILE ECONOMIES VOLATILITIES VOLATILITY VOLATILITY MEASURES WEALTH WORLD MARKET WORLD MARKET INTEGRATION Federico, Pablo Vegh, Carlos A. Vuletin, Guillermo The Effect of Capital Flows Composition on Output Volatility |
| relation |
Policy Research Working Paper;No. 6386 |
| description |
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. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Federico, Pablo Vegh, Carlos A. Vuletin, Guillermo |
| author_facet |
Federico, Pablo Vegh, Carlos A. Vuletin, Guillermo |
| author_sort |
Federico, Pablo |
| title |
The Effect of Capital Flows Composition on Output Volatility |
| title_short |
The Effect of Capital Flows Composition on Output Volatility |
| title_full |
The Effect of Capital Flows Composition on Output Volatility |
| title_fullStr |
The Effect of Capital Flows Composition on Output Volatility |
| title_full_unstemmed |
The Effect of Capital Flows Composition on Output Volatility |
| title_sort |
effect of capital flows composition on output volatility |
| publisher |
World Bank, Washington, DC |
| publishDate |
2013 |
| url |
http://documents.worldbank.org/curated/en/2013/03/17458211/effect-capital-flows-composition-output-volatility http://hdl.handle.net/10986/13184 |
| _version_ |
1764422919805468672 |