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Capital flows: Catalyst or Hindrance to economic takeoffs?

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  • Joshua Aizenman
  • Vladyslav Sushko

Abstract

This paper applies a probit estimation to assess the relationship between economic takeoffs during 1950-2000 and inflows of portfolio debt, portfolio equity, and FDI, controlling for country's stock of short-term external debt and commodity terms of trade. Average level of FDI inflows is associated with a 23 percent higher takeoff probability relative to a zero FDI inflow benchmark, and this effect is highest for the Latin America subsample, with a 65 rise in takeoff probability. Higher stock of short term external debt has been associated with a substantial negative effect on the probability of a takeoff, and the effect of the short terms debt overhang is largest for Latin American countries. Yet, virtually all the takeoffs were associated with a rise in portfolio debt inflows. At the sample mean, inflow of portfolio debt is associated with approximately 25 percent higher probability of a takeoff. In contrast, a one standard deviation increase in equity outflows (inflows) is associated with a 47 percent (17 percent) decline in the probability of a takeoff. A one standard deviation improvement in commodity terms of trade is associated with 28 percent higher takeoff probability.

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  • Joshua Aizenman & Vladyslav Sushko, 2011. "Capital flows: Catalyst or Hindrance to economic takeoffs?," NBER Working Papers 17258, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17258
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    References listed on IDEAS

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    1. Joshua Aizenman & Jaewoo Lee & Vladyslav Sushko, 2012. "From the Great Moderation to the Global Crisis: Exchange Market Pressure in the 2000s," Open Economies Review, Springer, vol. 23(4), pages 597-621, September.
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    8. Joshua Aizenman & Vladyslav Sushko, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," NBER Working Papers 17228, National Bureau of Economic Research, Inc.
    9. Joseph Joyce, 2011. "Financial Globalization and Banking Crises in Emerging Markets," Open Economies Review, Springer, vol. 22(5), pages 875-895, November.
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    Citations

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    Cited by:

    1. Marcel Fratzscher, 2014. "Capital Controls and Foreign Exchange Policy," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 7, pages 205-253, Central Bank of Chile.
    2. Forbes, Kristin & Fratzscher, Marcel & Kostka, Thomas & Straub, Roland, 2016. "Bubble thy neighbour: Portfolio effects and externalities from capital controls," Journal of International Economics, Elsevier, vol. 99(C), pages 85-104.
    3. Simone Salotti & Carmine Trecroci, 2016. "The Impact of Government Debt, Expenditure and Taxes on Aggregate Investment and Productivity Growth," Economica, London School of Economics and Political Science, vol. 83(330), pages 356-384, April.
    4. Joshua Aizenman & Brian Pinto, 2013. "Managing Financial Integration and Capital Mobility—Policy Lessons from the Past Two Decades," Review of International Economics, Wiley Blackwell, vol. 21(4), pages 636-653, September.
    5. Pierre-Louis Vezina, 2017. "Resource discoveries and FDI bonanzas: An illustration from Mozambique," OxCarre Working Papers 199, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    6. Simone Salotti & Carmine Trecroci, 2018. "Cross-country evidence on the distributional impact of fiscal policy," Applied Economics, Taylor & Francis Journals, vol. 50(51), pages 5521-5542, November.
    7. Aizenman, Joshua & Pinto, Brian & Sushko, Vladyslav, 2013. "Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute," Emerging Markets Review, Elsevier, vol. 16(C), pages 1-30.
    8. Vivek Arora & Karl Habermeier & Jonathan D. Ostry & Rhoda Weeks-Brown, 2013. "La liberalización y el manejo de los flujos de capital: una visión institucional," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 15(28), pages 205-255, January-J.
    9. Aizenman, Joshua & Pinto, Brian & Sushko, Vladyslav, 2012. "Financial Sector Ups and Downs and the Real Sector: Up by the Stairs and Down by the Parachute," Santa Cruz Department of Economics, Working Paper Series qt81p0j667, Department of Economics, UC Santa Cruz.
    10. Simone Salotti & Carmine Trecroci, 2012. "Even worse than you thought: The effects of government debt on investment and productivity," EcoMod2012 4200, EcoMod.
    11. Didier, Tatiana & Pinat, Magali, 2013. "How Does Trade Cause Growth?," Conference papers 332421, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    12. Simone Salotti & Carmine Trecroci, 2012. "Even Worse than You thought: The Impact of Public Debt on Aggregate Investment and Productivity," DEGIT Conference Papers c017_020, DEGIT, Dynamics, Economic Growth, and International Trade.
    13. Joshua Aizenman & Brian Pinto & Vladyslav Sushko, 2011. "Financial Sector Ups and Downs and the Real Sector: Up by the stairs, down by the parachute," NBER Working Papers 17530, National Bureau of Economic Research, Inc.
    14. Aizenman, Joshua & Pinto, Brian & Sushko, Vladyslav, 2011. "Financial sector ups and downs and the real sector : big hindrance, little help," Policy Research Working Paper Series 5860, The World Bank.

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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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