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Do international capital flows smooth or transmit macroeconomic volatility? Time-series evidence from emerging markets

Author

Listed:
  • Scott W Hegerty

    (Canisius College)

Abstract

Capital flows—particularly of more volatile types of investment—have the potential to destabilize an emerging economy. On the other hand, economic theory suggests that financial integration provides channels by which macroeconomic volatility might be reduced. This study looks at four emerging economies to test which hypothesis is correct. Generalized impulse-response and variance decomposition analysis shows that the volatility of real consumption shows relatively little response to capital flows, but that FDI reduces output and investment volatility only in a few cases. Non-FDI flows have a stronger but ambiguous influence, reducing real investment volatility for Mexico and South Africa, but increasing it for Brazil and Russia.

Suggested Citation

  • Scott W Hegerty, 2011. "Do international capital flows smooth or transmit macroeconomic volatility? Time-series evidence from emerging markets," Economics Bulletin, AccessEcon, vol. 31(2), pages 1659-1672.
    • Handle: RePEc:ebl:ecbull:eb-11-00355
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    File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I2-P153.pdf
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    Cited by:

    1. Scott W. Hegerty, 2014. "Do International Capital Flows Worsen Macroeconomic Volatility in Transition Economies?," Bulletin of Applied Economics, Risk Market Journals, vol. 1(1), pages 1-13.
    2. Christopher Baum & Madhavi Pundit & Arief Ramayandi, 2015. "Openness and financial stability," EcoMod2015 8652, EcoMod.

    More about this item

    Keywords

    Capital Inflows; Macroeconomic Volatility; Emerging Markets; Vector Autoregression;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E0 - Macroeconomics and Monetary Economics - - General

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