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The Influence of Capital Flow Bonanzas on Real and Financial Sectors: A Comparative Study of South Asia and China

Author

Listed:
  • Abdul RASHID

    (Intentional Institute of Islamic Economics (IIIE), International Islamic University (IIU), Islamabad, Pakistan.)

  • Zainab JEHAN

    (Department of Economics, Fatima Jinnah Women University, Rawalpindi, Pakistan.)

  • Mehreen KHAN

    (Intentional Institute of Islamic Economics (IIIE), International Islamic University (IIU), Islamabad, Pakistan.)

  • Muhammad SAEED

    (Government Postgraduate College, Mardan, Pakistan.)

Abstract

This paper investigates the impact of large capital flows (LCF) on real and financial sectors of selected South Asian countries and China for the period 1970-2013. In particular, we investigate the influence of episodes of large capital inflows (LCIF) and outflows (LCOF) on domestic private credits, market interest rates, exchange rates, inflation, stock prices, and GDP per capita. For this purpose, first, episodes of LCIF and LCOF, de-trended by the Hodrick-Prescott (HP) filter, are identified. Next, we estimate the impulse response function based on the local projections method (IRF-LP) to quantify the response of the underlying variables to episodes of LCF. The results suggest that massive capital flows have less positive but more negative effects on the nominal and real macroeconomic indicators for South Asian countries. Nevertheless, the results indicate that China has appeared much less vulnerable to episodes of capital flow bonanza during the same period. The findings are of great interest to policymakers for designing effective policies in order to avoid adverse effects of extreme capital flow episodes.

Suggested Citation

  • Abdul RASHID & Zainab JEHAN & Mehreen KHAN & Muhammad SAEED, 2019. "The Influence of Capital Flow Bonanzas on Real and Financial Sectors: A Comparative Study of South Asia and China," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 124-147, December.
    • Handle: RePEc:rjr:romjef:v::y:2019:i:4:p:124-147
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    Cited by:

    1. Umair Bin YOUSAF & Khalil JEBRAN & Man WANG, 2022. "A Comparison of Static, Dynamic and Machine Learning Models in Predicting the Financial Distress of Chinese Firms," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 122-138, April.
    2. Muhammad Imran & Abdul Rashid, 2023. "The Empirical Determinants of Foreign Direct Investment Episodes," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 15(3), pages 409-435, September.
    3. Ngo Thai HUNG, 2022. "Re-Study on Dynamic Connectedness between Macroeconomic Indicators and the Stock Market in China," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 104-124, April.

    More about this item

    Keywords

    Capital Flow Bonanza; Inflows and Outflows; Real and Financial Sectors; South Asian Countries; China; IRF; Hodrick-Prescott Filter; Local Projections;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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