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The macroeconomic effects of debt- and equity-based capital inflows

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  • J. Scott Davis

Abstract

This paper will consider whether debt- and equity-based capital inflows have different macroeconomic effects. Using external instruments in a structural VAR, we first identify the component of capital inflows that is driven not by domestic economic and financial conditions but by conditions in the rest of the world. We then estimate the response to an exogenous shock to debt or equity-based capital inflows in a structural VAR model that includes domestic variables like GDP, inflation, the exchange rate, stock prices, credit growth, and interest rates. An exogenous increase in debt inflows leads to a significant increase in GDP, inflation, stock prices and credit growth and an appreciation of the exchange rate. An exogenous increase in equity-based capital inflows has almost no effect on the same variables. Thus the macroeconomic effects of exogenous capital inflows are almost entirely due to changes in debt, not equity-based.

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  • J. Scott Davis, 2014. "The macroeconomic effects of debt- and equity-based capital inflows," Globalization Institute Working Papers 214, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:214
    DOI: 10.24149/gwp214
    Note: Published as: Davis, J. Scott (2015), "The Macroeconomic Effects of Debt- and Equity-Based Capital Inflows," Journal of Macroeconomics 46: 81-95.
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    2. J. Scott Davis, 2016. "Economic fundamentals and monetary policy autonomy," Globalization Institute Working Papers 267, Federal Reserve Bank of Dallas.
    3. Juan Carlos Cuestas & Karsten Staehr, 2017. "The Great Leveraging in the European crisis countries," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 44(6), pages 895-910, November.
    4. Akhilesh K. Verma & Rajeswari Sengupta, 2021. "Interlinkages between external debt financing, credit cycles and output fluctuations in emerging market economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 157(4), pages 965-1001, November.
    5. Igan, Deniz & Kutan, Ali M. & Mirzaei, Ali, 2020. "The real effects of capital inflows in emerging markets," Journal of Banking & Finance, Elsevier, vol. 119(C).
    6. Jonathan Scott Davis, 2017. "External debt and monetary policy autonomy," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 35(82), pages 53-63, April.
    7. Alimov, Behzod, 2022. "The dynamic effects of debt and equity inflows: Evidence from emerging and developing countries," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    8. Robert Dekle & Cheng Hsiao & Siyan Wang, 2001. "The Real Effects of Capital Inflows on Emerging Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 165-202.
    9. repec:bdr:ensayo:v:35:y:2017:i:82:p:96-105 is not listed on IDEAS
    10. Mara, Mirza Yuniar Isnaeni & Purwanto, Nur M.Adhi & Kurniati, Ina Nurmalia & Fauziah, Nanda Rizki & Aqmaliyah, Euis, 2021. "Capital flow and banking credit in Indonesia," Economic Modelling, Elsevier, vol. 95(C), pages 298-310.
    11. Nick Sander, 2023. "The Macroeconomic Effects of Portfolio Equity Inflows," Staff Working Papers 23-31, Bank of Canada.

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    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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