Seminar 281: International Trade and Finance: SEM 237/281: "Causal Effects of Capital Inflows (JMP)", Joint with Macroeconomics

Seminar | September 10 | 2-3:30 p.m. | 597 Evans Hall

 Nick Sander, UC Berkeley

 Department of Economics

ABSTRACT: In this paper I estimate the average country's business cycle response to capital inflows from abroad -- in particular equity and debt (portfolio) inflows. Capital flows have been argued by Rey(2015) to be a key factor synchronizing international business cycles, and large outflows of capital -- sudden stops -- are often associated with considerable subsequent economic distress. To identify whether capital inflows can lead to business cycle responses in the countries receiving the inflows, I construct a shift-share (Bartik) instrument for capital inflows using mutual fund level micro-data from the Emerging Portfolio Fund Research (EPFR) database. I use insturmented-Jorda local projections to estimate the effects foreign capital can have on the recipient country economy. The key findings are that capital inflows are expansionary: equity inflows lead to an investment boom and debt inflows lead to a consumption boom. Exchange rate regime, economic development and capital openness have modest effects on the qualitative effect of these responses.