Working Paper: CEPR ID: DP10554
Authors: Gianluca Benigno; Nathan Converse; Luca Fornaro
Abstract: This paper describes the stylized facts characterizing periods of exceptionally large capital inflows in a sample of 70 middle- and high-income countries over the last 35 years. We identify 155 episodes of large capital inflows and find that these events are typically accompanied by an economic boom and followed by a slump. Moreover, during episodes of large capital inflows capital and labor shift out of the manufacturing sector, especially if the inflows begin during a period of low international interest rates. However, accumulating reserves during the period in which capital inflows are unusually large appears to limit the extent of labor reallocation. Larger credit booms and capital inflows during the episodes we identify increase the probability of a sudden stop occurring during or immediately after the episode. In addition, the severity of the post-inflows recession is significantly related to the extent of labor reallocation during the boom, with a stronger shift of labor out of manufacturing during the inflows episode associated with a sharper contraction in the aftermath of the episode.
Keywords: capital flows; sectoral allocation; sudden stop
JEL Codes: F31; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large capital inflows (F32) | economic boom (E32) |
| economic boom (E32) | increases in output, consumption, investment, private credit, and employment (E20) |
| large capital inflows (F32) | labor and capital reallocation away from manufacturing into nontradable sectors (F16) |
| large capital inflows (F32) | recession (E32) |
| reserve accumulation during inflow episodes (E50) | mitigates negative impacts (F69) |
| larger credit booms and capital inflows (F65) | increase probability of sudden stops (R48) |
| extent of labor reallocation during inflow episodes (J69) | severity of post-inflows recessions (F44) |