Working Paper: CEPR ID: DP6996
Authors: Vincent Reinhart; Carmen Reinhart
Abstract: A considerable literature has examined the causes, consequences, and policy responses to surges in international capital flows. A related strand of papers has attempted to catalog current account reversals and capital account "sudden stops." This paper offers an encompassing approach with an algorithm cataloging capital inflow bonanzas in both advanced and emerging economies during 1980-2007 for 181 countries and 1960-2007 for a subset of 66 economies from all regions. In line with earlier studies, global factors, such as commodity prices, international interest rates, and growth in the world?s largest economies, have a systematic effect on the global capital flow cycle. Bonanzas are no blessing for advanced or emerging market economies. In the case of the latter, capital inflow bonanzas are associated with a higher likelihood of economic crises (debt defaults, banking, inflation and currency crashes). Bonanzas in developingcountries are associated with procyclical fiscal policies and attempts to curb or avoid an exchange rate appreciation - very likely contributing to economic vulnerability. For the advanced economies, the results are not as stark, but bonanzas are associated with morevolatile macroeconomic outcomes for GDP growth, inflation, and the external accounts. Slower economic growth and sustained declines in equity and housing prices follow at the end of the inflow episode.
Keywords: capital inflows; commodity prices; financial crises; procyclical policies
JEL Codes: F3; F32; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital inflow bonanzas (F21) | increased risks of economic crises (F65) |
| capital inflow bonanzas (F21) | increased risks of debt defaults (F65) |
| capital inflow bonanzas (F21) | increased risks of banking crises (F65) |
| capital inflow bonanzas (F21) | increased risks of inflation (E31) |
| capital inflow bonanzas (F21) | increased risks of currency crashes (F31) |
| capital inflow bonanzas (F21) | procyclical fiscal policies (E62) |
| procyclical fiscal policies (E62) | increased economic crises (F44) |
| capital inflow bonanzas (F21) | more volatile macroeconomic outcomes in advanced economies (F41) |
| real GDP growth (O49) | fluctuations during capital inflow bonanzas (F32) |