Effects Of Capital Inflows Research Articles

The Real Effects of Capital Inflows on Emerging Markets

We employ vector autoregression and cointegration estimation to examine the impact of net capital inflows on real exchange rates, output and real interest rates in several East Asian and Latin American economies during the 1990s. We find that increases in net capital inflows leads to appreciations of the real exchange rates in all the countries but have no impact on real output except for Thailand.

Policy responses to capital inflows: lessons from mexico

This paper has two basic objectives. The first is to examine the impact large inflows of foreign capital have on the economies of developing countries. This is important because international investment in many “emerging” markets has increased rapidly, particularly since 1990. The second objective is to explain Mexico's recent (1994-95) currency and financial crisis and to assess the role large capital inflows (and outflows) played in these events. In general, the paper concludes that the Mexican crisis was a direct outgrowth of the large inflows of foreign portfolio investment that followed the announcement of the NAFTA in early 1990. But while these capital inflows served as the catalyst, the policy responses adopted by the Mexican authorities to deal with these flows bear the ultimate responsibility for the crisis. Accordingly, this paper reviews the most common alternatives for redressing the effects of capital inflows on the recipient's economy and balance of payments, and uses Mexico's recent experience to draw general lessons for countries that encounter similar situations in the future.

Are capital inflows in the CR inflationary?

It is evident that the volume of capital inflows in the Czech Republic has had seriously monetary consequences. As shown in the section 2 net foreign assets accounted for most of the growth in the money supply in the Czech Republic during 1993 and 1994. Inflationary effects of capital inflows depend on whether capital inflows are driven by the money demand or by the money supply. The inflows driven by a rightward shift in the money demand function are not likely to result in inflation, while a shift in the money, supply function, caused perhaps by institutional change and greater availability of foreign funds, is likely to put pressure on prices. Empirical investigation of the supply and demand effects attempted to confirm the existence of the supply of money supply function in the Czech Republic. The application of appropriate econometric analysis in the turbulent period of 1992 - 1994 was somewhat problematic.

On the welfare effects of a ‘duty-free zone’

The analysis extends and corrects the results of an earlier paper by Hamada. Two problems are analyzed, (1) How is location of production affected by opening up of a free zone taking into account different kinds of trade barriers and zones? Implications for production, consumption and welfare in a number of different cases are analyzed. (2) What are the effects of capital inflow either into the zone or into the host country? Our results show that both types of capital inflow diminish welfare, and welfare diminishes comparatively more when imported into the zone. Repatriated income, as well as its composition, is explicitly incorporated.

Saving and Dependence with Externally Financed Growth

Although considerable attention has been directed in the last few years to the -effects of capital inflows on saving behavior in less developed countries (see, for example, Weisskopf (1972), Papanek (1972)), relatively little work has been done on the implications of this research for economic growth. Even if domestic saving is reduced by flows, one may legitimately ask, with Grinols and Bhagwati (1976, p. 416), How much does this matter? Grinols and Bhagwati's answer to this question is relatively optimistic: It is certainly possible for the usual, static, adverse impact of external capital to be eliminated quickly by a growing economy receiving the capital (p. 429). In this note I will argue that sustained adverse effects from external capital become quite likely when Grinols and Bhagwati's work is extended. With data from Puerto Rico I will show that the analytical conclusions are empirically relevant. Grinols and Bhagwati look at an interesting but limited case, that in which aid increases by a constant amount once and for all; their conclusions are weakened when the analysis is extended to growing aid streams. Their analysis can also be extended to bring out the implications of dependence on aid for return flows of profit and interest. Although it is not entirely clear from their article, Grinols and Bhagwati define aid as grants plus net capital inflows less net factor income outflows (profit, interest, royalties, etc.). In lumping together the net capital inflows and the current account factor income outflows (which inevitably follow dependence on external saving), they have removed from consideration the relationship between these flows. They have also ignored the distinction between GDP (the output produced within the country) and GNP (the income received by local residents). Net capital inflows can lead to a growing ratio of net external debt to the capital stock and therefore to a growing gap between output and income. In the note that follows, refers to grants plus the net capital inflow alone. (In fact, grants may be seen either as negligible or as fixed in proportion to the net capital inflow.) The return to aid-profit and interest-is considered separately and explicitly. The extensions to Grinols and Bhagwati's work are incorporated into a simple model which is solved analytically. The analysis leads to the conclusion that dependence can indeed be a more persistent phenomenon than Grinols and Bhagwati imply. The Model

Intertemporal Resource Allocation in Developing Countries: The Role of Foreign Capital

A great deal of research has been done in recent years on the effects of capital inflows on real investment, saving and output growth in developing countries.' It appears that in many instances these inflows have, in effect, been used for financing an expansion of consumption rather than investment. This note attempts to reinterpret the new research in the broader context of intertemporal resource allocation and intertemporal consumption opportunities. The acceptance of foreign capital, of course, augments the total amount of resources potentially available for current domestic real expenditure (consumption and investment). The invested portion of the foreign capital receipts adds to future potential net domestic product, but part of the domestic product increase may be absorbed by the associated debt service, income remittances and capital repatriations. If the domestic rate of return exceeds the cost of foreign capital, any one of the following three types of capital inflow response is possible: 1) both current and future consumption increases; 2) current consumption increases, while future consumption decreases, or 3) current consumption decreases, while future consumption increases. Crude empirical estimates of the true responses, based on the new research, are now possible.