Large Capital Inflows, Sectoral Allocation, and Economic Performance
52 Pages Posted: 25 Apr 2015
Date Written: March 30, 2015
This paper studies episodes of exceptionally large capital inflows. We 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, Surges, Sectoral Allocation, Sudden Stops
JEL Classification: F31, F32, F41, O41
Suggested Citation: Suggested Citation