Large Capital Inflows, Sectoral Allocation and Economic Performance

47 Pages Posted: 27 Apr 2015

See all articles by Gianluca Benigno

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics; Federal Reserve Bank of New York

Nathan Converse

Board of Governors of the Federal Reserve System

Luca Fornaro

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Barcelona Graduate School of Economics (Barcelona GSE)

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Date Written: April 2015

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 Classification: F31, F32, F41

Suggested Citation

Benigno, Gianluca and Converse, Nathan and Fornaro, Luca, Large Capital Inflows, Sectoral Allocation and Economic Performance (April 2015). CEPR Discussion Paper No. DP10554, Available at SSRN: https://ssrn.com/abstract=2599526

Gianluca Benigno (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

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Federal Reserve Bank of New York ( email )

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Nathan Converse

Board of Governors of the Federal Reserve System ( email )

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Luca Fornaro

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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