Real Effects of Capital Inflows in Emerging Markets

51 Pages Posted: 7 Mar 2017

See all articles by Deniz Igan

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division

Ali M. Kutan

Southern Illinois University at Edwardsville

Ali Mirzaei

American University of Sharjah

Date Written: December 2016

Abstract

We examine the association between capital inflows and industry growth in a sample of 22 emerging market economies from 1998 to 2010. We expect more external finance dependent industries in countries that host more capital inflows to grow disproportionately faster. This is indeed the case in the pre-crisis period of 1998-2007, and is driven by debt, rather than equity, inflows. We also observe a reduction in output volatility but this association is more pronounced for equity, rather than debt, inflows. These relationships, however, break down during the crisis, hinting at the importance of an undisrupted global financial system for emerging markets to harness the growth benefits of capital inflows. In line with this observation, we also document that the inflows-growth nexus is stronger in countries with well-functioning banks.

Keywords: Capital inflows, Economic growth, Capital flows, Industrial sector, Emerging markets, Capital flows, financial dependence, industry growth, emerging economies

JEL Classification: F30, L60, G20, G01

Suggested Citation

Igan, Deniz and Kutan, Ali M. and Mirzaei, Ali, Real Effects of Capital Inflows in Emerging Markets (December 2016). IMF Working Paper No. 16/235. Available at SSRN: https://ssrn.com/abstract=2924319

Deniz Igan (Contact Author)

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ali M. Kutan

Southern Illinois University at Edwardsville ( email )

Department of Economics and Finance AH-3141
Edwardsville, IL 62026-1102
United States
618-650-3473 (Phone)
618-650-3047 (Fax)

HOME PAGE: http://https://ideas.repec.org/e/pku30.html

Ali Mirzaei

American University of Sharjah ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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