Thursday, August 18

DO DIFFERENT TYPES OF CAPITAL INFLOWS HAVE DIFFERENTIAL IMPACT ON OUTPUT? Evidence from Time series and Panel Analysis

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By Bhavesh Garg & Pravakar Sahoo

Working Paper No- 443

Emerging market economies have experienced an unprecedented rise in cross-border capital flows and the existing literature provides us evidence of both expansionary and contractionary effects of inflows on domestic output. In this context, we make an attempt to answer the following questions: (1) Do capital inflows lead to expansionary or contractionary effect on emerging countries? (2) Do different types of capital inflows have different impacts? and (3) Do absorptive capacities influence the effect of capital flows on the host countries? To answer these questions, we carry out a comparative analysis for India and China using quarterly data for the period 1998Q1 to 2020Q1. The results reveal that total gross capital inflows as well as disaggregated capital inflows exhibit expansionary effect on domestic output in case of both India and China. We supplement the time series data with panel analysis for the top ten capital flows recipient EMEs over the period 1998-2019. We find that capital inflows a t aggregate level and also at the disaggregate level except debt flows have an expansionary effect on output.

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