Some scholars view capital inflows as contractionary, but many policymakers view them as expansionary. Evidence supports the policymakers. This column introduces an analytic framework that knits together the two views. For a given policy rate, bond inflows lead to currency appreciation and are contractionary, while non-bond inflows lead to an appreciation but also to a decrease in the cost of borrowing, and thus may be expansionary.
Olivier Blanchard, Jonathan D Ostry, Atish R Ghosh, Marcos Chamon, Thursday, November 26, 2015 - 00:00
Gianluca Benigno, Nathan Converse, Luca Fornaro, Sunday, October 11, 2015 - 00:00
In the aftermath of the Global Crisis, policymakers have adopted policies to limit, or at least manage, capital inflows. This column explores episodes of capital inflows coupled with weak productivity growth, in other words, the financial resource curse. The findings show that once access to foreign capital subsides, the initial boom gives way to a recession. Both investment and employment in the manufacturing sector drop, and the larger the decrease of labour in manufacturing, the sharper the following contraction.
Matthieu Bussière, Claude Lopez, Cédric Tille, Friday, August 7, 2015 - 00:00
Exchange rate appreciations could potentially have a damaging effect on competiveness and domestic production. This column argues that the relationship between exchange rate appreciations and growth depends on the underlying shock. Appreciations due to the surge of capital inflows could be relatively less favourable for growth. Concern about appreciations is therefore well-founded when they are due to shocks in global financial markets.
Pınar Yeşin, Saturday, February 21, 2015 - 00:00
Dennis Reinhardt, Cameron McLoughlin, Ludovic Gauvin, Wednesday, November 5, 2014 - 00:00
Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu, Monday, June 23, 2014 - 00:00
Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.
Barry Eichengreen, Poonam Gupta, Thursday, December 19, 2013 - 00:00
Fed tapering has started. A revival of last summer’s emerging economy turmoil is a real concern. This column discusses new research into who was hit and why by the June 2013 taper-talk shock. Those hit hardest had relatively large and liquid financial markets, and had allowed large rises in their currency values and their trade deficits. Good macro fundamentals did not provide much insulation, nor did capital controls. The best insulation came from macroprudential policies that limited exchange rate appreciation and trade deficit widening in response to foreign capital inflows.
Eduardo Olaberría, Saturday, December 7, 2013 - 00:00
Policymakers have long been concerned that large capital inflows are associated with asset-price booms. This column presents recent research showing that the composition of capital inflows also matters. The association between capital inflows and asset-price booms is about twice as strong for debt-related than for equity-related investment. Policymakers should therefore pay attention to the composition of capital inflows, since debt-related inflows may still undermine financial stability even if they do not result in an overall current-account deficit.
Filipa Sá, Pascal Towbin, Tomasz Wieladek, Thursday, March 10, 2011 - 00:00
In much of the Western world, the decade prior to the global crisis witnessed soaring house prices. While the debate on its causes continues, this column finds that the property booms owed a significant part of their ferocity to large capital inflows and low interest rates.
Dayanand Arora, Francis Xavier Rathinam , Shuheb Khan, Saturday, July 3, 2010 - 00:00
Despite the recent drop in capital inflows to India, this column argues that once global markets recover from the latest setback, the country will need to contain volatility in foreign portfolio investment. This column provides a detailed analysis of capital inflows to India and policy recommendations for how to deal with them.
Johan Mathisen, Srobona Mitra, Tuesday, May 25, 2010 - 00:00
In contrast to much of the emerging world, capital inflows to emerging Europe continue to be weak and mixed. How should the region ensure a healthy level of foreign investment while preventing excessive capital inflows and improving the stability of the financial sector? This column argues a comprehensive policy response is needed and recommendations should be tailored to country-specific circumstances.