The Macroeconomic Effects of Debt- and Equity-Based Capital Inflows

27 Pages Posted: 29 Nov 2014 Last revised: 1 Aug 2022

Date Written: November 28, 2014

Abstract

This working paper was written by Scott Davis (Hong Kong Institute for Monetary Research and Federal Reserve Bank of Dallas).

This paper will consider whether debt- and equity-based capital inflows have different macroeconomic effects. Using external instruments in a structural VAR, we first identify the component of capital inflows that is driven not by domestic economic and financial conditions but by conditions in the rest of the world. We then estimate the response to an exogenous shock to debt or equity-based capital inflows in a structural VAR model that includes domestic variables like GDP, inflation, the exchange rate, stock prices, credit growth, and interest rates. An exogenous increase in debt inflows leads to a significant increase in GDP, inflation, stock prices and credit growth and an appreciation of the exchange rate. An exogenous increase in equity-based capital inflows has almost no effect on the same variables. Thus the macroeconomic effects of exogenous capital inflows are almost entirely due to changes in debt, not equity-based, capital inflows.

Keywords: Capital Inflows, Debt, Equity, Macroeconomic Effects

JEL Classification: F3, F4

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, The Macroeconomic Effects of Debt- and Equity-Based Capital Inflows (November 28, 2014). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 28/2014, Available at SSRN: https://ssrn.com/abstract=2531526 or http://dx.doi.org/10.2139/ssrn.2531526

Hong Kong Institute for Monetary and Financial Research (Contact Author)

(HKIMR) ( email )

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