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: Suggested Citation