When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies

Graciela Laura Kaminsky (), Carmen Reinhart () and Carlos Végh ()

No 10780, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Based on a sample of 104 countries, we document four key stylized facts regarding the interaction between capital flows, fiscal policy, and monetary policy. First, net capital inflows are procyclical (i.e., external borrowing increases in good times and falls in bad times) in most OECD and developing countries. Second, fiscal policy is procyclical (i.e., government spending increases in good times and falls in bad times) for the majority of developing countries. Third, for emerging markets, monetary policy appears to be procyclical (i.e., policy rates are lowered in good times and raised in bad times). Fourth, in developing countries - and particularly for emerging markets - periods of capital inflows are associated with expansionary macroeconomic policies and periods of capital outflows with contractionary macroeconomic policies. In such countries, therefore, when it rains, it does indeed pour.

JEL-codes: F41 E52 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-mac
Date: Written 2004-09
Note: IFM
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