Expectations-Based Capital Inflow Shocks

Jongrim Ha, Dohan Kim, M. Ayhan Kose and Francis E. Warnock

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Identifying the impact of capital inflows on output is challenging because inflows are forward-looking and respond to expectations about future economic conditions. We develop a new measure of capital inflow shocks using a simple and broadly applicable expectations-based framework that isolates the unexpected component of inflows by purging movements predicted by professional forecasters' expectations. Estimates using the new measure for 27 emerging market economies indicate that capital inflows have sizable expansionary effects on output, operating through stronger domestic consumption and investment and easier financing conditions. Additional analysis indicates that equity-type inflows generate greater and more persistent effects than debt-type inflows, while large inflow reversals result in more pronounced effects than comparable increases in inflows. These results are robust to a wide range of alternative specifications.

Keywords: emerging market economies; FDI; debt flows; expectations; business cycle fluctuations (search for similar items in EconPapers)
JEL-codes: E32 F32 F41 G11 (search for similar items in EconPapers)
Pages: 76 pages
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-80

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