The effect of capital-flows composition on output volatility

Pablo Federico, Carlos Vegh and Guillermo Vuletin
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Pablo Federico: BlackRock
Carlos Vegh: World Bank

Económica, 2018, vol. 64, 95-132

Abstract: By distinguishing between foreign direct investment (FDI) and portfolio and other investments (OTR), we study the effects of the composition of capital inflows on output volatility. We develop a simple empirical model which, under certain conditions satisfied in the data, yields three key testable implications. First, output volatility should depend positively on FDI and OTR volatility. Second, output volatility should be an increasing function of the correlation between FDI and OTR. Third, for low values of the FDI share, output volatility should be a decreasing function of the share of FDI in total capital inflows. We find strong support in the data for all three implications, even after controlling for other factors that may influence output volatility and dealing with potential endogeneity problems.

Keywords: Foreign direct investment; capital inflows; output volatility. (search for similar items in EconPapers)
JEL-codes: F23 F32 F36 F44 (search for similar items in EconPapers)
Date: 2018
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Journal Article: The effect of capital-flows composition on output volatility (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:akh:journl:616

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