The Influence of Capital Flow Bonanzas on Real and Financial Sectors: A Comparative Study of South Asia and China

Abdul Rashid (), Zainab Jehan (), Mehreen Khan () and Muhammad Saeed ()
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Zainab Jehan: Department of Economics, Fatima Jinnah Women University, Rawalpindi, Pakistan.
Mehreen Khan: Intentional Institute of Islamic Economics (IIIE), International Islamic University (IIU), Islamabad, Pakistan.
Muhammad Saeed: Government Postgraduate College, Mardan, Pakistan.

Journal for Economic Forecasting, 2019, issue 4, 124-147

Abstract: This paper investigates the impact of large capital flows (LCF) on real and financial sectors of selected South Asian countries and China for the period 1970-2013. In particular, we investigate the influence of episodes of large capital inflows (LCIF) and outflows (LCOF) on domestic private credits, market interest rates, exchange rates, inflation, stock prices, and GDP per capita. For this purpose, first, episodes of LCIF and LCOF, de-trended by the Hodrick-Prescott (HP) filter, are identified. Next, we estimate the impulse response function based on the local projections method (IRF-LP) to quantify the response of the underlying variables to episodes of LCF. The results suggest that massive capital flows have less positive but more negative effects on the nominal and real macroeconomic indicators for South Asian countries. Nevertheless, the results indicate that China has appeared much less vulnerable to episodes of capital flow bonanza during the same period. The findings are of great interest to policymakers for designing effective policies in order to avoid adverse effects of extreme capital flow episodes.

Keywords: Capital Flow Bonanza; Inflows and Outflows; Real and Financial Sectors; South Asian Countries; China; IRF; Hodrick-Prescott Filter; Local Projections (search for similar items in EconPapers)
JEL-codes: F32 F41 F43 O11 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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