Macro-financial effects of portfolio flows: Malaysia’s experience

Tng Boon Hwa (), Mala Raghavan () and Teh Tian Huey ()
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Tng Boon Hwa: Bank Negara Malaysia
Teh Tian Huey: Bank Negara Malaysia

No 2017-07, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: This paper studies the causes and effects of portfolio flows in Malaysia. We use Structural Vector Autoregression (SVAR) and Autoregressive Distributed Lag (ARDL) models to analyse the interactions among portfolio flows, global and domestic macro and financial variables within a common empirical framework. Three findings emerge: First, the SVAR estimations show that global and domestic factors play transitory roles in driving Malaysia’s net portfolio flows. A subsample analysis from the ARDL model highlights that domestic factors play an increasingly important role in attracting portfolio inflows as Malaysia liberalised its exchange rate regime and capital flow restrictions. Second, higher net portfolio flows lead to exchange rate appreciation, higher equity prices and credit expansion. The effects are visible in the exchange rate, followed by equity prices and credit. Third, in the transmission of higher portfolio flows to growth, the positive effects from higher equity prices and credit are partially offset by the dampening effect from the appreciating exchange rate on output. While the contribution of portfolio flow’s effects on output variance is low, the impulse responses of output does change to portfolio flow shocks, suggesting that portfolio flows are tail risks to growth and that the risks magnify when the flows are large and volatile.

Keywords: international portfolio flows; open economy; financial economics; SVAR model (search for similar items in EconPapers)
JEL-codes: C52 E44 F41 G15 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017
New Economics Papers: this item is included in nep-mac, nep-opm and nep-sea
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Citations: View citations in EconPapers (1)

Published by the University of Tasmania. Discussion paper 2017-07

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