Capital inflows conundrums

Few things motivate finance ministers in emerging markets more than becoming attractive to international capital markets.  Attaining investment-grade rating, as Brazil did earlier this year, is often cause for national celebration.  The expectation is that capital inflows will reduce domestic costs of borrowing, boost investment, and raise growth.

But what really happens when you are the beneficiary of a sudden increase in capital inflows?  In a new paper, Carmen and Vincent Reinhart look at the experience of 181 countries from 1980 to 2007 and document some very interesting findings.

They find that capital inflow bonanzas have become more frequent as restrictions on international capital flows have been removed, that these episodes can last for quite some time (lulling policy makers into thinking that they are permanent), that they end with an abrupt reversal "more often than not," that they are are associated with greater incidence of banking, currency, and inflation crises (except for in the high income countries), and that economic growth tends to be higher in the run-up to a bonanza and then systematically lower. As the authors note, with significant understatement, "a bonanza is not to be confused with a blessing."

What lesson should domestic and international policy makers take from these facts? The standard response is that what is needed is more vigilance on the part of the authorities: do not pursue pro-cyclical fiscal policies, improve your banking supervision and prudential regulations, enhance your institutions all around.  The paradoxical nature of these policy conclusions is that they turn capital inflows into an imperative for even deeper reform, instead of treating them as a reward for good behavior.  It is a topsy-turvy world.    

Comments

[Minivet]

B-but financial liberalization must have good results! It has the word "liberalization" in it; what more do you want?!

[Rich C]

Doesn't this square very nicely with your argument on the link between real exchange rates and growth? That a high real exchange rate retards growth, while a low exchange rate stimulates it? At least, it seems like one would expect that a bonanza of capital inflows would raise the exchange rate (unless met with a similar bonanza of outflows), which in turn would slow export growth and increase the liklyhood of a asset price bubble.

[Kasinomics]

Why would that be a conundrum? If you are good at any sport, you will be invited to competitions, which will motivate you to exercise even more ;-)

If a country liberalizes its capital markets, it needs to invest also in financial regulation, improve financial standards and increase liquidity of the domestic capital markets to withstand shocks from a reversal of capital flows.

[MS]

I reckon private capital is going to be volatile whatever governments do to keep it within their territory. If all countries were equally competitive and if capital was not in limited supply,institutional reforms would have benefitted all. Unfortunately in this game someone somewhere has to lose.

[RJR]

The whole concept of "capital inflow" is a distortion. Capital is made of assets. The assets are accumulating to the other side. What flows in is credit. That credit can be used to by other assets, but it can also be squandered on mere consumption.

When foreign money flows into a stock market, the assets (stocks) are flowing out, not in. There is nothing controversial about the impoverishing effects of so called "capital inflows". It is just an Orwellian phrase to make people accept enormous debts.

[Manuel Agosin]

With a student, I wrote a very similar paper, looking at the issue from the point of view of the capital account. But I have had no takers as readers or commentators. I guess you have to be in the circuit to garner attention.

[rolex watches]

People usually say :"Seeing is believing." http://www.tt88times.com
Each attempt has a corresponding gain, in part or obvious, or vague. At least we have the kind of satisfaction After I bought this watch ,in a sense,it means a great deal to me. http://www.fashionhairfu.com

[ghd straighteners]

GHD straighteners was kmown as ghd flat iron, which was authorized online seller provides all kinds of hair straighteners,pink ghd,purple ghd,babyliss. By visiting ghd australia , you will find what you want and made yourself more beautiful.If you miss it ,you miss beauty.Buy a piece of ghd for yourself.Come and join us http://www.ghdoutlet-au.com/ to win the ghd iv styler.

[birkenstock]

Birkenstock was Made in Germany since 1774 . Check out our Birkenstock sandals and Birkenstock shoes including the Birkenstock gizeh,at the lowest regular outlet prices, free shipping and when you put on Birkenstocks. you will feel very comfortable.

[lv store]

I was expecting to see you guys through down serious optimization flags and stuff.

[jordan shoes for sale]

Very interesting issue that after a very successful. Nicely written article good work ! Thanks for the great piece of sharing.

[jordan shoes]

This is a wonderful site. The things mentioned are unanimous and needs to be appreciated by everyone.

[Volumerates]

which was authorized online seller provides all kinds of hair straighteners,pink ghd,purple ghd,babyliss. By visiting ghd australia , you will find what you want and made yourself more beautiful.If you miss it ,you miss beauty.Buy a piece of ghd for yourself.

[cheap and high quality handbags]

I can't believe how much of this I just wasn't aware of. Thank you for bringing more information to this topic for me. I'm truly grateful and really impressed.

[GHD UK]

Thank you for sharing this great article, i have learned something useful.

[GHD Africa]

This is a wonderful site. The things mentioned are unanimous and needs to be appreciated by everyone.

[Account Deleted]

raf

Thanks for article.

[Account Deleted]

http://www.ghdstyle-au.com/ghds.html
http://www.chihairflatirons.us
http://www.ghdsoutlet.com
http://www.googleghdhair.com

[Account Deleted]

Raf
raf

I like it ... Thanks !!

[Account Deleted]

Many places and centers offer business and trade promotions to both buyers and supplier.What about the differences in skill intensities across industries? The job losses in the relatively unskilled-labor intensive battery industry should have little effect on the relatively skilled-labor intensive machinery
sexshop
sexyshop
sexshop online
alongador peniano

[Account Deleted]

Amazing!I also wish him good luck to defend his gold medal. I like to share it with all my friends and hope they will also encourage him.

organic seo service