Growth from International Capital Flows: The Role of Volatility Regimes

IMF Working Papers, April 1, 2011

Source details

Canonical URL: Growth from International Capital Flows: The Role of Volatility Regimes

Authors: Antu Panini Murshid, Ashoka Mody
Date: April 1, 2011
Core observation: A country’s growth volatility changes over time, and the growth impact of cross-border private capital inflows depends on the prevailing volatility regime.

With volatility below a threshold, an inflow of foreign capital has promoted growth.
During periods of volatile growth, more flows have been associated with slower growth.
Volatility levels and changes reflect an interaction of domestic production and institutional structures with global factors.
Recent commentary has highlighted a possibly negative correlation between capital inflows and long-run growth; this paper presents new evidence consistent with standard economic theory and a more benign interpretation of cross-border private capital flows.

The paper emphasizes regime dependence: the effect of capital inflows on growth is conditional on whether the economy is in a low-volatility or high-volatility growth regime.
Growth volatility is influenced by an interaction of:
- domestic production structures,
- institutional structures, and
- global factors.

Policies that reduce growth volatility or strengthen institutional and production structures may improve the growth dividend from capital inflows.
Caution is warranted during high-volatility periods, since additional capital inflows have been associated with slower growth in such regimes.