{
  "title": "Going with the Flow: Benefits of Capital Inflows for Emerging Markets",
  "publication": "IMF Blog, December 6, 2016",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2016/12/06/going-with-the-flow-benefits-of-capital-inflows-for-emerging-markets",
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  "summary": "Author: Deniz Igan",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Author: Deniz Igan\n- Date: December 6, 2016\n- Motivating metaphor: Michael Mussa likened capital account liberalization to fire (remarks at the IMF Economic Forum on October 2, 1998), useful but potentially destructive.\n- Research question: Do capital inflows enhance growth in emerging market economies, or are they chiefly a source of vulnerability?"
    },
    {
      "heading": "Data and empirical approach",
      "content": "- Sample: 22 emerging market economies from 1998 to 2010.\n- Unit of observation: industry-level (micro) data.\n- Identification strategy: exploit differences across industries in their need for external financing to infer causal impacts of capital inflows on output and value added.\n- Distinctions made:  \n  - Types of capital flows (debt vs. equity and other sub-components).  \n  - Outcomes considered: industry growth and growth volatility.  \n  - Role of domestic financial market performance and large shocks to global financial markets."
    },
    {
      "heading": "Key findings",
      "content": "- Heterogeneous effects by industry financing needs:\n  - Industries more dependent on external finance grow disproportionately faster in countries hosting more capital inflows.\n- Time variation:\n  - Positive association is observed in the pre-crisis period of 1998–2007.\n  - The inflows–growth relationships break down during the crisis period (within the 1998–2010 sample).\n- Composition of inflows matters:\n  - The positive association with industry growth is driven by debt, rather than equity, inflows.\n  - Reduction in output volatility is more pronounced for equity, rather than debt, inflows.\n- Financial system interactions:\n  - The inflows–growth nexus is stronger in countries with well-functioning banks.\n- Role of global shocks:\n  - Large shocks to the global financial system are disruptive and hinder emerging market firms’ ability to turn capital inflows into investment and output."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Consider composition of capital inflows when assessing costs and benefits:\n  - Debt inflows are more closely associated with higher industry growth; equity inflows are more associated with volatility reduction.\n- Strengthen domestic banking and financial systems:\n  - Well-functioning banks improve the ability to harness growth benefits from capital inflows.\n- Improve global financial system resilience:\n  - A well-functioning global financial system reduces the risk that large shocks will prevent inflows from translating into growth.\n- Implement “fire safety measures”:\n  - Appropriate safeguards and policies (the domestic analog of fire safety) can improve the trade-off associated with capital inflow surges.\n\nSource: Going with the Flow: Benefits of Capital Inflows for Emerging Markets — Deniz Igan, December 6, 2016.\n\n---\n\n Content in this bundle\n\n- Staff Paper\n  - Staff Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Staff Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- recent work\n\nSource: https://www.imf.org/en/blogs/articles/2016/12/06/going-with-the-flow-benefits-of-capital-inflows-for-emerging-markets"
    }
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    "Authors: Deniz Igan",
    "Published: December 6, 2016",
    "Author: Deniz Igan",
    "Date: December 6, 2016",
    "Motivating metaphor: Michael Mussa likened capital account liberalization to fire (remarks at the IMF Economic Forum on October 2, 1998), useful but potentially destructive.",
    "Research question: Do capital inflows enhance growth in emerging market economies, or are they chiefly a source of vulnerability?",
    "Sample: 22 emerging market economies from 1998 to 2010.",
    "Unit of observation: industry-level (micro) data.",
    "Identification strategy: exploit differences across industries in their need for external financing to infer causal impacts of capital inflows on output and value added.",
    "Distinctions made:",
    "Heterogeneous effects by industry financing needs:",
    "Time variation:",
    "Composition of inflows matters:",
    "Financial system interactions:",
    "Role of global shocks:",
    "Consider composition of capital inflows when assessing costs and benefits:",
    "Strengthen domestic banking and financial systems:",
    "Improve global financial system resilience:",
    "Implement “fire safety measures”:",
    "**Staff Paper**",
    "[recent work](https://www.imf.org/external/pubs/cat/longres.aspx?sk=44438.0)"
  ],
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