SHORT-TERM CAPITAL FLOWS AND GROWTH
IN DEVELOPED AND EMERGING MARKETS
Bank of Greece
A lot of attention has been directed towards recent financial crises around the world and empirical studies have found that short-term flows increase financial fragility and also increase the probability of financial crises. This study takes a macro-oriented approach and shows that while large and volatile short-term flows have no effect on growth for rich countries, they are growth inhibiting for emerging markets. These results are robust to a large variety of estimation methods and pass stringent extreme bound analysis criteria. Moreover, their magnitude turns out to be of economic importance. The analysis indicates that opening up emerging markets' capital accounts, which implies increased short-term capital flows, is not a clear-cut way to prosperity.
Keywords: Capital flows; Growth; Financial crises; Panel data
JEL classification: F32; F43; F34; C23
Acknowledgements: I am thankful to Rikard Forslid, Mårten Palme, Annika Alexius, Jonas Agell, Peter Skogman, Heather Gibson, and workshop participants at Stockholm University for very useful comments and suggestions. I am also very grateful to Jakob Svensson for providing the data on short-term flows. The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of Greece.
Economic Research Department,
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