Research On Capital Inflow Vulnerability And Its Economic Effect

The volatility of international capital inflows depicts the dynamic "surge-dry up-reverse" process of capital flows. Recent crises in Latin American and Asian emerging economies were featured by this kind of volatility. The subprime crisis in2007has raised doubts on the sustainability of enormous capital inflows to China. Hence, study on the volatility and its economic impact is of great interest to the risk control of the instability of capital inflows to China.The volatility of capital inflows is still a new topic in China’s domestic academic circle. Current literature on this topic is limited. Due to difference in volatility indicators used and their internal bias, there have been few consensuses among scholars. Besides, current study describes how the volatility influences the economy mainly in qualitative research, providing little theoretical and empirical evidence.This study made improvement in volatility indicators and statistical analysis, compared the volatility of different types of capital inflows in developed, Latin American and Asian emerging economies, and analyzed the trend of the volatility. This paper also complemented the current study by providing empirical and comparative analysis on the economic impact of the volatility through TSLS panel estimation.The major findings of this paper are as follows:(1)The volatility of FDI is increasing in all economies. The volatility of all types of capital inflows in Asia is increasing, especially that of FDI. Since1998, Asia has achieved the highest volatility of capital inflows and exposed to the highest risk which is not retarded by the fact that its capital inflows are mainly in FDI.(2) The volatility of capital inflows causes output loss and higher output volatility, negatively influences gross domestic capital formation and has positive impact on the volatility of nominal exchange rate and price level.(3) The negative impact of the volatility of capital inflows is more severe in Asia, which can be explained by its lack of exchange rate flexibility and the over-borrowing behavior of its domestic financial institutions in foreign currency.