Large capital inflows, sectoral allocation, and economic performance

Abstract

This paper describes the stylized facts characterizing periods of exceptionally large capital inflows in a sample of 70 middle-and high-income countries over the last 35 years. We identify 155 episodes of large capital inflows and find that these events are typically accompanied by an economic boom and followed by a slump. Moreover, during episodes of large capital inflows capital and labor shift out of the manufacturing sector, especially if the inflows begin during a period of low international interest rates. However, accumulating reserves during the period in which capital inflows are unusually large appears to limit the extent of labor reallocation. Larger credit booms and capital inflows during the episodes we identify increase the probability of a sudden stop occurring during or immediately after the episode. In addition, the severity of the post-inflows recession is significantly related to the extent of labor reallocation during the boom, with a stronger shift of labor out of manufacturing during the inflows episode associated with a sharper contraction in the aftermath of the episode.

Managing capital flows in the 21st century

“…In joint work with Gianluca Benigno and Nathan Converse, we perform a similar analysis and obtain consistent results (Benigno, Converse, & Fornaro, ). We also find that large capital inflows are associated with an expansion of non‐tradable sectors at the expenses of sectors producing tradable goods.…”

Growing Like Spain: 1995–2007

“…Next, we investigate whether the poor evolution of TFP during the studied period can be explained by resources being systematically allocated to sectors with bad performance in terms of lower productivity and/or worse productivity growth as conjectured by Benigno et al. ()…”

“…Reis () and Benigno et al. () argue that the large entry of cheap capital resulted in a misallocation of resources toward low‐productivity nontradable sectors (in particular construction) in Portugal and Spain, respectively. However, we show that the sectoral data from EU‐KLEMS gives a limited role to the increase in misallocation across sectors in Spain.…”

Latin America's Declining Skill Premium: A Macroeconomic Analysis

“…This paper is related to a strand of literature on the effects of resource allocation among tradable and nontradable sectors. Sectoral reallocation is central to the explanation of macroeconomic phenomena such as the so‐called Dutch disease (Corden ; Corden and Neary ), the role of terms‐of‐trade shocks as drivers of business cycles (Mendoza ), and the macroeconomic effects of capital inflows (Benigno, Converse, and Fornaro ). Little is known, however, about its role in explaining distributional issues.…”

“…Thus, Figure could be reflecting secular sectoral shifts rather than features of Latin America's expansions. To address this potential drawback, I follow Benigno, Converse, and Fornaro () and detrend the sectoral shares of manufacturing and low‐skilled services (the grouping that includes the first three service sectors) using the Hodrick–Prescott filter. Figure shows the cyclical evolution of sectoral shares in value added as percent deviations from HP trends (mean and median values across 14 countries; sectoral shares computed from nominal data).…”