The composition of capital inflows when emerging market firms face financing constraints

• 成果类型: Article; Proceedings Paper
• 署名作者: Smith, Katherine A.; Valderrama, Diego
• 署名单位: United States Department of Defense; United States Navy; United States Naval Academy; Federal Reserve System - USA; Federal Reserve Bank - San Francisco
• 刊物名称: JOURNAL OF DEVELOPMENT ECONOMICS
• ISSN/ISSBN: 0304-3878
• DOI: 10.1016/j.jdeveco.2008.05.003
• 发表日期: 2009
• 页码: 223-234
• 关键词: Capital inflow composition; Financing premium; financial frictions; Small open economy

摘要

The composition of capital inflows to emerging market economies tends to follow a predictable dynamic pattern across the business cycle. In most emerging market economies, total inflows are pro-cyclical, with debt and portfolio equity flowing in first, followed later in the expansion by foreign direct investment (FDI). To understand the dynamic composition of these flows, we use a small open economy (SOE) framework to model the composition of capital inflows as the equilibrium outcome of emerging market firms' financing decisions. We show how costly external financing and FDI search costs generate a state contingent cost of financing such that the cheapest source of financing depends on the phase of the business cycle. In this manner, the financial frictions are able to explain the interaction between the types of flows and deliver a time-varying composition of flows, as well as other standard features of emerging market business cycles. If, as this work suggests, flows are an equilibrium outcome of firms' financing decisions, then volatility of capital inflows is not necessarily bad for an economy. Furthermore, using capital controls to shut down one type of flow and encourage another is certain to have both short- and long-run welfare implications. Published by Elsevier B.V.