Converse, Nathan
(2013)
Essays on international capital flows.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis examines the impact of international capital
flows on small open economies from a theoretical and empirical perspective. The �first chapter shows that where maturity mismatch is widespread, as in emerging markets, greater capital flow volatility negatively affects investment, output, and aggregate productivity. I build a model of a small open economy in which �financial frictions force �firms to engage in maturity mismatch, funding long-term projects with short-term debt. Greater uncertainty regarding the future availability of foreign borrowing causes �firms to cut long-term investment, depressing
aggregate investment and generating an endogenous drop in aggregate productivity. The second chapter examines the relationship between capital flow volatility and economic performance using unique monthly frequency data set on international capital flows. I show that it is specifically the volatility of portfolio debt flows that negatively affects investment. Using �financial development as a proxy for the extent of maturity mismatch in the economy, I �find that the negative impact of debt flows is smaller where financial markets are more developed. Finally, I use industry-level data to show capital flow volatility depresses investment more in industries with longer average time-to-build. These �findings are consistent with a role for maturity mismatch in transmitting volatility shocks.
The third chapter studies episodes of large capital in
flows. These events are typically followed by an economic downturn and a reallocation of labor and capital into the nontradables sector. The extent of labor reallocation is significantly related to the depth and length of the post-episode downturn. We interpret our results using a model of a two sector economy, showing that capital in flows episodes generated by a fall in international
interest rates or a rise in future productivity will push labor into the notradables sector. In flows caused by a productivity increase that has already occurred shift labor into tradables production. Allocation of labor therefore provides information on the underlying shock driving the capital inflows.
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