Hot money and economic performance: An empirical analysis

Duasa, Jarita and Kassim, Salina (2008): Hot money and economic performance: An empirical analysis.

Abstract

The present study empirically examines the importance of foreign portfolio investment (FPI) or hot money from certain investor(s) or country(s) on Malaysian economic performance. In methodology, the study uses vector error correction (VECM) model of FPI inflows from major investors such as the United States, United Kingdom, Singapore and Hong Kong and Malaysian real GDP using quarterly data covering the period of Q1:1991 to Q3:2007. For further inferences, the study adopts an innovation accounting by simulating variance decompositions (VDC) and impulse response functions (IRF). It is found that the country’s GDP is highly attributable to UK FPI inflow especially in the long run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign portfolio investment, Economic performance, VECM, Impulse Response, Variance Decomposition
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General

References

Baghwati, J. (1998). The capital myth: the difference between trade in widgets and dollars. Foreign Affairs. 77: 7-12.

Bank Negara Malaysia. (2006). Financial Stability and Payment Systems Report. Kuala Lumpur.

_________. Monthly Statistical Bulletin. Various issues.

Beck, T., Demirguc-Kunt, A. and Maksimovic, V. (2005). Financial and legal constraints to firm growth: does size matter? The Journal of Finance. 60: 137-177.

Bekaert, G. and C.R. Harvey. (2003). Emerging markets finance. Journal of Empirical Finance. 10(1-2): 3-56.

Boyd, J. H. and Smith, B. D. (1992). Intermediation and the equilibrium allocation of investment capital: implications for economic development. Journal of Monetary Economics. 30:409-432.

Demirguc-Kunt, Asli and Detragiache, E. (1999). Financial liberalization and financial fragility. Proceedings of the Wordl Bank Annual Conference on Development Economics.

Dickey, D. A. and Fuller, W. F. (1979). “Distribution of the estimates for autoregressive time series with a unit root,” Journal of the American Statistical Association, 74: 427-431.

Feldman, Robert A. and Kumar, Manmohan S. (1995). Emerging equity markets: growth, benefits, and policy concerns. The World Bank Research Observer. 10(2): 181-200.

Henry, P. (2003). Capital-account liberalization, the cost of capital and economic growth. American Economic Review. 93(2): 91-96.

Johansen, S. (1988). Statistical analysis of cointegration vector. Journal of Economics Dynamics and Control. 12: 231-254.

Johansen, Søren. (1991). “Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models”. Econometrica, 59, no. 006: 1551-1580

Johansen, Søren. (1998). “Statistical analysis of cointegration vector,” Journal of Economics Dynamics and Control. 12: 231-254.

Johansen, Søren. and Juselius, Katarina. (1990). Maximum likelihood estimation and inference on cointegration: with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169-210.

Johansen, Søren & Juselius, Katarina (1992). "“Testing Structural Hypotheses in a Multivariate Cointegration Analysis of the PPP and the UIP for UK”. Journal of Econometrics, 53: 211-244.

Kanioura, A. (2001). A Cointegration Analysis of US Interest Rates. Working Paper no. 3. Department of Economics, University of Sheffield.

Kim, E. Han and Singal, V. (2000). Stock market openings: Experience of emerging economies, Journal of Business. 73: 25–66.

Knill, A. (2004). Can foreign portfolio investment bridge the small firm financing gap around the world? Working Paper. University of Maryland.

Laeven, L. (2003). Does financial liberalization reduce financing constraints? Financial Management. 32(1): 5–34.

La Porta, R. Lopez-de-Silanes, F, Shleifer, A., and Vishny, R. (1998). Law and finance. The Journal of Political Economy. 106: 1113-1155.

Levine, R. and S. Zervos. (1996). Stock market development and long-run growth. World Bank Economic Review. 10: 323-339.

Love, I. (2003). Financial development and financing constraints: international evidence from the structural investment model. Review of Financial Studies. 6: 765-791.

Patro, D. and Wald, P. (2005). Firm characteristics and the impact of emerging market liberalization. Journal of Banking and Finance. 29(7): 1671-1695.

Rajan, R. and Zingales, L. (1998). Financial dependence and growth. American Economic Review. 88(3): 559-586.

Shinn, J. (2000). Nitwits, barbarians, and the convergence cycle. Working Paper. Princeton University.

Sula, Ozan and Willet, Thomas D. (2006). Reversibility of different types of capital flows to emerging markets. Munich Personal RePEc Archive. No. 384.

Wurgler, J. (2000). Financial markets and the capital allocation. Journal of Financial Economics. 58: 187-214.