Portfolio flows, volatility and growth

Abstract

We study the realized openness to portfolio flows of economically more-developed and less-developed countries as it affects future GDP growth. Outflows of a country's funds into U.S. securities are predictive of GDP growth, suggesting that the benefits of openness outweigh local capital flight. Both inflows and outflows of funds via local equity securities are predictive of growth, which is the evidence of the benefits of openness. For less-developed countries, the effect of inflows is especially strong. Country-specific volatility in flows does not detract from growth, and volatility in world-wide flows precedes growth. Overall, the evidence is consistent with strong benefits of realized financial integration where the availability of U.S. markets for local portfolio investment along with equity investment from the outside enhances economic growth.