Capital Flows and the Macroeconomy: Key Drivers, Impacts, and the Role of Monetary Policy

  • Trinil Arimurti

Student thesis: Doctoral ThesisPhD


This thesis focuses on the potentially important role of capital flows on macroeconomic performance and monetary policy setting in emerging and advanced economies. The chapter begins with an explanation of the main causes of capital inflows, as it is crucial to the policymakers when constructing an effective policy framework. This chapter contributes mainly by applying different estimation techniques and disaggregating the different types of capital flows. The potential heterogeneity across flow’s components is accounted for by the SUR estimation. This study has found that country-specific factors have an important role for capital flows into emerging economies, whilst in advanced economies, the inflows can be closely associated with global indicators. Moreover, each type of flows is driven by different sets of indicators. These findings confirm the relevance of disaggregating the sample and components of the inflows.

The next study is focused on how capital flows may affect an economy. The main contribution lies in the SVAR model construction, which modifies the multiple-country SVAR model by Dungey and Fry (2000) by taking into account the influence of the foreign and domestic capital flows and concentrating the analysis on two countries. This study observed a significant spillover-effect from the US and Japan’s capital flow shocks to Indonesia's capital flow expansion, specifically on the direct and portfolio investment flows. Moreover, the exchange rate consistently appreciates in response to a domestic flows shock. Additionally, Indonesia’s economy is more responsive to domestic flow shocks in the Indonesia-US model, but less responsive in the Indonesia-Japan model.

Finally, the thesis examines the potentially important role of capital flows on monetary policy setting in IT countries, which has been the most valuable contribution of this study. We extend the Taylor rule in Taylor (2001) by accommodating the capital flow dynamics in the interest rate setting. The non-linear model allows us to identify the response of the policymakers during extreme and normal capital flow periods. Overall, the results confirm a potential to involve capital flow dynamics as an alternative policy rule in both emerging and advanced economies.
Date of Award24 Jun 2020
Original languageEnglish
Awarding Institution
  • University of Bath
SupervisorBruce Morley (Supervisor) & Christopher Martin (Supervisor)

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