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Capital Inflows and Asset Prices - A Country Study of the United States, Switzerland and Denmark

Olsson, Kerstin LU (2015) NEKP01 20151
Department of Economics
Abstract
Capital inflows can have beneficial effects for the receiving country, such as fostering economic growth. But they can also have severe negative effects, such as increasing financial vulnerability and overall macroeconomic instability. There is a widespread perception among academics as well as policymakers that capital inflows are correlated with asset prices. This essay aims to examine if there is a long-run relationship between capital inflows and asset prices. Three different measures of capital inflows and two measures of asset prices are examined, using time series data from the United States, Switzerland and Denmark. The time period studied is 1980Q1-2014Q4 for the United States and Denmark, and due to data limitations 2000Q1-2014Q4... (More)
Capital inflows can have beneficial effects for the receiving country, such as fostering economic growth. But they can also have severe negative effects, such as increasing financial vulnerability and overall macroeconomic instability. There is a widespread perception among academics as well as policymakers that capital inflows are correlated with asset prices. This essay aims to examine if there is a long-run relationship between capital inflows and asset prices. Three different measures of capital inflows and two measures of asset prices are examined, using time series data from the United States, Switzerland and Denmark. The time period studied is 1980Q1-2014Q4 for the United States and Denmark, and due to data limitations 2000Q1-2014Q4 for Switzerland. The empirical results confirm that there is a long-run relationship between house prices and aggregated capital inflows for all three countries, but not for share prices or disaggregated capital inflows. The long-run relationship is estimated by a Vector Error Correction Model (VECM). The estimation results show strong evidence of a structural break in the years leading up to the global financial crisis of 2007-2008. The analysis of the time period preceding the structural break show that the factors determining the long-run relationship differ across the three countries. Furthermore, cross-country heterogeneity is found in the response to a disequilibrium. (Less)
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author
Olsson, Kerstin LU
supervisor
organization
course
NEKP01 20151
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Asset prices, capital inflows, vector error correction model, VECM, house prices
language
English
id
5469509
date added to LUP
2015-06-30 10:23:48
date last changed
2015-06-30 10:23:48
@misc{5469509,
  abstract     = {Capital inflows can have beneficial effects for the receiving country, such as fostering economic growth. But they can also have severe negative effects, such as increasing financial vulnerability and overall macroeconomic instability. There is a widespread perception among academics as well as policymakers that capital inflows are correlated with asset prices. This essay aims to examine if there is a long-run relationship between capital inflows and asset prices. Three different measures of capital inflows and two measures of asset prices are examined, using time series data from the United States, Switzerland and Denmark. The time period studied is 1980Q1-2014Q4 for the United States and Denmark, and due to data limitations 2000Q1-2014Q4 for Switzerland. The empirical results confirm that there is a long-run relationship between house prices and aggregated capital inflows for all three countries, but not for share prices or disaggregated capital inflows. The long-run relationship is estimated by a Vector Error Correction Model (VECM). The estimation results show strong evidence of a structural break in the years leading up to the global financial crisis of 2007-2008. The analysis of the time period preceding the structural break show that the factors determining the long-run relationship differ across the three countries. Furthermore, cross-country heterogeneity is found in the response to a disequilibrium.},
  author       = {Olsson, Kerstin},
  keyword      = {Asset prices,capital inflows,vector error correction model,VECM,house prices},
  language     = {eng},
  note         = {Student Paper},
  title        = {Capital Inflows and Asset Prices - A Country Study of the United States, Switzerland and Denmark},
  year         = {2015},
}