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Macro-financial effects of portfolio flows: Malaysia’s experience

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Hwa, TB and Raghavan, M and Huey, TT (2017) Macro-financial effects of portfolio flows: Malaysia’s experience. Discussion Paper. University of Tasmania, Hobart.

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Abstract

This paper studies the causes and effects of portfolio flows in Malaysia. We use Structural
Vector Autoregression (SVAR) and Autoregressive Distributed Lag (ARDL) models to
analyse the interactions among portfolio flows, global and domestic macro and financial
variables within a common empirical framework. Three findings emerge: First, the SVAR
estimations show that global and domestic factors play transitory roles in driving Malaysia’s
net portfolio flows. A subsample analysis from the ARDL model highlights that domestic
factors play an increasingly important role in attracting portfolio inflows as Malaysia
liberalised its exchange rate regime and capital flow restrictions. Second, higher net portfolio
flows lead to exchange rate appreciation, higher equity prices and credit expansion. The effects
are visible in the exchange rate, followed by equity prices and credit. Third, in the transmission
of higher portfolio flows to growth, the positive effects from higher equity prices and credit are
partially offset by the dampening effect from the appreciating exchange rate on output. While
the contribution of portfolio flow’s effects on output variance is low, the impulse responses of
output does change to portfolio flow shocks, suggesting that portfolio flows are tail risks to
growth and that the risks magnify when the flows are large and volatile.

Item Type: Report (Discussion Paper)
Keywords: international portfolio flows; open economy; financial economics; SVAR model
Publisher: University of Tasmania
Copyright Information:

Copyright 2017 The University of Tasmania

Date Deposited: 02 May 2017 23:07
Last Modified: 02 May 2017 23:07
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