"This is a tidy and useful
addition to the literature on how high levels of international capital flows
generate financial instability."
"Policymakers have long been
concerned that large capital inflows are associated with asset-price booms.
This column presents recent research showing that the composition of capital
inflows also matters. The association between capital inflows and asset-price
booms is about twice as strong for debt-related than for equity-related
investment. Policymakers should therefore pay attention to the composition of
capital inflows, since debt-related inflows may still undermine financial
stability even if they do not result in an overall current-account deficit."
"In general, to monitor the threat of capital
inflows, policymakers look at the current-account balance. If it is in surplus
(as is the case in Germany today) or the deficit is low, they assume that
capital inflows do not pose a risk to financial stability If, on the other
hand, the deficit is large, they worry about the potential risk and, only then,
they may look at the composition of capital inflows.
Our research shows that this view is misleading."
