Implication of the Twin Crises during the Global Financial Integration Period 1980-2016: Can Capital Flows Impede Economic Growth?

Abstract

The twin crises are relatively a new phenomenon emerged during the global financial integration period 1980-2016. The twin crises imply the strong association between large international capital flow movements, balance-of-payment crises, and banking crises. This paper examines the interaction between banking crisis and capital flows—disaggregated into FDI, portfolio debt and equity—and their impacts on lowering economic growth. The result indicates together with banking crisis, lagged FDI and portfolio flows cotemporaneous to banking crisis have statistically significant negative impact on growth. Furthermore, examining impact of capital flows on growth by income level reveals the impact of equity flows on growth is more pronounced for higher income countries, whereas the impact of debt flows on growth is more pronounced for lower income countries.