7 Theoretical and empirical analysis Practical lessons and policy implications
Introduction Based on the theoretical analysis in Chapters 2 to 6, the goal of this chapter is to map the theoretical results to the existing empirical findings in the literature and to identify what has been overlooked in each analysis. Each analysis has its strengths and weaknesses, regardless of theoretical or empirical analysis. Also, blind spots may arise for specific analysis, especially when specific methods have been taken as given without further examination. Therefore, it is crucial to keep learning and examining various analyses. In the literature on capital flows and the connections to banking crises, the results have been mixed. The mixed results have brought about many puzzles and debates. It has been well documented that many puzzles and debates have resulted from the use of various definitions and measurements of datasets across countries and across time. Although there have been many methods developed in empirical studies, the methods which have been applied to analyse capital flows are actually quite limited. Among the specific methods adopted to analyse capital flows, the characteristics of these specific methods tend to drive similar results [Forbes (2012)]. Moreover, specific treatments of the data may affect the results but are hardly explained in the empirical studies. We will require the professionals with expertise in constructing various datasets across countries and in methodologies to provide specific comments and to point out what future work will be needed. Because I am not an expert on various datasets and econometric methodologies, I will focus on the lessons learned from the theoretical and empirical analysis regarding the possible causes of these inconsistent results and the policy implications as well as the most fruitful directions for future work. The chapter is organized as follows. The second section will discuss general issues in empirical studies. The third and fourth sections will look at the impacts of FDI and FPI flows on economic growth, respectively. The fifth section will be on sudden stops and banking crises, while the sixth will be on bank governance and banking crises. The seventh section will focus on capital controls. The eighth section will provide the conclusion.
