Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility

46 Pages Posted: 20 Jul 2000 Last revised: 10 Apr 2008

See all articles by Philippe Bacchetta

Philippe Bacchetta

University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Eric van Wincoop

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 1998

Abstract

The paper analyzes the impact of financial liberalizations and reforms in emerging markets on the dynamics of capital flows to these markets, using a simple model of international investors' behavior. We first show that the gradual nature of liberalizations, combined with the cost of absorbing large inflows in emerging economies, leads to rich dynamics of capital flows and often implies an initial period of overshooting as portfolios adjust. Asset prices will overshoot as well. Second, we show that if investors have incomplete information about new emerging markets, and learn over time, there can be high volatility of capital flows as well as contagion. Finally, we provide numerical estimates of long run capital inflows to emerging market economies and compare them to actual inflows. This gives a good indicator of upcoming crisis situations.

Suggested Citation

Bacchetta, Philippe and van Wincoop, Eric, Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility (April 1998). NBER Working Paper No. w6530, Available at SSRN: https://ssrn.com/abstract=226267

Philippe Bacchetta (Contact Author)

University of Lausanne ( email )

Faculty of Business and Economics
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1015 Lausanne
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HOME PAGE: http://www.hec.unil.ch/pbacchetta/

Centre for Economic Policy Research (CEPR)

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Swiss Finance Institute

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Eric Van Wincoop

University of Virginia - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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