Global Financial Shocks and Foreign Asset Repatriation: Do Local Investors Play a Stabilizing Role?

32 Pages Posted: 15 May 2014

See all articles by Gustavo Adler

Gustavo Adler

International Monetary Fund (IMF) - Research Department

Marie-Louise Djigbenou

Banque de France

Sebastiàn Sosa

International Monetary Fund (IMF) - Western Hemisphere Department

Date Written: April 2014

Abstract

We study the dynamic response of gross capital flows in emerging market economies to different global financial shocks, using a panel vector-autoregressive (PVAR) setting. Our focus lies primarily on the potentially stabilizing role played by domestic investors in offsetting the response of foreign investors to global shocks. We find evidence of such role, but its existence and magnitude depend on the nature of the shock. Local investors play a meaningful stabilizing role in the face of global uncertainty shocks, as well as shocks to long-term U.S. interest rates. However, while in the former case, sizeable asset repatriation largely offsets the retrenchment of non-residents, in the latter case the extent of the offsetting is much more limited. Meanwhile, residents and non-resident behave alike in response to short-term U.S. interest rate shocks, pulling capital away from emerging markets, although magnitudes are not economically significant. The results shed light on the potential impact of the Fed’s QE tapering on emerging market economies.

Keywords: International capital markets, External shocks, Emerging markets, Foreign investment, Capital flows, Economic integration, Economic models, gross capital flows, foreign assets, global financial shocks, capital inflows, net capital, net capital flows, capital outflows, commodity prices, financial integration, global financial markets, net capital outflows, capital movements, capital mobility, international capital flows, international financial, international financial markets, short-term capital, foreign asset holdings, government bonds, official flows, capital account restrictions, capital accounts, capital flow reversals

JEL Classification: F30, F32, F41, G15

Suggested Citation

Adler, Gustavo and Djigbenou, Marie-Louise and Sosa, Sebastian, Global Financial Shocks and Foreign Asset Repatriation: Do Local Investors Play a Stabilizing Role? (April 2014). IMF Working Paper No. 14/60, Available at SSRN: https://ssrn.com/abstract=2437295

Gustavo Adler

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Marie-Louise Djigbenou

Banque de France ( email )

Paris
France

Sebastian Sosa

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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