Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed?

36 Pages Posted: 22 Nov 2014

See all articles by Erlend W. Nier

Erlend W. Nier

International Monetary Fund (IMF)

Tahsin Saadi-Sedik

International Monetary Fund (IMF)

Tomas Mondino

Columbia University

Date Written: October 2014

Abstract

This paper assesses empirically the key drivers of private capital flows to a large sample of emerging market economies in the last decade. It analyzes the effect of the global financial cycle, measured by the VIX, on capital flows and investigates the role of fundamentals and country characteristics in mitigating or amplifying its effect. Using interaction models, we find the effect of the VIX to be non-linear. For low levels of the VIX, capital flows are driven by fundamental factors. During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance. Our results also suggest that the effect of global financial conditions on gross private capital flows increases with the host country’s level of financial sector development. Finally, our results imply that countries cannot fully insulate themselves from global financial shocks, unless creating a fragmented global financial system.

Keywords: Private capital flows, Emerging markets, Procyclicality of financial system, Interest rates, Central bank policy, Econometric models, Global financial cycles, Emerging Market Economies, capital inflows, capital controls, capital markets, volatile capital flows, risk aversion, global financial crisis, stock market, exchange rates, global financial system, capital account restrictions, determinants of capital flows, real effective exchange rate, stock market capitalization, capital transactions, border capital flows, equity prices, foreign exchange, net capital, access to private capital markets, net capital flows, foreign capital, current account deficit, capital movements, foreign capital fl

JEL Classification: F32, F39, G11

Suggested Citation

Nier, Erlend W. and Saadi-Sedik, Tahsin and Mondino, Tomas, Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed? (October 2014). IMF Working Paper No. 14/196. Available at SSRN: https://ssrn.com/abstract=2529315

Erlend W. Nier (Contact Author)

International Monetary Fund (IMF) ( email )

Tahsin Saadi-Sedik

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Tomas Mondino

Columbia University

New York, NY
United States

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