Joining the Club? Procyclicality of Private Capital Inflows in Low Income Developing Countries

43 Pages Posted: 31 Aug 2015

See all articles by Juliana Araujo

Juliana Araujo

International Monetary Fund (IMF)

Antonio C. David

World Bank - Policy Research Department; International Monetary Fund (IMF)

Carlos van Hombeeck

Bank of England

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department

Date Written: July 2015

Abstract

Using a newly developed dataset this paper examines the cyclicality of private capital inflows to low-income developing countries (LIDCs) over the period 1990-2012. The empirical analysis shows that capital inflows to LIDCs are procyclical, yet considerably less procyclical than flows to more advanced economies. The analysis also suggests that flows to LIDCs are more persistent than flows to emerging markets (EMs). There is also evidence that changes in risk aversion are a significant correlate of private capital inflows with the expected sign, but LIDCs seem to be less sensitive to changes in global risk aversion than EMs. A host of robustness checks to alternative estimation methods, samples, and control variables confirm the baseline results. In terms of policy implications, these findings suggest that private capital inflows are likely to become more procyclical as LIDCs move along the development path, which could in turn raise several associated policy challenges, not the least concerning the reform of traditional monetary policy frameworks.

Keywords: Cyclicality, Emerging Markets, capital inflows, private capital, international capital, developing countries, Open Economy Macroeconomics, Macroeconomic Analyses of Economic Development, Emerging Markets

JEL Classification: F21, F32, F41, O11

Suggested Citation

Araujo, Juliana and David, Antonio C. and van Hombeeck, Carlos Eduardo and Papageorgiou, Chris, Joining the Club? Procyclicality of Private Capital Inflows in Low Income Developing Countries (July 2015). IMF Working Paper No. 15/163. Available at SSRN: https://ssrn.com/abstract=2653616

Juliana Araujo (Contact Author)

International Monetary Fund (IMF) ( email )

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

Antonio C. David

World Bank - Policy Research Department ( email )

1818 H Street
Washington, DC 20433
United States

International Monetary Fund (IMF) ( email )

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

Carlos Eduardo Van Hombeeck

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Chris Papageorgiou

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

700 19th Street NW
Washington, DC 20431
United States

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