Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence

33 Pages Posted: 3 Dec 2019

See all articles by Diego Cerdeiro

Diego Cerdeiro

International Monetary Fund (IMF)

Andras Komaromi

International Monetary Fund (IMF)

Date Written: September 2019

Abstract

We reassess the connection between capital account openness and capital flows in an empirical framework that is grounded in theory and makes use of previously unexplored variation in the data. We demonstrate how our theory-consistent regressions may overcome some ubiquitous measurement problems in the literature by relying on interaction terms between financial openness and traditional push-pull factors. Within our proposed framework, we ask: what can be said robustly about the effect of capital account restrictions on capital flows? Our results warrant against over-interpreting the existing cross-country evidence as we find very few robust relationships between capital account restrictiveness and various types of capital inflows. Countries with a higher degree of financial openness are more susceptible to some, but by no means all, push and pull factors. Overall, the results are still consistent with a complex set of tradeoffs faced by policymakers, where the ability to shield the domestic economy from volatile capital flow cycles must be weighed against the sources of exogenous risks and potential long run growth effects.

Keywords: Balance of payments, Capital flows, Capital inflows, Economic theory, Financial account, financial openness, capital flow management, capital controls., WP, capital flow, restrictiveness, openness, inflow, pull factor

JEL Classification: E58, F21, F32, G28, E01, F3, O24, F16, G21

Suggested Citation

Cerdeiro, Diego and Komaromi, Andras, Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence (September 2019). IMF Working Paper No. 19/194. Available at SSRN: https://ssrn.com/abstract=3496704

Diego Cerdeiro (Contact Author)

International Monetary Fund (IMF) ( email )

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

Andras Komaromi

International Monetary Fund (IMF) ( email )

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

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