International Capital Flows: Do Short-Term Investment and Direct Investment Differ?
36 Pages Posted: 20 Apr 2016
Date Written: October 1, 1996
Empirical support for the conventional notion that short-term investment is hot money and direct investment is not: short-term investment appears to respond more dramatically to disturbances in other capital flows and in other countries than does direct investment.
Chuhan, Perez-Quiros, and Popper examine the behavior of four major components of international capital flows in 15 developing and industrial countries.
Striking differences in the behavior of the component flows arise in general specifications that allow the flows to interact. For example, in each country, the behavior of international short-term investment appears to be sensitive to changes in all the other types of international capital flows, including direct investment, but direct investment appears to be insensitive to such changes.
Among the links across countries, there is further evidence that short-term investment is more sensitive than direct investment. A particularly telling example is found in the response to sudden changes in capital flows to Mexico. A disturbance in Mexican short-term investment appears to be transmitted quickly to the other Latin American countries studied. But there appears to be little response by those countries to a similar change in direct investment. This implies that only short-term investment suffers much from the tequila hangover.
In finding that short-term investment appears to respond more dramatically to disturbances in other capital flows and in other countries than does direct investment, the authors provide empirical support for the conventional notion that short-term investment is hot money and direct investment is not.
This paper - a product of the Development Data Group and the International Finance Division, International Economics Department - is part of a larger effort in the department to study the determinants of capital flows to developing countries.
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