Capital Flows to Latin America: Is There Evidence of Contagion Effects?

36 Pages Posted: 20 Apr 2016

See all articles by Sara Guerschanik Calvo

Sara Guerschanik Calvo

Columbia University

Carmen Reinhart

Harvard University - Center for Business and Government; Centre for Economic Policy Research (CEPR); World Bank; University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER); International Monetary Fund (IMF); Peterson Institute for International Economics; Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

Date Written: June 1996

Abstract

Mexico's economic crisis in December 1994 gave renewed importance to the issue of spillover or contagion effects in other emerging market economies (and their sensitivity to events in larger countries in the region.) They focus on how small open economies are affected by their neighbors' ecomomic developments and what role financial markets play in the transmission of disturbances. They find that: (1) There was evidence of increased comovement across weekly equity and Brady bond returns for emerging markets in Latin America after the Mexican crisis. Such comovement could be seen as evidence of herding behavior among investors, or as a result of the effect on stock prices in other markets when a few large investors in one market sell off equities to raise cash. (2) Contagion may be more regional than global - the degree of comovement after the crisis increased in both Asia and Latin America, but regional patterns differed. (3) International capital movements are all significantly affected by swings in interest rates in the United States. Other things being equal, increases in U.S. interest rates are associated with capital outflows from Latin America. Large and small countries are equally vulnerable. (4) Developments in large countries influence the capital account balance of all countries in the region through a more persistent form of contagion than that associated with a crisis. Other things being equal, capital flows in and out of large countries in a region tend to encourage flows affecting the smaller countries, although capital developments in small countries appear to have no systematic impact on larger countries. (5) Smaller Latin American countries appear to be affected more by developments in a core set of countries in a region than by developments in a single country.

Suggested Citation

Calvo, Sara Guerschanik and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen, Capital Flows to Latin America: Is There Evidence of Contagion Effects? (June 1996). Available at SSRN: https://ssrn.com/abstract=636120

Sara Guerschanik Calvo

Columbia University ( email )

New York
New York, NY 10027
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Carmen Reinhart (Contact Author)

Centre for Economic Policy Research (CEPR)

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