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 M. Reinhart

Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER)

Date Written: June 1996


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 M., Capital Flows to Latin America: Is There Evidence of Contagion Effects? (June 1996). World Bank Policy Research Working Paper No. 1619. Available at SSRN:

Sara Guerschanik Calvo

Columbia University ( email )

New York
New York, NY 10027
United States
212-854-6537 (Phone)

Carmen M. Reinhart (Contact Author)

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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