Capital Inflow Surges in Emerging Economies: How Worried Should Latin America and the Caribbean Be?

Abstract

In the years leading up to the global economic crisis, Latin America and the Caribbean received large capital inflows. Nonetheless, the region survived the (albeit short-lived) dramatic events of 2007-09 reasonably well, with no financial crisis in any of the larger economies. After the crisis, capital inflows rose again: in 2010 gross inflows to seven Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela) amounted to more than 6 percent of gross domestic product (GDP), and net inflows exceeded 3 percent of GDP. More recently following the May 2013 speech of then-Chairman of the U.S. Federal Reserve, Ben Bernanke, there has been concern regarding the potential effects of tapering asset purchases by the U.S. Federal Reserve System and rising interest rates, possibly spelling the end of large capital inflows to the Latin American and Caribbean region.The literature on capital inflows suggests that while these flows represent an opportunity to spur investment and growth, they may also increase vulnerability to financial crises, macroeconomic instability, and ultimately recession. A relevant question, then, is whether the region can declare victory in being able to manage large capital inflows successfully or whether risks remain that justify strong measures.