Time varying determinants of bond flows to emerging markets

Erduman, Yasemin; Kaya, Neslihan

doi:10.1016/j.cbrev.2016.05.003

Cited by 7 publications

(6 citation statements)

References 1 publication

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“…Importantly, Figure b shows that what drove the reduction in portfolio inflows after the GFC are debt securities; equity flows remained relatively stable after the crisis. This evidence is consistent with the results of Erduman and Kaya (), which point out a structural change after the crisis in bond flows, but not in equity flows.…”

Section: Discussionsupporting

confidence: 92%

Do foreign portfolio capital flows affect domestic investment? Evidence from Brazil

2018

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Although there are several direct and indirect theoretical channels through which foreign capital flows may affect domestic investment, empirical evidence remains inconclusive. In this paper, we employ a VARX framework to assess the impact of equity foreign portfolio investment (EFPI) on domestic investment growth, employing monthly series for the Brazilian economy. Our results suggest that EFPI played a nonnegligible role in explaining aggregate investment fluctuations, but only before the 2008 global financial crisis. After the crisis, a period marked first by a shift in economic policy in 2008–2009, with substantial increases in government intervention, followed by deterioration in the institutional outlook and political stability in 2014–2015, mostly against the backdrop of the Petrobras corruption scandal, unexpected shocks to EFPI no longer led any real effects on investment growth. Although, in general, our results vouch for beneficial effects of equity capital flows on investment, this virtuous relationship is likely disturbed by interventionist policies and political unrest.

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Section: Discussionsupporting

confidence: 92%

Do foreign portfolio capital flows affect domestic investment? Evidence from Brazil

2018

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“…Positive (negative) values in the test correspond to a measure of expected inflation performing below (above) the benchmark. Source: calculations by the authors positive shocks on interest rate spreads in favor of emerging markets can be expected to increase portfolio inflows by between 0.1% and 2.2% of quarterly GDP (Ahmed and Zlate, 2014;Adler et al, 2016;Bems et al 2016;Erduman and Kaya, 2016;Clark et al, 2020). Graph B2.1 summarizes some of these findings.…”

Section: Results and Conclusionmentioning

confidence: 99%

“…The literature also underscores investors' focus on potential returns as a determinant of portfolio composition, as they are willing to accept a certain degree of risk in their emerging market positions in exchange for higher returns. As a result, the spread between domestic and international interest rates can help explain capital inflows, especially when it comes to bonds (Fernández-Arias, 1996;Taylor and Sarno, 1997;Montiel and Reinhart, 1999;Baek, 2006;Dahlhaus and Vasishtha;Feroli, et al, 2014;Koepke, 2014;Fratzscher et al, 2016;Adler et al, 2016;Banerjee et al, 2016;Erduman and Kaya, 2016). This effect could be symmetrical: all else equal, increases in advanced economy interest rates may plausibly lead to portfolio outflows among emerging markets.…”

Section: Results and Conclusionmentioning

confidence: 99%

Monetary Policy Report - October 2020

2021

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Recent data suggest that the technical staff’s appraisals of the condition and development of economic activity, inflation and the labor market have been in line with current trends, marked by a decline in demand and the persistence of ample excess productive capacity. A significant projected fall in output materialized in the second quarter, contributing to a decline in inflation below the 3% target and reflected in a significant deterioration of the labor market. A slow recovery in output and employment is expected to continue for the remainder of 2020 and into next year, alongside growing inflation that should remain below the target. The Colombian economy is likely to undergo a significant recession in 2020 (GDP contraction of 7.6%), though this may be less severe than projected in the previous report (-8.5%). Output is expected to have begun a slow recovery in the second half of this year, though it is not projected to return to pre-pandemic levels in 2021 amid significant global uncertainty. The output decline in the first half of 2020 was less severe than anticipated, thanks to an upward revision in first-quarter GDP and a smaller contraction in the second quarter (-15.5%) than had been projected (-16.5%). Available economic indicators suggest an annual decline in GDP in the third quarter of around 9%. No significant acceleration of COVID-19 cases that would imply a tightening of social distancing measures is presumed for the remainder of this year or in 2021. In that context, a gradual opening of the economy would be expected to continue, with supply in sectors that have been most affected by the pandemic recovering slowly as restrictions on economic activity continue to be relaxed. On the spending side, an improvement in consumer confidence, suppressed demand for goods and services, low interest rates, and higher expected levels of foreign demand should contribute to a recovery in output. A low base of comparison would also help explain the expected increase in GDP in 2021. Based on the conditions laid out above, economic growth in 2020 is expected to be between -9% and -6.5%, with a central value of -7.6%. Growth in 2021 is projected to be between 3% and 7%, with a central value of 4.6% (Graph 1.1). Upward revisions compared to the July report take into account a lower-than-expected fall in first-semester growth and a somewhat faster recovery in the third quarter in some sectors. The forecast intervals for 2020 and 2021 growth tightened somewhat but continue to reflect a high degree of uncertainty over theevolution of the pandemic, the easures required to deal with it, and their effects on global and domestic economic activity.

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“…As a matter of fact, when the risk appetite of investors combined with the relatively strong growth outlooks and higher interest rates of EMEs, these countries witnessed an increase in capital flows especially in the form of bonds flows in 2009 and 2010. According to Erduman & Kaya (2016), given the past practices of the 1994 Mexican crisis and the 1997 Asian crisis (both were triggered by strong and volatile bonds inflows), the recent wave of capital inflows to the EMEs has increased worries about the potential risks. Therefore, it is underlined that designing appropriate strategies for financial and macroeconomic stability to eliminate undesired outcomes on the capital attracting countries.…”

Section: Evaluating the Macroeconomic Reasons And Effects Of Bond Flows: Pull And Push Factorsmentioning

confidence: 99%

“…According to the results, there is a significant price spread effect from the government domestic debt securities and stock markets to the foreign exchange market, while the price spread effect from the foreign exchange market towards the government domestic debt stock and stock markets could not be identified. Erduman & Kaya (2016) investigates the time changing nature of the determinants of bond flows with a focus on the global financial crisis period and points that the interest rate differential, along with the inflation rate, is the most noteworthy pull factor of bond flows, but the growth rate does not play a significant role. Kılıçarslan (2018) uses the GARCH model and FMOLS method to determine the long-term relationship between the exchange rate volatility and real effective exchange rate volatility for the period 1974-2016 in Turkey.…”

Section: International Portfolio Flows and Exchange Rate Volatilitymentioning

confidence: 99%

Determining the Interaction of the International Portfolio Flows with Exchange Rate Volatility in Developing Countries

Altunöz

2020

WJAE

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Time varying determinants of bond flows to emerging markets

Cited by 7 publications

References 1 publication

Do foreign portfolio capital flows affect domestic investment? Evidence from Brazil

Do foreign portfolio capital flows affect domestic investment? Evidence from Brazil

Monetary Policy Report - October 2020

Determining the Interaction of the International Portfolio Flows with Exchange Rate Volatility in Developing Countries

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