Varieties of Capital Flows: What Do We Know?

Abstract

Inter-American Development Bank. This work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Note that link provided above includes additional terms and conditions of the license.The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.http://www.iadb.org 2016 1 Abstract * Capital flows have been the subject of acute policy concern since the Brady plan launched the emerging markets bond asset class. Their massive volume, coupled with their volatile and procyclical nature, is often associated with a variety of financial and real risks, which have changed over time. While emerging market crises in the 1990s and 2000s were inherently driven by financial dollarization and balance sheet effects, financial dollarization has receded in emerging markets and the focus has shifted to the macroeconomic effects of cross-market flows, including extended periods of exchange rate misalignment and the amplification of business cycles in a context of large and persistent terms-of-trade shocks and global liquidity swings. These conditions make it difficult to evaluate capital flows based on data mostly from the 1990s and early 2000s, and recent empirical literature is reviewed that revisits the issue with fresh data and an open mind. JEL classifications: E44, F30, F65, G15

Varieties of Saving and Crises

“…In most cases external debt contracts are stipulated in foreign currency and need to be serviced correspondingly. The inability to issue foreign debt in local currency at reasonable terms, the so-called "original sin" of emerging economies, is still a preponderant feature in the region and one that hampers financial integration (see Levy-Yeyati and Zuñiga, 2015). But more generally, irrespective of the specifics of the foreign liability contract, in the last analysis foreigners care about the real value of their holdings in terms of their purchasing power in their own countries.…”

The Risk of External Financial Crisis

“…The notion that foreign assets provide important protection to foreign liabilities has a long tradition, at least starting with Kindleberger in reference to the United States. This statistically significant and substantial estimation of the mitigation power of FDI assets is robust to country sampling: a separate regression within non-advanced economies yields an almost identical point estimate (Appendix C, TableC3).18 SeeLevy-Yeyati and Zúñiga (2015).…”

Financial, Institutional and Macroeconomic Determinants of Cross-Country Portfolio Equity Flows

“…Capital flows have also been the focus of concern when considering the risks associated with exchange rate fluctuations, capital that moves quickly and frequently (for further discussion on 'hot money' see Yan (2018) and on detecting surges in flows see Kaya et al (2020)) as well as the loss of monetary control (Binici et al, 2010). These issues have led to a literature that explores the determinants of equity flows, where global/external (push) and country-specific (pull) factors are used to categorise the independent variables used in modelling exercises (see Koepke (2019);Levy Yeyati and Zúñiga (2015) for reviews of the equity flows literature).…”