Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed?

By Erlend Nier, Tahsin Saadi Sedik, Tomas Mondino

October 27, 2014

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Format: Chicago

Erlend Nier, Tahsin Saadi Sedik, and Tomas Mondino. Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed?, (USA: International Monetary Fund, 2014) accessed December 30, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper assesses empirically the key drivers of private capital flows to a large sample of emerging market economies in the last decade. It analyzes the effect of the global financial cycle, measured by the VIX, on capital flows and investigates the role of fundamentals and country characteristics in mitigating or amplifying its effect. Using interaction models, we find the effect of the VIX to be non-linear. For low levels of the VIX, capital flows are driven by fundamental factors. During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance. Our results also suggest that the effect of global financial conditions on gross private capital flows increases with the host country’s level of financial sector development. Finally, our results imply that countries cannot fully insulate themselves from global financial shocks, unless creating a fragmented global financial system.

Subject: Balance of payments, Capital flows, Capital inflows, Emerging and frontier financial markets, Financial markets, Financial sector development, Private capital flows

Keywords: Capital flow, Capital flows, Capital inflows, Effect of the VIX, Emerging and frontier financial markets, Emerging market country, Emerging Market Economies, Financial sector development, Global, Global financial cycles, Interest rate differential, Log VIX, Private capital flows, VIX coefficient, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/196
Stock No:

WPIEA2014196
ISBN:

9781498351867
ISSN:

1018-5941

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