Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence

September 13, 2019

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Diego A. Cerdeiro, and Andras Komaromi. Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We reassess the connection between capital account openness and capital flows in an empirical framework that is grounded in theory and makes use of previously unexplored variation in the data. We demonstrate how our theory-consistent regressions may overcome some ubiquitous measurement problems in the literature by relying on interaction terms between financial openness and traditional push-pull factors. Within our proposed framework, we ask: what can be said robustly about the effect of capital account restrictions on capital flows? Our results warrant against over-interpreting the existing cross-country evidence as we find very few robust relationships between capital account restrictiveness and various types of capital inflows. Countries with a higher degree of financial openness are more susceptible to some, but by no means all, push and pull factors. Overall, the results are still consistent with a complex set of tradeoffs faced by policymakers, where the ability to shield the domestic economy from volatile capital flow cycles must be weighed against the sources of exogenous risks and potential long run growth effects.

Subject: Balance of payments, Capital account, Capital flows, Capital inflows, Financial account, Fiscal accounting and reporting, Public financial management (PFM)

Keywords: Capital account, Capital flow component, Capital flows, Capital inflows, Diversification model, Drive capital flow, Equilibrium capital, FDI inflow, Fed funds rate, Financial account, Fiscal accounting and reporting, Flow component, GDP, Global, Inflow data, Interest rate data, Open economy, Portfolio debt inflow, Portfolio debt regression, Portfolio equity inflow, Portfolio equity outflow, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/194
Stock No:

WPIEA2019194
ISBN:

9781513509839
ISSN:

1018-5941

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