Financial openness and capital inflows to emerging markets: In search of robust evidence

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 can overcome some ubiquitous measurement problems in the literature. 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 show that policymakers should carefully weigh the ability to shield the domestic economy from some sources of capital flow volatility against the potentially negative long run growth effects.