Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence
Abstract
This paper examines interest rates in nine Latin American and East Asian countries during the period 1987-94. The goal is to discover why interest rates remained high, failing to converge to US levels, despite capital market liberalization and a resurgence of portfolio capital inflows during the second half of this sample period. Related questions are whether portfolio capital flows are strong enough to equalize expected returns between these "emerging markets" and the US, and whether there is any scope left for the authorities to sterilize inflows. The conclusion of the study is that the largest single component of the gap in interest rates is expectations of depreciation of the local currencies against the dollar. The key to the analysis is the use of survey data on exchange rate forecasts by market participants. Indicative of integrated financial markets, we also find a big effect of US interest rates on local interest rates, and a highly significant degree of capital flow offset to monetary policy. Copyright @ 1996 by John Wiley & Sons, Ltd. All rights reserved.Download Info
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Bibliographic Info
Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.
Volume (Year): 1 (1996)
Issue (Month): 1 (January)
Pages: 1-23
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Handle: RePEc:ijf:ijfiec:v:1:y:1996:i:1:p:1-23
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Related research
Keywords:Other versions of this item:
- Jeffrey A. Frankel & Chudozie Okongwu, 1995. "Liberalized portfolio capital inflows in emerging markets: sterilization, expectations and the incompleteness of interest rate convergence," Pacific Basin Working Paper Series 95-04, Federal Reserve Bank of San Francisco.
- Jeffrey A. Frankel and Chudozie Okongwu., 1995. "Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," Center for International and Development Economics Research (CIDER) Working Papers C95-054, University of California at Berkeley.
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