IDEAS home Printed from https://ideas.repec.org/p/chb/bcchwp/898.html
   My bibliography  Save this paper

Capital Flows and Emerging Markets Fluctuations

Author

Listed:
  • Jorge Lorca

Abstract

In the spirit of Rey’s (2015) global financial cycle hypothesis, we estimate a factor model of portfolio capital flows into emerging market economies (EME). Beyond determining the number of statistically relevant factors, we uncover the effects of U.S. interest rates, risk aversion, and commodity price fluctuations onto such estimated model. We use our estimated factors in a factoraugmented VAR in order to figure out the effects of mild fluctuations of capital flows into the macroeconomic performance of a sample of middle-income emerging economies. A shock to the common component of capital flows explains about a third of aggregate activity across our country sample.

Suggested Citation

  • Jorge Lorca, 2021. "Capital Flows and Emerging Markets Fluctuations," Working Papers Central Bank of Chile 898, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:898
    as

    Download full text from publisher

    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_898.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Vincent Reinhart & Christoph Trebesch, 2016. "Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015," American Economic Review, American Economic Association, vol. 106(5), pages 574-580, May.
    2. Choi, Woon Gyu & Kang, Taesu & Kim, Geun-Young & Lee, Byongju, 2017. "Global liquidity transmission to emerging market economies, and their policy responses," Journal of International Economics, Elsevier, vol. 109(C), pages 153-166.
    3. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
    4. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    5. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    6. Acharya, Sushant & Bengui, Julien, 2018. "Liquidity traps, capital flows," Journal of International Economics, Elsevier, vol. 114(C), pages 276-298.
    7. V.V. Chari & Lawrence Christiano, 2017. "Financialization in Commodity Markets," NBER Working Papers 23766, National Bureau of Economic Research, Inc.
    8. Robin Koepke, 2019. "What Drives Capital Flows To Emerging Markets? A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 516-540, April.
    9. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    10. Temesvary, Judit & Ongena, Steven & Owen, Ann L., 2018. "A global lending channel unplugged? Does U.S. monetary policy affect cross-border and affiliate lending by global U.S. banks?," Journal of International Economics, Elsevier, vol. 112(C), pages 50-69.
    11. Rey, Hélène, 2015. "Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence," CEPR Discussion Papers 10591, C.E.P.R. Discussion Papers.
    12. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115(1), pages 69-102.
    13. Anaya, Pablo & Hachula, Michael & Offermanns, Christian J., 2017. "Spillovers of U.S. unconventional monetary policy to emerging markets: The role of capital flows," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 275-295.
    14. Contessi, Silvio & De Pace, Pierangelo & Francis, Johanna L., 2013. "The cyclical properties of disaggregated capital flows," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 528-555.
    15. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    16. Ericsson, Neil R & Hendry, David F & Mizon, Grayham E, 1998. "Exogeneity, Cointegration, and Economic Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 370-387, October.
    17. Erkko Etula, 2013. "Broker-Dealer Risk Appetite and Commodity Returns," Journal of Financial Econometrics, Oxford University Press, vol. 11(3), pages 486-521, June.
    18. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2015. "Measuring Uncertainty," American Economic Review, American Economic Association, vol. 105(3), pages 1177-1216, March.
    19. Albagli, Elias & Ceballos, Luis & Claro, Sebastian & Romero, Damian, 2019. "Channels of US monetary policy spillovers to international bond markets," Journal of Financial Economics, Elsevier, vol. 134(2), pages 447-473.
    20. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
    21. Fernández, Andrés & Schmitt-Grohé, Stephanie & Uribe, Martín, 2017. "World shocks, world prices, and business cycles: An empirical investigation," Journal of International Economics, Elsevier, vol. 108(S1), pages 2-14.
    22. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
    23. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomás, 2017. "International asset allocations and capital flows: The benchmark effect," Journal of International Economics, Elsevier, vol. 108(C), pages 413-430.
    24. Fratzscher, Marcel, 2012. "Capital flows, push versus pull factors and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 341-356.
    25. Chen, Liang & Dolado, Juan J. & Gonzalo, Jesús, 2014. "Detecting big structural breaks in large factor models," Journal of Econometrics, Elsevier, vol. 180(1), pages 30-48.
    26. Byrne, Joseph P. & Fiess, Norbert, 2016. "International capital flows to emerging markets: National and global determinants," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 82-100.
    27. Eugenio Cerutti & Stijn Claessens & Andrew K. Rose, 2019. "How Important is the Global Financial Cycle? Evidence from Capital Flows," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 24-60, March.
    28. Seung C. Ahn & Alex R. Horenstein, 2013. "Eigenvalue Ratio Test for the Number of Factors," Econometrica, Econometric Society, vol. 81(3), pages 1203-1227, May.
    29. Bruno, Valentina & Shin, Hyun Song, 2015. "Capital flows and the risk-taking channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 119-132.
    30. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2013. "Gross capital flows: Dynamics and crises," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 113-133.
    31. Atish R. Ghosh & Jonathan D. Ostry & Mahvash S. Qureshi, 2016. "When Do Capital Inflow Surges End in Tears?," American Economic Review, American Economic Association, vol. 106(5), pages 581-585, May.
    32. Cesa-Bianchi, Ambrogio & Ferrero, Andrea & Rebucci, Alessandro, 2018. "International credit supply shocks," Journal of International Economics, Elsevier, vol. 112(C), pages 219-237.
    33. Angela Abbate & Sandra Eickmeier & Wolfgang Lemke & Massimiliano Marcellino, 2016. "The Changing International Transmission of Financial Shocks: Evidence from a Classical Time‐Varying FAVAR," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(4), pages 573-601, June.
    34. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    35. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    36. Benigno, Gianluca & Converse, Nathan & Fornaro, Luca, 2015. "Large capital inflows, sectoral allocation, and economic performance," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 60-87.
    37. Amengual, Dante & Watson, Mark W., 2007. "Consistent Estimation of the Number of Dynamic Factors in a Large N and T Panel," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 91-96, January.
    38. Adams, Zeno & Glück, Thorsten, 2015. "Financialization in commodity markets: A passing trend or the new normal?," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 93-111.
    39. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    40. Akıncı, Özge, 2013. "Global financial conditions, country spreads and macroeconomic fluctuations in emerging countries," Journal of International Economics, Elsevier, vol. 91(2), pages 358-371.
    41. Roberto Chang & Andrés Fernández, 2013. "On The Sources Of Aggregate Fluctuations In Emerging Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 1265-1293, November.
    42. Kehoe, Timothy J. & Ruhl, Kim J., 2009. "Sudden stops, sectoral reallocations, and the real exchange rate," Journal of Development Economics, Elsevier, vol. 89(2), pages 235-249, July.
    43. Sarno, Lucio & Tsiakas, Ilias & Ulloa, Barbara, 2016. "What drives international portfolio flows?," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 53-72.
    44. Silvia Miranda-Agrippino & Hélène Rey, 2020. "U.S. Monetary Policy and the Global Financial Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(6), pages 2754-2776.
    45. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    46. Jeffrey A. Frankel, 2008. "The Effect of Monetary Policy on Real Commodity Prices," NBER Chapters, in: Asset Prices and Monetary Policy, pages 291-333, National Bureau of Economic Research, Inc.
    47. Stephanie Schmitt†Grohé & Martín Uribe, 2018. "How Important Are Terms†Of†Trade Shocks?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(1), pages 85-111, February.
    48. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2016. "Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 298-330.
    49. Sydney C. Ludvigson & Serena Ng, 2009. "Macro Factors in Bond Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
    50. Suleyman Basak & Anna Pavlova, 2016. "A Model of Financialization of Commodities," Journal of Finance, American Finance Association, vol. 71(4), pages 1511-1556, August.
    51. Bai, Jushan & Ng, Serena, 2007. "Determining the Number of Primitive Shocks in Factor Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 52-60, January.
    52. Chamberlain, Gary & Rothschild, Michael, 1983. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Econometrica, Econometric Society, vol. 51(5), pages 1281-1304, September.
    53. J. B. Taylor & Harald Uhlig (ed.), 2016. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 2, number 2.
    54. Carlos F. Díaz Alejandro, 1983. "Stories of the 1930s for the 1980s," NBER Chapters, in: Financial Policies and the World Capital Market: The Problem of Latin American Countries, pages 5-40, National Bureau of Economic Research, Inc.
    55. James D. Hamilton, 2019. "Measuring Global Economic Activity," NBER Working Papers 25778, National Bureau of Economic Research, Inc.
    56. Adams, Zeno & Glueck, Thorsten, 2014. "Financialization in Commodity Markets: A Passing Trend or the New Normal?," Working Papers on Finance 1413, University of St. Gallen, School of Finance, revised Aug 2015.
    57. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, vol. 67(5), pages 1811-1843, October.
    58. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    59. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
    60. James D. Hamilton & Jing Cynthia Wu, 2015. "Effects Of Index‐Fund Investing On Commodity Futures Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 187-205, February.
    61. Olivier Blanchard & Jonathan D. Ostry & Atish R. Ghosh & Marcos Chamon, 2016. "Capital Flows: Expansionary or Contractionary?," American Economic Review, American Economic Association, vol. 106(5), pages 565-569, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gent Bajraj & Jorge Lorca & Juan M. Wlasiuk, 2022. "On Foreign Drivers of EMEs Fluctuations," Working Papers Central Bank of Chile 951, Central Bank of Chile.
    2. Bajraj, Gent & Lorca, Jorge & Wlasiuk, Juan M., 2023. "On foreign drivers of emerging markets fluctuations," Economic Modelling, Elsevier, vol. 129(C).
    3. Eller, Markus & Huber, Florian & Schuberth, Helene, 2020. "How important are global factors for understanding the dynamics of international capital flows?," Journal of International Money and Finance, Elsevier, vol. 109(C).
    4. Eugenio Cerutti & Stijn Claessens & Andrew K. Rose, 2019. "How Important is the Global Financial Cycle? Evidence from Capital Flows," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 24-60, March.
    5. Mauricio Villamizar-Villegas & Lucía Arango-Lozano & Geraldine Castelblanco & Nicolás Fajardo-Baquero & Maria A. Ruiz-Sanchez, 2022. "The effects of Monetary Policy on Capital Flows A Meta-Analysis," Borradores de Economia 1204, Banco de la Republica de Colombia.
    6. Aldasoro, Iñaki & Beltrán, Paula & Grinberg, Federico & Mancini-Griffoli, Tommaso, 2023. "The macro-financial effects of international bank lending on emerging markets," Journal of International Economics, Elsevier, vol. 142(C).
    7. Gent Bajraj & Andrés Fernández & Miguel Fuentes & Benjamín García & Jorge Lorca & Manuel Paillacar & Juan Marcos Wlasiuk, 2022. "Global Drivers and Macroeconomic Volatility in EMEs: a Dynamic Factor, General Equilibrium Perspective," Working Papers Central Bank of Chile 963, Central Bank of Chile.
    8. Chou, Ray Yeutien & Yen, Tso-Jung & Yen, Yu-Min, 2020. "Macroeconomic forecasting using approximate factor models with outliers," International Journal of Forecasting, Elsevier, vol. 36(2), pages 267-291.
    9. Ashima Goyal & Akhilesh K. Verma & Rajeswari Sengupta, 2022. "External shocks, cross-border flows and macroeconomic risks in emerging market economies," Empirical Economics, Springer, vol. 62(5), pages 2111-2148, May.
    10. Mao Takongmo, Charles Olivier & Stevanovic, Dalibor, 2015. "Selection Of The Number Of Factors In Presence Of Structural Instability: A Monte Carlo Study," L'Actualité Economique, Société Canadienne de Science Economique, vol. 91(1-2), pages 177-233, Mars-Juin.
    11. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    12. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," Working Papers 2019-4, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    13. Bank for International Settlements, 2021. "Changing patterns of capital flows," CGFS Papers, Bank for International Settlements, number 66, december.
    14. Emter, Lorenz, 2023. "Leverage cycles, growth shocks, and sudden stops in capital inflows," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 711-731.
    15. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," PSE Working Papers halshs-02262202, HAL.
    16. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," Working Papers halshs-02262202, HAL.
    17. Tenreyro, Silvana & Drechsel, Thomas & McLeay, Michael, 2019. "Monetary policy for commodity booms and busts," CEPR Discussion Papers 14030, C.E.P.R. Discussion Papers.
    18. Boonman, Tjeerd M., 2023. "Portfolio capital flows before and after the Global Financial Crisis," Economic Modelling, Elsevier, vol. 127(C).
    19. Xichen Wang & Cheng Yan, 2022. "Does the Relative Importance of the Push and Pull Factors of Foreign Capital Flows Vary Across Quantiles?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(2), pages 252-299, June.
    20. Horn, Sebastian & Reinhart, Carmen M. & Trebesch, Christoph, 2021. "China's overseas lending," Journal of International Economics, Elsevier, vol. 133(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:898. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alvaro Castillo (email available below). General contact details of provider: https://edirc.repec.org/data/bccgvcl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.