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Determinants and Repercussions of the Composition of Capital Inflows

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  • Mark S. Carlson
  • Leonardo Hernández
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    Abstract

    The Mexican, Asian, and Russian crises of the mid- and late 1990s have renewed interest among policymakers in the determinants and effects of private capital inflows. This paper analyzes whether policies can affect the composition of capital inflows and whether different compositions aggravate crises. The results support the view that, while fundamentals matter, capital controls can affect the mix of capital inflows that countries receive. The results also show that during the Asian crisis, countries with more yen-denominated debt faired worse, while during the Mexican crisis larger short-term debt stocks increased the severity of the crisis.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/86.

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    Length: 50
    Date of creation: 01 May 2002
    Date of revision:
    Handle: RePEc:imf:imfwpa:02/86

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    Keywords: Capital flows; exchange rate; capital inflows; real exchange rate; net capital inflow; exchange rate appreciation; capital controls; real exchange rate appreciation; fixed exchange rate; net capital; exchange rates; composition of capital inflows; private floating exchange rate; exchange rate regime; private capital; capital markets; capital transactions; private capital inflows; equity investment; exchange rate dummy; domestic credit; nominal exchange rate; capital transaction; floating exchange rates; nominal exchange rates; exchange rate regimes; capital movements; bilateral real exchange rate; floating exchange rate regime; short-term capital; foreign capital; capital account liberalization; currency pegs; inflation rate; real appreciation; speculative attacks; capital market; fixed exchange rates; exchange rate crises; foreign investment; capital control; credit expansion; government bonds; credit rating; stock market; exchange arrangements; real exchange rates; domestic capital; capital account transactions; exchange rate pegs; exchange rate float; gross domestic product; exchange rate risk; exchange rate regime classification; equity stake; exchange rate variability; domestic capital markets; aggregate capital market crises; dollar exchange rate; exchange rate appreciations; currency units; real exchange rate appreciations; de facto exchange rate regime;

    References

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    1. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    2. Zhaohui Chen & Mohsin S. Khan, 1997. "Patterns of Capital Flows to Emerging Markets," IMF Working Papers 97/13, International Monetary Fund.
    3. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters, Peterson Institute for International Economics, in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
    4. Leonardo Hernández & Heinz Rudolph, 1997. "Sustainability of Private Capital Flows to Developing Countries: Is a Generalized Reversal Likely?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 34(102), pages 237-266.
    5. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
    6. 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.
    7. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
    8. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
    9. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
    10. Morris Goldstein & John Hawkins, 1998. "The Origin of the Asian Financial Turmoil," RBA Research Discussion Papers, Reserve Bank of Australia rdp9805, Reserve Bank of Australia.
    11. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, Elsevier, vol. 55(2), pages 439-463, April.
    12. Hernandez, Leonardo F. & Valdes, Rodrigo O., 2001. "What drives contagion: Trade, neighborhood, or financial links?," International Review of Financial Analysis, Elsevier, Elsevier, vol. 10(3), pages 203-218.
    13. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, American Economic Association, vol. 67(4), pages 537-48, September.
    14. Montiel, Peter & Reinhart, Carmen M., 1999. "Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(4), pages 619-635, August.
    15. Rodrigo O. Valdés & Leonardo Hernández, 2001. "What Drives Contagion," IMF Working Papers 01/29, International Monetary Fund.
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    Citations

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    Cited by:
    1. Norbert Funke & Faisal Ahmed & Rabah Arezki, 2005. "The Composition of Capital Flows," IMF Working Papers 05/40, International Monetary Fund.
    2. Kinda, Tidiane, 2007. "Increasing private capital flows to developing countries: The role of physical and financial infrastructure," MPRA Paper 19163, University Library of Munich, Germany.
    3. Selim Elekdag & M. Ayhan Kose & Roberto Cardarelli, 2009. "Capital Inflows," IMF Working Papers 09/40, International Monetary Fund.
    4. Gerald EPSTEIN & Ilene GRABEL & JOMO K.S., 2004. "Capital Management Techniques In Developing Countries: An Assessment Of Experiences From The 1990s And Lessons From The Future," G-24 Discussion Papers, United Nations Conference on Trade and Development 27, United Nations Conference on Trade and Development.
    5. M. Ayhan Kose & Eswar S. Prasad & Marco E. Terrones, 2004. "How do trade and financial integration affect the relationship between growth and volatility," Working Paper Series, Federal Reserve Bank of San Francisco 2004-29, Federal Reserve Bank of San Francisco.
    6. LANTERI, Luis N., 2010. "Determinantes De Los Flujos Netos De Capital. Alguna Evidencia Para La Economia Argentina," Estudios Economicos de Desarrollo Internacional, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 10(1), pages 57-84.
    7. Asiedu, Elizabeth & Lien, Donald, 2004. "Capital Controls and Foreign Direct Investment," World Development, Elsevier, Elsevier, vol. 32(3), pages 479-490, March.
    8. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei & Ann Harrison, . "Financial Globalization, Growth and Volatility In Developing Countries," Working Paper 14902, Harvard University OpenScholar.
    9. David, Antonio C., 2007. "Controls on capital inflows and external shocks," Policy Research Working Paper Series 4176, The World Bank.
    10. Leslie Hull, 2002. "Corporate behaviour and the balance of payments," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 65, December.
    11. Alina Kudina & Oleksandr Lozovyi, 2007. "Determinants of Portfolio Flows into CIS Countries," CASE Network Studies and Analyses, CASE-Center for Social and Economic Research 0354, CASE-Center for Social and Economic Research.
    12. Antonio David, 2005. "Do controls on capital inflows insulate domestic variables against external shocks?," Money Macro and Finance (MMF) Research Group Conference 2005, Money Macro and Finance Research Group 9, Money Macro and Finance Research Group.
    13. Uctum, Merih & Uctum, Remzi, 2011. "Crises, portfolio flows, and foreign direct investment: An application to Turkey," Economic Systems, Elsevier, Elsevier, vol. 35(4), pages 462-480.
    14. Kinda, Tidiane, 2008. "Les déterminants des flux de capitaux privés dans l’UMOA: Une approche empirique sur données de panel
      [The determinants of private capital inflows in WAEMU: A panel data approach]
      ," MPRA Paper 19159, University Library of Munich, Germany.
    15. Jo�l van der Weele, 2005. "Financing development: debt versus equity," DNB Working Papers, Netherlands Central Bank, Research Department 038, Netherlands Central Bank, Research Department.
    16. K.S. Jomo & Ilene Grabel & Gerald Epstein, 2003. "Capital Management Techniques In Developing Countries: An Assessment of Experiences From the 1990s and Lessons for the Future," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp56, Political Economy Research Institute, University of Massachusetts at Amherst.
    17. Faisal Ahmed & Rabah Arezki & Norbert Funke, 2007. "The composition of capital flows to South Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(2), pages 275-294.

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