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Surges

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  • Mahvash Saeed Qureshi
  • Atish R. Ghosh
  • Juan Zalduendo
  • Jun Il Kim

Abstract

This paper examines why surges in capital flows to emerging market economies (EMEs) occur, and what determines the allocation of capital across countries during such surge episodes. We use two different methodologies to identify surges in EMEs over 1980-2009, differentiating between those mainly caused by changes in the country''s external liabilities (reflecting the investment decisions of foreigners), and those caused by changes in its assets (reflecting the decisions of residents). Global factors-including US interest rates and risk aversion¡-are key to determining whether a surge will occur, but domestic factors such as the country''s external financing needs (as implied by an intertemporal optimizing model of the current account) and structural characteristics also matter, which explains why not all EMEs experience surges. Conditional on a surge occurring, moreover, the magnitude of the capital inflow depends largely on domestic factors including the country''s external financing needs, and the exchange rate regime. Finally, while similar factors explain asset- and liability-driven surges, the latter are more sensitive to global factors and contagion.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/22.

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Length: 43
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/22

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Keywords: Capital flows; Developing countries; Economic models; net capital flows; net capital; exchange rate; capital flow; capital inflows; exchange rate regime; net capital flow; real exchange rate; international capital flows; commodity prices; current account deficit; stock market; capital mobility; capital inflow; stock market capitalization; private capital flows; exchange rate overvaluation; international capital; real exchange rate overvaluation; current account balance; private capital; capital movements; flexible exchange rate; risk aversion; capital markets; real effective exchange rate; volatility of capital flows; exchange rate regimes; flexible exchange rate regime; current account deficits; nominal exchange rate; effective exchange rate; capital accounts; capital controls; de facto exchange rate regime; border capital flows; real exchange rate depreciation; world capital markets; foreign capital flows; exchange rate appreciation; flexible exchange rate regimes; exchange rate depreciation; foreign capital; private capital inflows; real exchange rate change; domestic credit; exchange rate index; exchange restrictions; nominal effective exchange rate; exchange rate changes; capital account restrictions; real exchange rate appreciation; exchange arrangements; nominal effective exchange rate index; exchange rate change; determinants of capital flows; index options; private capital flow; short-term capital; inflation rate; exchange reserves; log nominal exchange rate; market assets; foreign exchange; currency appreciation; foreign exchange reserves; consumer price index; fixed exchange rate; credit rating; domestic borrowers;

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References

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  1. Fernandez-Arias, Eduardo & Montiel, Peter J, 1996. "The Surge in Capital Inflows to Developing Countries: An Analytical Overview," World Bank Economic Review, World Bank Group, vol. 10(1), pages 51-77, January.
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  3. Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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  17. Barry Eichengreen & Muge Adalet, 2005. "Current Account Reversals: Always a Problem?," NBER Working Papers 11634, National Bureau of Economic Research, Inc.
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  19. Selim Elekdag & M. Ayhan Kose & Roberto Cardarelli, 2009. "Capital Inflows," IMF Working Papers 09/40, International Monetary Fund.
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