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Volatility of short term capital flows and socio-political instability in developing countries: A review

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Demir, Firat

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Abstract

The paper reviews the theoretical and empirical evidence on the relationship between financial liberalization and socio-political risk by identifying the inter-dependent nature of socio-political and economic fault lines. In particular, the research examines the dynamic relationship between the volatility of short-term capital flows and socio-political instability. Accordingly, the socio-political risk is argued to be endogenously determined with the volatility of short term capital inflows such that increasing volatility by disrupting market activities, domestic investment and growth increases socio-political risk, which further feeds into the volatility of such flows. Using evidence from three major developing countries that are Argentina, Mexico and Turkey and applying Granger causality tests and Impulse Response Functions, the paper finds support for the presence of an endogenous relationship between the volatility of short-term capital inflows and socio-political instability. The results challenge the previous research regarding the use of political risk as a purely exogenous variable.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1943.

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Date of creation: May 2007
Date of revision: Jan 2008
Handle: RePEc:pra:mprapa:1943

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Related research
Keywords: Short Term Capital Flow Volatility; Socio-Political Instability; Developing Countries;

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Find related papers by JEL classification:
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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