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Reversibility of Different Types of Capital Flows to Emerging Markets

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  • Sula, Ozan
  • Willett, Thomas D.

Abstract

Most of the emerging market currency crises are accompanied by sharp reversals or “sudden stops” of capital inflows. We investigated whether some types of capital flows are more likely to reverse than others during these crises. Foreign direct investment is usually considered stable while portfolio investment is frequently depicted as the least reliable type of flow. Recent statistical testing has yielded conflicting results on this issue. We argue that a major problem with recent studies is that the degree of variability of capital flows during normal or inflow periods may give little clue to their behavior during crises and it is the latter that is most important for policy. Using data for 35 emerging economies for 1990 through 2003, we confirm that direct investment is the most stable category, but find that private loans on average are as reversible as portfolio flows.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 384.

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Date of creation: Jan 2006
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Handle: RePEc:pra:mprapa:384

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Keywords: Capital flows; currency crises; volatility of capital flows; reversibility of capital flows; Emerging Markets; private loans; portfolio flows; foreign direct investment;

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References

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  1. John Williamson, 2005. "Curbing the Boom-Bust Cycle: Stabilizing Capital Flows to Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa75.
  2. Michael Hutchison & Ilan Noy (Neuberger), 2002. "Sudden stops and the Mexican wave: currency crises, capital flow reversals and output loss in emerging markets," Pacific Basin Working Paper Series 2002-03, Federal Reserve Bank of San Francisco.
  3. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
  4. Classens, S. & Dooley, M.P. & Warner, A., 1995. "Portfolio Capital Flows: Hot or Cold," Papers 501, Harvard - Institute for International Development.
  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. Chuhan, Punam & Perez-Quiros, Gabriel & Popper, Helen, 1996. "International capital flows : do short-term investment and direct investment differ?," Policy Research Working Paper Series 1669, The World Bank.
  7. Guillermo A. Calvo & Enrique G. Mendoza, 1999. "Regional Contagion and the Globalization of Securities Markets," NBER Working Papers 7153, National Bureau of Economic Research, Inc.
  8. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  9. Sarno, Lucio & Taylor, Mark P., 1999. "Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation," Journal of Development Economics, Elsevier, vol. 59(2), pages 337-364, August.
  10. Alberto Gabriele & Korkut Baratav & Ashok Parikh, 2000. "Instability and Volatility of Capital Flows to Developing Countries," The World Economy, Wiley Blackwell, vol. 23(8), pages 1031-1056, 08.
  11. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
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Cited by:
  1. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
  2. Gozgor, Giray & Erzurumlu, Yaman O., 2010. "Causality relations between foreign direct investment and portfolio investment volatility," MPRA Paper 34352, University Library of Munich, Germany.
  3. Linyue Li & Nan Zhang & Thomas D. Willett, 2012. "Measuring macroeconomic and financial market interdependence: a critical survey," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(2), pages 128-145, June.
  4. G. Andrew Karolyi & David T. Ng & Eswar S. Prasad, 2013. "The Coming Wave," Working Papers 082013, Hong Kong Institute for Monetary Research.
  5. Duasa, Jarita & Kassim, Salina, 2008. "Hot money and economic performance: An empirical analysis," MPRA Paper 12470, University Library of Munich, Germany.
  6. Levan Efremidze & Samuel M. Schreyer & Ozan Sula, 2011. "Sudden stops and currency crises," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(4), pages 304-321, November.
  7. World Bank, 2012. "Using Lebanon's Large Capital Inflows to Foster Sustainable Long-Term Growth," World Bank Other Operational Studies 2727, The World Bank.

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