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Why are capital flows so much more volatile in emerging than in developed countries?

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Abstract

The standard deviations of capital flows to emerging countries are 80 percent higher than those to developed countries. First, we show that very little of this difference can be explained by more volatile fundamentals or by higher sensitivity to fundamentals. Second, we show that most of the difference in volatility can be accounted for by three characteristics of capital flows: (i) capital flows to emerging countries are more subject to occasional large negative shocks (“crises”) than those to developed countries, (ii) shocks are subject to contagion, and (iii) – the most important one – shocks to capital flows to emerging countries are more persistent than those to developed countries. Finally, we study a number of country characteristics to determine which are most associated with capital flow volatility. Our results suggest that underdevelopment of domestic financial markets, weak institutions, and low income per capita, are all associated with capital flow volatility.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 862.

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Date of creation: Oct 2004
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Handle: RePEc:upf:upfgen:862

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Web page: http://www.econ.upf.edu/

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Keywords: Capital flows; emerging countries; volatility; crises; contagion; persistence;

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References

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  1. Fernando Broner & Guido Lorenzoni & Sergio Schmuckler, 2006. "Why Do Emerging Economies Borrow Short Term?," 2006 Meeting Papers, Society for Economic Dynamics 841, Society for Economic Dynamics.
  2. Norman Loayza & Pablo Fajnzylber & César Calderón, 2005. "Economic Growth in Latin America and the Caribbean : Stylized Facts, Explanations, and Forecasts," World Bank Publications, The World Bank, number 7315, August.
  3. Ricardo Hausmann & Ugo Panizza & Roberto Rigobon, 2004. "The Long-Run Volatility Puzzle of the Real Exchange Rate," NBER Working Papers 10751, National Bureau of Economic Research, Inc.
  4. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Excessive Dollar Debt: Financial Development and Underinsurance," Journal of Finance, American Finance Association, American Finance Association, vol. 58(2), pages 867-894, 04.
  5. repec:bge:wpaper:185 is not listed on IDEAS
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Cited by:
  1. Contessi, Silvio & De Pace, Pierangelo & Francis, Johanna L., 2013. "The cyclical properties of disaggregated capital flows," Journal of International Money and Finance, Elsevier, Elsevier, vol. 32(C), pages 528-555.
  2. repec:nbr:nberwo:13194 is not listed on IDEAS
  3. Jaume Ventura & Fernando Broner, 2008. "Rethinking the effects of financial liberalization," 2008 Meeting Papers 747, Society for Economic Dynamics.
  4. Jean-Pierre Allegret & Alain Sand-Zantman, 2009. "Modeling the Impact of Real and Financial Shocks on Mercosur: The Role of the Exchange Rate Regime," Open Economies Review, Springer, Springer, vol. 20(3), pages 359-384, July.
  5. Mercado, Rogelio & Park, Cyn-Young, 2011. "What Drives Different Types of Capital Flows and Their Volatilities in Developing Asia?," Working Papers on Regional Economic Integration, Asian Development Bank 84, Asian Development Bank.
  6. Remberto Rhenals & Alejandro Torres, 2007. "Volatilidad de los flujos de capital hacia los países en desarrollo: evidencia para América Latina, 1970-2002," REVISTA LECTURAS DE ECONOMÍA, UNIVERSIDAD DE ANTIOQUIA - CIE.
  7. Partha Sen, 2007. "Capital Inflows, Financial Repression And Macroeconomic Policy In India Since The Reforms," Working papers, Centre for Development Economics, Delhi School of Economics 157, Centre for Development Economics, Delhi School of Economics.
  8. Dong He & Lillian Cheung & Wenlang Zhang & Tommy Wu, 2012. "How would Capital Account Liberalisation Affect China's Capital Flows and the Renminbi Real Exchange Rates?," Working Papers 092012, Hong Kong Institute for Monetary Research.
  9. Gozgor, Giray & Erzurumlu, Yaman O., 2010. "Causality relations between foreign direct investment and portfolio investment volatility," MPRA Paper 34352, University Library of Munich, Germany.
  10. Paolo Mauro & Andrei A. Levchenko, 2006. "Do Some Forms of Financial Flows Help Protect From Sudden Stops?," IMF Working Papers 06/202, International Monetary Fund.
  11. Neumann, Rebecca M. & Penl, Ron & Tanku, Altin, 2009. "Volatility of capital flows and financial liberalization: Do specific flows respond differently?," International Review of Economics & Finance, Elsevier, Elsevier, vol. 18(3), pages 488-501, June.
  12. Gan-Ochir Doojav & Borkhuu Gotovsuren & Tsenddorj Dorjpurev, 2012. "Financial Contagion and Volatile Capital Flows," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ56, June.
  13. repec:ebl:ecbull:v:6:y:2008:i:3:p:1-10 is not listed on IDEAS

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