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Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?

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  • Barry Eichengreen
  • Ashoka Mody

Abstract

Qualitative accounts have long emphasized the level of interest rates in the advanced industrial countries as a determinant of capital flows to emerging markets and spreads on external debt. Curiously, econometric studies relying on disaggregated data have lent little support to this hypothesis. Upon modelling the issue and pricing decisions jointly, we confirm that global credit conditions have an important impact on the market for developing‐country debt. US rates have a negative impact on the demand by international investors for fixed‐rate issues by Latin American borrowers, as predicted by the search‐for‐yield hypothesis. The same effect is apparent for East Asian floating‐rate issues, although the evidence there is not as robust. But, whatever the region, this effect is evident only upon controlling for the impact of US interest rates on the decision of developing‐country borrowers to issue debt.

Suggested Citation

  • Barry Eichengreen & Ashoka Mody, 1998. "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?," International Finance, Wiley Blackwell, vol. 1(1), pages 35-57, October.
  • Handle: RePEc:bla:intfin:v:1:y:1998:i:1:p:35-57
    DOI: 10.1111/1468-2362.00003
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