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Global financial conditions, capital flows and the exchange rate regime in emerging market economies

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  • Lu, Dong
  • Liu, Jialin
  • Zhou, Hang

Abstract

We examine if the sensitivity of private capital flows to global financial conditions varies across exchange rate regimes by focusing on 43 emerging market economies. We find that the flexible exchange rate regime stabilizes capital flows when the global risk aversion is low, particularly for gross liability flows; however, it fails to play such a role when the global risk aversion is high. We also show that larger covered interest parity deviations would amplify the impact of global risk aversion, which explains the failure of flexible exchange rate regimes during high global risk aversion periods.

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  • Lu, Dong & Liu, Jialin & Zhou, Hang, 2022. "Global financial conditions, capital flows and the exchange rate regime in emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
  • Handle: RePEc:eee:intfin:v:77:y:2022:i:c:s1042443121002043
    DOI: 10.1016/j.intfin.2021.101500
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    More about this item

    Keywords

    Global financial conditions; Capital flows; Emerging market economies; Exchange rate regimes; Covered interest rate parity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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