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The dynamics of international capital flows: Results from a dynamic hierarchical factor model

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  • Förster, Marcel
  • Jorra, Markus
  • Tillmann, Peter

Abstract

The present paper examines the degree of comovement of gross capital inflows, which is a highly sensitive issue for policy makers. We estimate a dynamic hierarchical factor model that is able to decompose inflows in a sample of 47 economies into (i) a global factor common to all types of flows and all recipient countries, (ii) a factor specific to a given type of capital inflows, (iii) a regional factor and (iv) a country-specific component. We find that the latter explains by far the largest fraction of fluctuations in capital inflows followed by regional factors, which are particularly important for emerging markets' FDI and portfolio inflows as well as bank lending to Emerging Europe. The global factor, however, explains only a small share of the overall variation. We also employ dynamic panel and time series regressions to explain the determinants of the estimated components. The global factor is shown to reflect U.S. financial conditions.

Suggested Citation

  • Förster, Marcel & Jorra, Markus & Tillmann, Peter, 2014. "The dynamics of international capital flows: Results from a dynamic hierarchical factor model," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 101-124.
    • Handle: RePEc:eee:jimfin:v:48:y:2014:i:pa:p:101-124
    DOI: 10.1016/j.jimonfin.2014.07.004
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    More about this item

    Keywords

    Capital flows; Dynamic hierarchical factor model; Emerging economies; Financial crises;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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