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Capital flows to emerging economies: Minsky in the tropics

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  • Manuel R. Agosin
  • Franklin Huaita

Abstract

Capital inflows to emerging economies have a significant exogenous component, they are very large when scaled to the size of the domestic financial sectors of recipients and they have large real macroeconomic effects. They also sow the seeds for the ensuing sudden stops, or capital flow reversals, observed in financial crises in emerging markets. This paper tests the implications of applying the Kindleberger--Minsky model of financial crises to capital account reversals in emerging economies, or sudden stops as they have been called in the recent literature. It uses a panel-probit framework with heterogeneous unobserved country effects. The most important variables that account for sudden stops are preceding capital surges, the share of flows other than foreign direct investment, the size of the current account deficit, contagion from sudden stops in other emerging markets and the ratio of external debt to exports. The main policy conclusion is that emerging economies need specific policies to deal with capital surges. In addition, macroeconomic policies geared toward preserving sustainable macroeconomic balance may be necessary to avoid sudden stops but they are clearly insufficient. Copyright The Author 2010. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

Suggested Citation

  • Manuel R. Agosin & Franklin Huaita, 2011. "Capital flows to emerging economies: Minsky in the tropics," Cambridge Journal of Economics, Oxford University Press, vol. 35(4), pages 663-683.
  • Handle: RePEc:oup:cambje:v:35:y:2011:i:4:p:663-683
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    File URL: http://hdl.handle.net/10.1093/cje/beq047
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    2. Seung-Gwan Baek & Chi-Young Song, 2016. "On the Determinants of Surges and Stops in Foreign Loans: An Empirical Investigation," Open Economies Review, Springer, vol. 27(3), pages 405-445, July.
    3. Kohler, Karsten, 2019. "Exchange rate dynamics, balance sheet effects, and capital flows. A Minskyan model of emerging market boom-bust cycles," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 270-283.
    4. Calderón, César & Kubota, Megumi, 2019. "Ride the Wild Surf: An investigation of the drivers of surges in capital inflows," Journal of International Money and Finance, Elsevier, vol. 92(C), pages 112-136.
    5. Agosin, Manuel R. & Díaz, Juan D. & Karnani, Mohit, 2019. "Sudden stops of capital flows: Do foreign assets behave differently from foreign liabilities?," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 28-36.
    6. Masyita Crystallin & Levan Efremidze & Sungsoo Kim & Wahyu Nugroho & Ozan Sula & Thomas Willett, 2015. "How Common are Capital Flows Surges? How They are Measured Matters -a Lot," Open Economies Review, Springer, vol. 26(4), pages 663-682, September.
    7. Keilla Dayane Silva-Oliveira & Edson Keyso Miranda Kubo & Michael J. Morley & Rodrigo Médici Cândido, 2021. "Emerging Economy Inward and Outward Foreign Direct Investment: A Bibliometric and Thematic Content Analysis," Management International Review, Springer, vol. 61(5), pages 643-679, October.
    8. Robin Boudias, 2014. "Capital Inflows, Exchange Rate Regimes and Credit Dynamics in Emerging Market Economies," Working Papers 2014-17, CEPII research center.
    9. Stefanos Ioannou, 2017. "Credit Rating Downgrades and Sudden Stops of Capital Flows in the Eurozone," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-36, October.
    10. Eller, Markus & Huber, Florian & Schuberth, Helene, 2020. "How important are global factors for understanding the dynamics of international capital flows?," Journal of International Money and Finance, Elsevier, vol. 109(C).
    11. Seung-Gwan Baek & Chi-Young Song, 2019. "What Drives Stops in Cross-Border Bond Flows?," Sustainability, MDPI, vol. 11(14), pages 1-21, July.
    12. Manuel R. Agosin, 2013. "Un Fondo Monetario Latinoamericano: Dimensiones Requeridas y Modalidades," Documentos de Discusión FLAR 011017, Fondo Latino Americano de Reservas - FLAR.
    13. Nderitu Kingori, 2016. "Market Structure, Macroeconomic Shocks, and Banking Risk in Kenya," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 1(2), pages 81-113, December.

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