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Dynamic Capital inflow transmission of monetary policy to emerging markets

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  • Olani, Adugna

Abstract

This paper analyzes the dynamic and size effects of the U.S. monetary policy shock, a proxy for advanced economies' monetary policy shock, as well as domestic monetary and exchange rate shocks on gross foreign direct and portfolio investment in flows to emerging markets. It uses panel and country-specific structural vector auto-regressions to analyze and compare the dynamic, size, and differential impacts of the shocks on each in ow category. Foreign direct investment in ow's response to policy shocks is weak but persistent while that of foreign portfolio investment is strong and on impact. The implication is that macro-prudential and capital control policies may be more effective when they are directed at portfolio in flows. In addition to providing a richer dynamic structure, the use of structural vector auto-regressions provides a clearer comparison of "push" and "pull" factors on financial flows via forecast error variance decomposition. Although the U.S. monetary policy explains a significant variation in both gross in flows, this paper does not find a consistent evidence of "push" over "pull" factors in either capital in ow type or across the countries.

Suggested Citation

  • Olani, Adugna, 2016. "Dynamic Capital inflow transmission of monetary policy to emerging markets," Queen's Economics Department Working Papers 274684, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274684
    DOI: 10.22004/ag.econ.274684
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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