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Estimating the determinants of capital flows to emerging market economies: a maximum likelihood disequilibrium approach

  • Felices, Guillermo

    (Bank of England)

  • Orskaug, Bjorn-Erik

    (Bank of England)

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    This paper studies the determinants of capital flows defined as gross external bond and syndicated loan issuance to a group of emerging market economies (EMEs) since 1992. We follow the previous literature by estimating an explicit disequilibrium demand and supply model of capital flows using maximum likelihood techniques. We use the estimated supply and demand determinants to calculate time-varying probabilities of international supply-side rationing, estimating the model for the asset class as a whole. We then explore applications to individual EMEs including Brazil, Chile, China, Colombia, Korea, Mexico, Poland and Thailand using a longer time period than in previous work. For our selection of EMEs taken together, the main determinants of the supply of capital from the rest of the world are credit ratings, EME spreads, world growth and US high-yield spreads. On the demand side, the EME equity index has a positive effect on capital flows, while EME spreads and commodity prices have a negative one. The applications to individual countries show similar signs. Finally, we calculate the probability of capital crunch for EMEs in aggregate and for some countries individually.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2008/wp354.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 354.

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    Length: 27 pages
    Date of creation: 24 Nov 2008
    Date of revision:
    Handle: RePEc:boe:boeewp:0354
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    1. Taylor, Mark P & Sarno, Lucio, 1997. "Capital Flows to Developing Countries: Long- and Short-Term Determinants," World Bank Economic Review, World Bank Group, vol. 11(3), pages 451-70, September.
    2. Agenor, Pierre-Richard, 1998. "The Surge in Capital Flows: Analysis of 'Pull' and 'Push' Factors," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(1), pages 39-57, January.
    3. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
    4. Maddala, G S & Nelson, Forrest D, 1974. "Maximum Likelihood Methods for Models of Markets in Disequilibrium," Econometrica, Econometric Society, vol. 42(6), pages 1013-30, November.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "Serial Default and the "Paradox" of Rich to Poor Capital Flows," NBER Working Papers 10296, National Bureau of Economic Research, Inc.
    6. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
    7. Ashoka Mody & Mark P. Taylor, 2013. "International capital crunches: the time-varying role of informational asymmetries," Applied Economics, Taylor & Francis Journals, vol. 45(20), pages 2961-2973, July.
    8. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
    9. Amemiya, Takeshi, 1974. "A Note on a Fair and Jaffee Model," Econometrica, Econometric Society, vol. 42(4), pages 759-62, July.
    10. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    12. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "Inflows of Capital to Developing Countries in the 1990s: Causes and Effects," IDB Publications (Working Papers) 5718, Inter-American Development Bank.
    13. Reinhart, Carmen M. & Rogoff, Kenneth S., 2004. "Serial Default and the “Paradox†of Rich-to-Poor Capital Flows," Scholarly Articles 11129182, Harvard University Department of Economics.
    14. Kiefer, Nicholas M, 1980. "A Note on Regime Classification in Disequilibrium Models," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 637-39, April.
    15. Fair, Ray C & Jaffee, Dwight M, 1972. "Methods of Estimation for Markets in Disequilibrium," Econometrica, Econometric Society, vol. 40(3), pages 497-514, May.
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