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Joining the Club? Procyclicality of Private Capital Inflows in Low Income Developing Countries

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  • Juliana Dutra Araujo
  • Antonio David
  • Carlos van Hombeeck
  • Chris Papageorgiou

Abstract

Using a newly developed dataset this paper examines the cyclicality of private capital inflows to low-income developing countries (LIDCs) over the period 1990-2012. The empirical analysis shows that capital inflows to LIDCs are procyclical, yet considerably less procyclical than flows to more advanced economies. The analysis also suggests that flows to LIDCs are more persistent than flows to emerging markets (EMs). There is also evidence that changes in risk aversion are a significant correlate of private capital inflows with the expected sign, but LIDCs seem to be less sensitive to changes in global risk aversion than EMs. A host of robustness checks to alternative estimation methods, samples, and control variables confirm the baseline results. In terms of policy implications, these findings suggest that private capital inflows are likely to become more procyclical as LIDCs move along the development path, which could in turn raise several associated policy challenges, not the least concerning the reform of traditional monetary policy frameworks.

Suggested Citation

  • Juliana Dutra Araujo & Antonio David & Carlos van Hombeeck & Chris Papageorgiou, 2015. "Joining the Club? Procyclicality of Private Capital Inflows in Low Income Developing Countries," IMF Working Papers 15/163, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:15/163
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Juliana D. Araujo & Povilas Lastauskas & Chris Papageorgiou, 2017. "Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1517-1554, October.
    2. Galindo, Arturo J. & Panizza, Ugo, 2018. "The cyclicality of international public sector borrowing in developing countries: Does the lender matter?," World Development, Elsevier, vol. 112(C), pages 119-135.
    3. Juliana Dutra Araujo & Antonio David & Carlos van Hombeeck & Chris Papageorgiou, 2015. "Non-FDI Capital Inflows in Low-Income Developing Countries; Catching the Wave?," IMF Working Papers 15/86, International Monetary Fund.
    4. Gardberg, Malin, 2018. "Linking Net Foreign Portfolio Debt and Equity to Exchange Rate Movements," Working Paper Series 1246, Research Institute of Industrial Economics.
    5. Anita Angelovska–Bezhoska & Ana Mitreska & Sultanija Bojcheva-Terzijan, 2018. "The Impact of the ECB’s Quantitative Easing Policy on Capital Flows in the CESEE Region," Working Papers 2018-04, National Bank of the Republic of North Macedonia.

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