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Volatility of short term capital flows and socio-political instability in Argentina, Mexico and Turkey

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  • Demir, Firat

Abstract

The paper analyzes the relationship between financial liberalization and socio-political risk by identifying the inter-dependent nature of socio-political and economic fault lines in three developing countries. Unlike the previous research, the current article suggests that domestic socio-political factors cannot be isolated from the fluctuations taking place in the economic arena. In particular, we examine the effects of short-term capital inflows on the recipient countries by exploring the dynamic relationship between the volatility of such flows and socio-political instability. Accordingly, we endogenize the volatility of short term capital inflows with political risk variables where increasing volatility by disrupting market activities and private investment increases socio-political risk, which further feeds into the volatility of such flows. In the empirical analysis using both the Granger causality tests and a simultaneous-equation approach we uncover a contemporaneous relationship between the volatility of short-term capital inflows and socio-political instability. The results also challenge the previous research regarding their use of political variables as purely exogenous from economic variables. Likewise, the legitimacy of the arguments explaining investor cautiousness vis-à-vis political developments in the developing countries with purely domestic factors also becomes questionable.

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  • Demir, Firat, 2006. "Volatility of short term capital flows and socio-political instability in Argentina, Mexico and Turkey," MPRA Paper 1943, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:1943
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    Cited by:

    1. Liu, Xuan, 2007. "Trade Openness and the Cost of Sudden Stops: The Role of Financial Friction," MPRA Paper 18260, University Library of Munich, Germany, revised 26 Oct 2009.

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    Keywords

    Capital Account Liberalization; Volatility of Short Term Capital Flows; Socio-Political Instability; Macroeconomic Uncertainty;

    JEL classification:

    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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