Capital market inflation in emerging markets: The case of Brazil and South Korea

This paper aims to investigate the dynamics of capital markets in emerging markets in a period of financial integration. It takes the case of Brazil and South Korea, two key emerging markets in the global economy, to assess the relationship between capital flows and equity prices. This is analysed through Jan Toporowski’s theory of “capital market inflation”, which explains the movements of equity prices in relation to the inflows of funds into the capital market. The main argument put forward is that the foreign capital inflows into the emerging equity markets have substantially concurred to create the excess liquidity that gives rise to a process of capital market inflation. This contributes both to extend Toporowski’s theory to the context of emerging financially open countries, and to give a new perspective to the debates over financial globalisation by proposing the theory of capital market inflation as a framework to understand the mechanics of capital flows to emerging markets. The empirical evidence available from Brazil and South Korea suggests that this is a consistent and instructive framework of analysis.