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Dynamic Capital inflow transmission of monetary policy to emerging markets

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  • Adugna Olani

    () (Queen's University)

Abstract

In this paper, I examine the effects of advanced economies' conventional monetary policy on gross foreign direct and portfolio investment inflows to emerging economies. I use structural vector autoregressions to analyse and compare the response of each inflow category to world interest rate and emerging economies' monetary and exchange rate shocks. Gross foreign direct inflows respond slowly to shocks while gross portfolio reacts on impact. Furthermore, the reaction of foreign direct investment to the shocks is not as high. These results suggest that monetary and exchange rate policies of emerging economies influence portfolio inflows more than they impact foreign direct investment in ows. These results also imply the existence of fundamental differences in capital flow categories beyond what we know to date. I address the "push" and "pull" debate in categories capital flows by quantitatively comparing the forecast error variance decomposition. I do not find evidence of "push" over "pull" factors in either class of inflows.

Suggested Citation

  • Adugna Olani, 2016. "Dynamic Capital inflow transmission of monetary policy to emerging markets," Working Papers 1358, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1358
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    More about this item

    Keywords

    Monitary Policy; Capital Flows; Emerging Markets; Exchange Rate; Interest Rates;

    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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