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Capital flows, country risk, and contagion


  • Fiess, Norbert


It has been widely recognized that both country-specific and global factors matter in explaining capital flows. The author presents an empirical framework that disentangles the relative weight of country-specific and global factors in determining capital flows. In essence, his approach first separates the common component of emerging country spreads from their country-specific component. The pure country risk and global risk components are then used as explanatory variables to account for the observed pattern of capital flows using multivariate cointegration analyses. The author is able to identify the relative weight of global and country-specific factors in explaining capital flows to Argentina, Brazil, Mexico, and Venezuela in the 1990s. When further decomposing country risk into its determinants, the author finds that within a small system it is possible to jointly identify the determinants of capital flows and sovereign bond spreads. We find that capital flows are driven by country risk and global factors ("contagion"and U.S. long-term interest rates), while country risk is determined by the primary balance-to-GDP ratio (-) and the ratio of public debt to GDP (+).

Suggested Citation

  • Fiess, Norbert, 2003. "Capital flows, country risk, and contagion," Policy Research Working Paper Series 2943, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2943

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    References listed on IDEAS

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    Cited by:

    1. Perry, Guillermo & Serven, Luis, 2003. "The anatomy of a multiple crisis : why was Argentina special and what can we learn from it?," Policy Research Working Paper Series 3081, The World Bank.
    2. Hildegart A. Ahumada & Maria Lorena Garegnani, 2005. "Testing the Exogeneity of Argentine Devaluation and Default Risks in Retrospect," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(5), pages 647-672, October.
    3. Wildmann, Christian, 2010. "What drives portfolio investments of German banks in emerging capital markets?," Discussion Paper Series 2: Banking and Financial Studies 2010,04, Deutsche Bundesbank.
    4. Alina Kudina & Oleksandr Lozovyi, 2007. "Determinants of Portfolio Flows into CIS Countries," CASE Network Studies and Analyses 0354, CASE-Center for Social and Economic Research.
    5. Vladimir Kühl Teles & Maria Carolina da Silva Leme, 2006. "Fundamentals Or Discrimination: What Causes Country Risk?," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 60, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    6. Agosin, Manuel R. & Huaita, Franklin, 2012. "Overreaction in capital flows to emerging markets: Booms and sudden stops," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1140-1155.
    7. Hamidreza Tabarraei, 2014. "Euro-Crisis and Spillover Effects on the Emerging Economies," PSE Working Papers halshs-00952153, HAL.
    8. Louise Allsopp, 2003. "Speculative behaviour, debt default and contagion: A stylised framework of the Latin American Crisis 2001-2002," Reserve Bank of New Zealand Discussion Paper Series DP2003/10, Reserve Bank of New Zealand.
    9. Alfonso Mendoza, 2004. "Modelling long memory and risk premia in Latin American sovereign bond markets," Money Macro and Finance (MMF) Research Group Conference 2003 65, Money Macro and Finance Research Group, revised 13 Oct 2004.
    10. San-Martín-Albizuri, Nerea & Rodríguez-Castellanos, Arturo, 2012. "Globalisation And The Unpredictability Of Crisis Episodes: An Empirical Analysis Of Country Risk Indexes / La Imprevisibilidad De Los Episodios De Crisis: Un Análisis Sobre Los Índices De Riesgo País ," Investigaciones Europeas de Dirección y Economía de la Empresa (IEDEE), Academia Europea de Dirección y Economía de la Empresa (AEDEM), vol. 18(2), pages 148-155.
    11. Vladimir Kuhl Teles & Maria Carolina Leme, 2010. "Fundamentals or market sentiment: what causes country risk?," Applied Economics, Taylor & Francis Journals, vol. 42(20), pages 2577-2585.
    12. Christian Wildmann, 2011. "What drives portfolio investments of German banks in emerging capital markets?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 25(2), pages 197-231, June.
    13. Franklin Huaita & Manuel Agosín Trumper, 2007. "Why Should Emerging-Market Countries (Still) Concern Themselves With Capital Inflows?," Working Papers wp268, University of Chile, Department of Economics.
    14. World Bank, 2003. "Brazil : Stability for Growth and Poverty Reduction," World Bank Other Operational Studies 14881, The World Bank.
    15. Jorge Selaive C. & Valentín Délano T., 2006. "Sovereign Spreads: A Factorial Approach," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(1), pages 49-67, April.
    16. Andreas Hauskrecht & Nhan Le, 2005. "Capital Account Liberalization for a Small, Open Economy," Working Papers 2005-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    17. Javier Díaz-Cassou & Alicia García-Herrero & Luis Molina, 2006. "What kind of capital flows does the IMF catalyze and when?," Working Papers 0617, Banco de España;Working Papers Homepage.
    18. Anton Jevcak & Ralph Setzer & Massimo Suardi, 2010. "Determinants of Capital Flows to the New EU Member States Before and During the Financial Crisis," European Economy - Economic Papers 2008 - 2015 425, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    19. Sfia, Mohamed Daly, 2007. "Régimes de change: Le chemin vers la flexibilité," MPRA Paper 4085, University Library of Munich, Germany.


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