Taxi, Takeoff and Landing: Behavioural Patterns of Capital Flows to Emerging Markets

Keskinsoy, Bilal (2017): Taxi, Takeoff and Landing: Behavioural Patterns of Capital Flows to Emerging Markets. Forthcoming in: International Economic Journal

Abstract

This paper analyses volatility, persistence, predictability, correlation, comovement (or contagion risk) and sudden stop (reversibility) of capital flows (foreign direct investment (FDI), foreign portfolio equity investment, long-term and short-term debt flows) using time series econometric techniques for 24 emerging economies over 1970-2014. This is informative on the pattern and relationship between capital inflows, with implications for accommodating macroeconomic policies in countries receiving inflows. The paper also addresses the predictions of conventional theory, that differences are associated with the maturity of the capital (long-term vs. short-term), with the information based trade-off model of Goldstein and Razin (2006), that differences are associated with the structure of the capital (equity vs. debt). In line with the latter, equity flows (FDI and portfolio) are less volatile and persistent, more predictable and less susceptible to sudden stops than debt flows. Contrary to conventional theory, short-term flows are not more volatile, but there is evidence that correlations and risks of contagion are strong within all capital flow components.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital flows, Volatility, Persistence, Forecasting, Comovement, Sudden stop
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications; G - Financial Economics > G0 - General > G01 - Financial Crises; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O57 - Comparative Studies of Countries

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