SUSTAINED CAPITAL FLOWS TO EMERGING MARKET ECONOMIES

Abstract

A recurrent pattern in international economics is abundant global liquidity and capital flows, followed by monetary policy tightening and capital outflows from emerging markets (EMs). This pattern often results in exchange rate instability, balance of payment problems, and financial turbulences in EMs. This study aims to identify the determinants of sustained capital flows to EMs. To this end, episodes of sustained capital flows above a threshold value are used as binary variables in constructing a complementary logarithmic framework. The results indicate that to preserve capital inflows, EMs should maintain stable and positive gross domestic product (GDP) growth, restrain exchange rate volatility, and hold interest rates low. External factors, such as GDP growth rates and interest rates in developed countries, also affect capital flows to EMs. While EMs cannot affect external variables, maintaining a sound macroeconomic environment at home would insulate them from the financial turbulences generated by global factors.

Keywords

• Capital flows
• financial stability
• emerging markets

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