Volume 48

Journal of International Money and Finance

Volume 48, Part B,November 2014, Pages 221-248

Capital flows to emerging market economies: A brave new world?

We study the determinants of private capital flows to emerging markets.

Growth and interest rate differentials and global risk appetite are key factors.

Net inflows became more sensitive to interest differentials after the 2008 crisis.

Capital controls introduced in recent years discouraged both net and gross inflows.

We find positive effects of Fed LSAPs on net and, especially, gross inflows.

We examine the determinants of net private capital inflows to emerging market economies (EMEs) since 2002. Our main findings are: First, growth and interest rate differentials between EMEs and advanced economies and global risk appetite are statistically and economically important determinants of net private capital inflows. Second, there have been significant changes in the behavior of net inflows from the period before the recent global financial crisis to the post-crisis period, especially for portfolio inflows, partly explained by the greater sensitivity of such flows to interest rate differentials since the crisis. Third, capital controls introduced in recent years do appear to have discouraged both total and portfolio net inflows. Finally, we find positive effects of unconventional U.S. monetary policy on EME inflows, especially portfolio inflows. Even so, U.S. unconventional policy is one among several important factors influencing flows.

The views in this paper are solely the responsibility of the authors and should not be interpreted as representing the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System.

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