Capital Flows to Emerging Markets: Liberalization, Overshooting and Volatility

Philippe Bacchetta and Eric van Wincoop

No 1889, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The paper analyses the impact of financial liberalization and reform in emerging markets on the dynamics of capital flows to these markets, using a simple model of international investors’ behaviour. We first show that the gradual nature of liberalization, combined with the cost of absorbing large inflows in emerging eonomies, leads to rich dynamics of capital flows and often implies an initial period of overshooting as portfolios adjust. Asset prices will also overshoot. Second, we show that, if investors have incomplete information about new emerging markets, and learn over time, there can be high volatility of capital flows and contagion. Finally, we provide numerical estimates of long-run capital inflows to emerging market economies and compare them to actual inflows. This gives a good indicator of upcoming crisis situations.

Keywords: Emerging Markets; Liberalization; Volatility (search for similar items in EconPapers)
JEL-codes: F21 F32 (search for similar items in EconPapers)
Date: 1998-05
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Citations: View citations in EconPapers (78)

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Related works:
Chapter: Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility (2000)
Working Paper: Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility (1998)
Working Paper: Capital flows to Emerging Markets: Liberalization, Overshooting, and Volatility (1998)
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