Global financial conditions, capital flows and the exchange rate regime in emerging market economies

Dong Lu, Jialin Liu and Hang Zhou

Journal of International Financial Markets, Institutions and Money, 2022, vol. 77, issue C

Abstract: We examine if the sensitivity of private capital flows to global financial conditions varies across exchange rate regimes by focusing on 43 emerging market economies. We find that the flexible exchange rate regime stabilizes capital flows when the global risk aversion is low, particularly for gross liability flows; however, it fails to play such a role when the global risk aversion is high. We also show that larger covered interest parity deviations would amplify the impact of global risk aversion, which explains the failure of flexible exchange rate regimes during high global risk aversion periods.

Keywords: Global financial conditions; Capital flows; Emerging market economies; Exchange rate regimes; Covered interest rate parity (search for similar items in EconPapers)
JEL-codes: F31 F36 F41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:77:y:2022:i:c:s1042443121002043

DOI: 10.1016/j.intfin.2021.101500

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