Volatility of short term capital flows and socio-political instability in Argentina, Mexico and Turkey

Firat Demir

MPRA Paper from University Library of Munich, Germany

Abstract: The paper analyzes the relationship between financial liberalization and socio-political risk by identifying the inter-dependent nature of socio-political and economic fault lines in three developing countries. Unlike the previous research, the current article suggests that domestic socio-political factors cannot be isolated from the fluctuations taking place in the economic arena. In particular, we examine the effects of short-term capital inflows on the recipient countries by exploring the dynamic relationship between the volatility of such flows and socio-political instability. Accordingly, we endogenize the volatility of short term capital inflows with political risk variables where increasing volatility by disrupting market activities and private investment increases socio-political risk, which further feeds into the volatility of such flows. In the empirical analysis using both the Granger causality tests and a simultaneous-equation approach we uncover a contemporaneous relationship between the volatility of short-term capital inflows and socio-political instability. The results also challenge the previous research regarding their use of political variables as purely exogenous from economic variables. Likewise, the legitimacy of the arguments explaining investor cautiousness vis-à-vis political developments in the developing countries with purely domestic factors also becomes questionable.

Keywords: Capital Account Liberalization; Volatility of Short Term Capital Flows; Socio-Political Instability; Macroeconomic Uncertainty (search for similar items in EconPapers)
JEL-codes: C32 F32 O11 O57 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-cwa and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/6835/1/MPRA_paper_6835.pdf revised version (application/pdf)

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