Evolution of global factors in emerging market capital flows

Neha Verma ()
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Neha Verma: Kirori Mal College, University of Delhi

Economics Bulletin, 2026, vol. 46, issue 3, 1100 - 1108

Abstract: This paper examines whether the role of global factors in driving capital inflows has changed structurally in the past decades for Emerging Market and Developing Economies (EMDEs) by decomposing the capital flows into global, regional, and country-specific components using a dynamic factor model (DFM). A block-structured DFM shows that Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) inflows respond differently to global economic and financial conditions, with FDI being associated with policy-uncertainty shocks and FPI with financial-market sentiment. Moreover, the contribution of the global factor to capital flow variance exhibits statistically significant structural breaks post the Global Financial Crisis (GFC), with a persistent decline in FPI and a partial recovery in FDI. The results indicate a structural shift in the dynamics of EMDE capital flows following the GFC, with distinct patterns across long-term (FDI) and short-term (FPI) flows.

Keywords: Global Factors; Capital Flows; Global Financial Cycle (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2026-09-30
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