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Distance and beyond: What drives financial flows to emerging economies?

Eleonora Cavallaro () and Eleonora Cutrini ()

Economic Modelling, 2019, vol. 81, issue C, 533-550

Abstract: A major theme in the empirical literature is whether country-specific ‘pull’ or external ‘push’ factors drive international capital flows. In this paper we show that pull-push interactions matter: the response of international investors to country-specific developments depends on global volatility/liquidity stress conditions. We model asset-trade behaviour of investors: with limited information, strong institutional quality ‘pulls’ asset demand; mounting tensions in global markets amplify portfolio adjustments. We derive an empirically testable equation for cross-border bank flows to emerging economies (EMEs) and focus on pull-push interactions that trigger financial vulnerabilities. We find that global volatility amplifies demand for institutional quality, prior to the recent crisis, implying that EMEs with weak institutional settings are exposed to sharp capital retrenchments. In the aftermath of the crisis, the liquidity easing in advanced economies drives down concerns for EMEs' developments, boosting flows and challenging EMEs' ability to use capital controls to mitigate unbridled flows.

Keywords: Asset trade; International financial flows; Pull-push interaction; Distance; Institutional quality; Emerging markets; Capital controls (search for similar items in EconPapers)
JEL-codes: F12 F3 F4 G1 O5 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.econmod.2018.06.001

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