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Gross capital inflows and outflows: Twins or distant cousins?

Erdal Özmen and Fatma Taşdemir

Economic Systems, 2021, vol. 45, issue 3

Abstract: We investigate the long-run relations and equilibrium correction mechanisms between gross capital inflows, outflows and global financial conditions for advanced (AE) and emerging market economies (EME). According to our results, the puzzling findings of the recent literature suggesting that domestic and foreign investors act as distant cousins, leading to capital inflows and outflows to act as twins, tend to be supported for the long run. The short-run relations, however, often appear to be consistent with the conventional theory suggesting that the behaviors of residents and non-residents do not systematically diverge from each other. Consistent with flight to safety concerns, capital outflows from EME and capital inflows to AE tend to increase in the long run in response to worsening global financial conditions. We find that these results essentially hold for the main components of capital flows as well.

Keywords: Advanced economies; Cointegration; Emerging market economies; Foreign direct investment; Gross capital flows; Portfolio flows (search for similar items in EconPapers)
JEL-codes: F21 F30 F32 G01 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.ecosys.2021.100881

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