Capital Flows Cycle: Stylized Facts and Empirical Evidences for Emerging Market Economies

Helio Mori and Marcelo Muinhos

No 98, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: In the 1990s, several emerging market countries have faced a cycle of large capital inflows followed by sharp reversals. This cycle occurred almost simultaneously to groups of these economies. Studies on this issue have restricted mostly to reversals, while this paper includes the phase of inflows to study the behavior of affected economies related to them, concerning developments of macroeconomic variables. Empirical tests showed that, initially, during inflow phase, countries had experienced strong GDP growth; but then, with reversal, GDP contracted steeply. Inflows helped to stabilize inflation while, for economies with less flexible exchange regimes, reversals forced some of them to let their currency float, causing sharp depreciation and acceleration of inflation. Large inflows might have produced distortions in the affected economies that contributed to severe adjustments with reversals. In this process of inflow-reversal, external factors beyond the control of emerging markets could have a role.

Date: 2005-08
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