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Capital Flows and Emerging Markets Fluctuations

Jorge Lorca

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: In the spirit of Rey’s (2015) global financial cycle hypothesis, we estimate a factor model of portfolio capital flows into emerging market economies (EME). Beyond determining the number of statistically relevant factors, we uncover the effects of U.S. interest rates, risk aversion, and commodity price fluctuations onto such estimated model. We use our estimated factors in a factoraugmented VAR in order to figure out the effects of mild fluctuations of capital flows into the macroeconomic performance of a sample of middle-income emerging economies. A shock to the common component of capital flows explains about a third of aggregate activity across our country sample.

Date: 2021-01
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