Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility

Philippe Bacchetta and Eric van Wincoop

No 6530, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper analyzes the impact of financial liberalizations and reforms in emerging markets on the dynamics of capital flows to these markets, using a simple model of international investors' behavior. We first show that the gradual nature of liberalizations, combined with the cost of absorbing large inflows in emerging economies, leads to rich dynamics of capital flows and often implies an initial period of overshooting as portfolios adjust. Asset prices will overshoot as well. Second, we show that if investors have incomplete information about new emerging markets, and learn over time, there can be high volatility of capital flows as well as contagion. Finally, we provide numerical estimates of long run capital inflows to emerging market economies and compare them to actual inflows. This gives a good indicator of upcoming crisis situations.

JEL-codes: F21 F32 (search for similar items in EconPapers)
Date: 1998-04
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (72)

Published as Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility , Philippe Bacchetta, Eric van Wincoop. in Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies , Edwards. 2000

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Related works:
Chapter: Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility (2000)
Working Paper: Capital Flows to Emerging Markets: Liberalization, Overshooting and Volatility (1998)
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