Why Should Emerging-Market Countries (Still) Concern Themselves With Capital Inflows?

Franklin Huaita () and Manuel Agosin

Working Papers from University of Chile, Department of Economics

Abstract: This paper develops a simple analytic framework to analyze the effects of capital surges and sudden stops in the financial account of the balance of payments in emerging economies. In this model, capital inflows are largely exogenous to the recipient economies, they are very large when scaled to the size of the domestic financial sectors of recipients, and have large real effects. They also sow the seeds for the ensuing sudden stops, or capital flow reversals, observed in recent financial crises in emerging markets. Sudden stops can have devastating effects on output, growth, and employment. The paper goes on to test the main hypothesis derived from the model with an econometric analysis of capital surges and sudden stops using a panel-probit framework with heterogeneous unobserved country effects. While capital surges can be triggered by a number of domestic or foreign signals, the main variables that account for sudden stops are preceding capital surges, the size of the current account deficit, and contagion from sudden stops in other emerging markets. The main policy conclusion is that emerging economies need specific policies to deal with capital surges, which are largely exogenous to them.

Keywords: Capital Flows; Sudden Stops; Capital Surges; Contagion; Financial Crises; Current Account Balance. (search for similar items in EconPapers)
JEL-codes: F30 F32 F39 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2007-11
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Persistent link: https://EconPapers.repec.org/RePEc:udc:wpaper:wp268

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