Why are capital flows so much more volatile in emerging than in developed countries?

Fernando Broner and Roberto Rigobon

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: The standard deviations of capital flows to emerging countries are 80 percent higher than those to developed countries. First, we show that very little of this difference can be explained by more volatile fundamentals or by higher sensitivity to fundamentals. Second, we show that most of the difference in volatility can be accounted for by three characteristics of capital flows: (i) capital flows to emerging countries are more subject to occasional large negative shocks (“crises”) than those to developed countries, (ii) shocks are subject to contagion, and (iii) – the most important one – shocks to capital flows to emerging countries are more persistent than those to developed countries. Finally, we study a number of country characteristics to determine which are most associated with capital flow volatility. Our results suggest that underdevelopment of domestic financial markets, weak institutions, and low income per capita, are all associated with capital flow volatility.

Keywords: Capital flows; emerging countries; volatility; crises; contagion; persistence (search for similar items in EconPapers)
JEL-codes: F21 F32 F37 G15 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Related works:
Working Paper: Why are Capital Flows so Much More Volatile in Emerging Than in Developed Countries? (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:862

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