Paper #862

Títol:

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

Autors:

Fernando Broner i Roberto Rigobon

Data:

Octubre 2004

Resum:

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.

Paraules clau:

Capital flows, emerging countries, volatility, crises, contagion, persistence

Codis JEL:

F21, F32, F37, G15

Àrea de Recerca:

Macroeconomia i Economia Internacional

Publicat a:

External Financial Vulnerability and Preventive Policies. R. Caballero, C. Calderón, and L. Céspedes (eds.). Eighth Annual Conference of the Central Bank of Chile, 2006

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