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Why are capital flows so much more volatile in emerging than in developed countries?
Broner, Fernando; Rigobon, Roberto
Universitat Pompeu Fabra. Departament d'Economia i Empresa
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.
15-09-2005
Macroeconomics and International Economics
capital flows
emerging countries
volatility
crises
contagion
persistence
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