Causes of capital flows in developing countries

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67 Scopus citations

Abstract

This paper investigates the causes of capital flows in four developing countries: Mexico, Chile, Korea, and Malaysia. Using structural decomposition analysis, it finds that the recent resurgence in capital movements is largely due to external reasons such as decreases in the world interest rate or recession in industrial countries. Domestic factors, including country-specific productivity shocks and demand shocks, are relatively less important. Another interesting finding is that the fundamental causes of capital flows differ little across the countries under study. These results suggest that developing countries need to pay attention to the financial arrangements associated with capital flows and to exchange rate policy as well as macroeconomic fundamentals to avoid financial crises in a world of increased capital mobility.

Original languageEnglish
Pages (from-to)235-253
Number of pages19
JournalJournal of International Money and Finance
Volume19
Issue number2
DOIs
StatePublished - Apr 2000

Bibliographical note

Funding Information:
I would like to thank two anonymous referees and the Editor of the Journal for helpful comments and suggestions. This research was supported by a summer research grant from the Carol Martin Gatton College of Business and Economics at the University of Kentucky. The grant was made possible by a donation of funds to the College by Ashland Inc.

Keywords

  • Capital flows
  • External and domestic factors
  • Structural decomposition

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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