Global Financial Shocks and Foreign Asset Repatriation: Do Local Investors Play a Stabilizing Role?

IMF Working Papers, April 16, 2014

Source details

Canonical URL: Global Financial Shocks and Foreign Asset Repatriation: Do Local Investors Play a Stabilizing Role?

Study objective: Examine the dynamic response of gross capital flows in emerging market economies to different global financial shocks, focusing on whether domestic investors offset the response of foreign investors.
Empirical approach: Panel vector-autoregressive (PVAR) setting.
Authors: Gustavo Adler, Marie-Louise Djigbenou, Sebastian Sosa.
Date: April 16, 2014.

Framework: Panel vector-autoregressive (PVAR) to identify responses of gross capital flows to global financial shocks.
Focus variables: Gross capital flows, resident (local) investor behavior, non-resident (foreign) investor behavior.
Types of global shocks analyzed:
- Global uncertainty shocks.
- Shocks to long-term U.S. interest rates.
- Short-term U.S. interest rate shocks.

Evidence of a stabilizing role for local investors exists, but its presence and magnitude depend on the nature of the shock.
Global uncertainty shocks:
- Local investors play a meaningful stabilizing role.
- Sizeable asset repatriation by residents largely offsets the retrenchment of non-residents.
Shocks to long-term U.S. interest rates:
- Local investors also play a stabilizing role, but the extent of offsetting is much more limited compared with global uncertainty shocks.
Short-term U.S. interest rate shocks:
- Residents and non-residents behave alike, both pulling capital away from emerging markets.
- Magnitudes of responses to short-term rate shocks are not economically significant.
Broader implication:
- Results shed light on the potential impact of the Fed’s QE tapering on emerging market economies.

The stabilizing capacity of domestic investors is shock-specific:
- Policymakers should consider the type of global shock when assessing vulnerability and designing responses.
For global uncertainty episodes:
- Domestic asset repatriation can provide substantial offset to foreign investor retrenchment, suggesting resilience stemming from resident behavior.
For long-term interest rate shifts:
- Limited resident offset implies emerging markets may remain vulnerable to prolonged shifts in global long-term yields.
For short-term interest rate changes:
- Similar resident and non-resident behavior implies broad-based capital withdrawal tendencies, but small economic magnitudes reduce immediate concerns.