Joining the Club? Procyclicality of Private Capital Inflows in Low Income Developing Countries

Author/Editor:

Juliana Dutra Araujo ; Antonio David ; Carlos van Hombeeck ; Chris Papageorgiou

Publication Date:

July 17, 2015

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Using a newly developed dataset this paper examines the cyclicality of private capital inflows to low-income developing countries (LIDCs) over the period 1990-2012. The empirical analysis shows that capital inflows to LIDCs are procyclical, yet considerably less procyclical than flows to more advanced economies. The analysis also suggests that flows to LIDCs are more persistent than flows to emerging markets (EMs). There is also evidence that changes in risk aversion are a significant correlate of private capital inflows with the expected sign, but LIDCs seem to be less sensitive to changes in global risk aversion than EMs. A host of robustness checks to alternative estimation methods, samples, and control variables confirm the baseline results. In terms of policy implications, these findings suggest that private capital inflows are likely to become more procyclical as LIDCs move along the development path, which could in turn raise several associated policy challenges, not the least concerning the reform of traditional monetary policy frameworks.

Series:

Working Paper No. 15/163

Subject:

English

Publication Date:

July 17, 2015

ISBN/ISSN:

9781513508146/1018-5941

Stock No:

WPIEA2015163

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

42

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