The Volatility of Capital Flows in Emerging Markets: Measures and Determinants
IMF Working Papers, March 7, 2017
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Bibliographic details
- Authors: Maria Sole Pagliari, Swarnali A Hannan
- Published: March 7, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475585254.001
Summary
- Authors: Maria Sole Pagliari, Swarnali A Hannan
- Date: March 7, 2017
- Core objective: Analyze capital flow volatility in emerging markets in two dimensions:
- Construct three measures of volatility for total capital flows and key instruments.
- Perform panel regressions to identify determinants of volatility.
- Sample and period: quarterly data for 65 countries over the period 1970Q1-2016Q1.
- Primary finding: Volatility of all instruments is prone to bouts, rising sharply during global shocks like the taper tantrum episode.
- Policy relevance: Capital flow volatility remains a challenge for policy makers; characteristics of volatility can differ from those of flow levels.
Data and volatility measures
- Sample: 65 countries.
- Frequency and coverage: quarterly data spanning 1970Q1-2016Q1.
- Measures constructed: three measures of volatility (for total capital flows and key instruments).
Key empirical findings
- Volatility behavior:
- All instruments exhibit bouts of heightened volatility.
- Volatility rises sharply during global shocks (example cited: the taper tantrum episode).
- Distinction between levels and volatility:
- Regression results indicate that determinants of volatility differ from determinants of flow levels.
- Role of factors:
- Push factors can be more important than pull factors in explaining volatility.
Methodology (overview)
- Approach: construction of volatility measures followed by panel regressions to assess determinants.
- Instruments analyzed: total capital flows and key instruments (instrument-level measures constructed; specifics in full paper).
Policy implications and interpretation
- Capital flow volatility poses macroeconomic and financial stability concerns for emerging markets.
- Because push factors may dominate pull factors in driving volatility, policies focusing solely on domestic (pull) conditions may be insufficient to mitigate volatility.
- Policymakers should account for global shock transmission when designing macroeconomic and financial stability frameworks.