Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence

IMF Working Papers, September 13, 2019

Source details

Canonical URL: Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence

Reassesses the connection between capital account openness and capital flows in an empirical framework grounded in theory.
Uses previously unexplored variation in the data.
Employs theory-consistent regressions that rely on interaction terms between financial openness and traditional push-pull factors to address measurement problems common in the literature.

Focus on interaction terms between financial openness and push-pull factors to obtain theory-consistent estimates.
Emphasis on overcoming ubiquitous measurement problems in cross-country studies by exploiting new variation and model structure.

Finds very few robust relationships between capital account restrictiveness and various types of capital inflows.
Countries with a higher degree of financial openness are more susceptible to some, but by no means all, push and pull factors.
Results are consistent with complex tradeoffs faced by policymakers regarding capital flow volatility, exogenous risks, and potential long run growth effects.

Evidence cautions against over-interpreting existing cross-country correlations between capital account openness and capital inflows.
Policy tradeoffs: the potential benefit of shielding the domestic economy from volatile capital flow cycles must be weighed against sources of exogenous risk and possible long run growth effects.
Suggests careful, nuanced assessment of capital account restrictions rather than broad generalizations based on prior cross-country evidence.

By Diego A. Cerdeiro and Andras Komaromi; IMF Working Paper, September 13, 2019.