Increasing integration in international financial markets exposes emerging economies (EMEs) to the global financial cycle and to foreign investors' appetite, putting their stability at risk. Capital flows toward EMEs are also dependent on domestic factors, such as economic policy implementation. This work empirically analyses the relationship between capital flows toward EMEs and their global and domestic determinants over the last 25 years.
Our results show that the sensitivity of capital flows to domestic and global factors has changed over time. After the financial crisis, domestic factors became less important. Starting from May 2013, the perception of the imminent end of the Fed's non-conventional monetary policies has enhanced the sensitivity to both global and domestic factors. Moreover, the variability of flows has increased and, consequently, so have the risks for EME's financial stability.
Forthcoming in: International Finance.
