Determinants of capital flows to emerging and advanced economies between 1990 and 2011

Abstract

The previous and latest crises confirmed that stability of external financing of the economy is determined not only by the volume of capital inflow but also by its structure. It is established that a bias in gross external liabilities towards debt, especially short-term, may rise vulnerability to financial crises. Greater share of equity capital, mainly direct investment is not found to bear such financial risk. The results of Bayesian Model Averaging (BMA) show that influence of variables inherent in macroeconomic and portfolio approaches varies depending on the type of capital inflow and the group of countries. We also find some arguments that equity investment is a more desirable form of foreign capital because debt inflows are more responsive to global factors and therefore more volatile. As a word of caution, we highlight the need for diversification and careful monitoring of external financing sources and forms.

Impact of Interest Rate Differential and Exchange Rate Movement on the Dynamics of Nigeria’s International Private Capital Flows

“…The literature provides evidence on important global and country-specific factors determining capital flows in developing economies (see Taylor & Sarno, 1997;Ç ulha, 2006;Glauco & Kyaw, 2008a;Glauco & Kyaw, 2008b;Brana & Lahet, 2010;Förster et al, 2012;Byrne & Fiess, 2015;Bogdan 2016;Grzegorz et al, 2017) including those relating to the interest rate parity theory (see Dooley, 1988;Wang & He, 2007;Su & Zhang, 2010;Fang, Pei Zhang, 2012;Cheung, Sven, & Frank, 2016;Ning & Zhang, 2018). Also, there are studies for Nigeria in the literature suggesting different determinants of foreign capital flow (Essien & Onwioduokit, 1999;Obida & Abu, 2010;Ibrahim & Omoniyi, 2011;Maghori, 2014;Okereke & Ebulison, 2016;Nwokoye & Oniore, 2017;Nwosa & Adeleke, 2017;Enisan, 2017;Leonard, 2018).…”

“…The study also provides evidence that aggregated and disaggregated capital inflows responds differently to shocks. Grzegorz, et al (2017) applying a Bayesian model averaging (BMA) on thirty-three emerging and nineteen developed economies opined that equity investment is a more desirable form of foreign capital flow since debt inflows are more responsive to global factors and are therefore more volatile. Findings from Grzegorz et al (2017) reveals that the influence of macroeconomic and portfolio related variables on capital flows depends on the type of capital inflow and the group of countries involved, which reinforces the results of Förster, et al (2012) suggesting that global factors and country-specific factors are important for countries with more developed financial systems, and that a fixed exchange rate regime does not impede the dynamics of global capital flows.…”

“…Various scholars have studied the determinants of international capital flows in different countries, including Nigeria (see Taylor & Sarno, 1997;Ç ulha, 2006;Glauco & Kyaw, 2008a;Glauco & Kyaw, 2008b;Brana & Lahet, 2010;Förster, Jorra, & Tillmann, 2012;Byrne & Fiess, 2015;Bogdan 2016;Grzegorz, Brzozowski &Śliwiński, 2017;Maghori, 2014;Obida & Abu, 2010;Ibrahim & Omoniyi, 2011;Essien & Onwioduokit, 1999;Okereke & Ebulison, 2016;Nwosa & Adeleke, 2017;Enisan, 2017;Nwokoye & Oniore 2017;Leonard, 2018). However, the causes of capital reversals in emerging economies, especially the role of interest rate differentials and exchange rate movements, are hardly examined, making it difficult to distinguish between policy actions that reverse or perpetuate outflows and policy actions that sustain or perpetuate inflows.…”

The Influence of Asymmetric Information on Foreign Capital Inflows in Asean Plus Three Countries

“…The liberalisation and globalisation of the world economy in the post Bretton Woods system have led to a rise in cross-border capital flows. Theoretical underpinnings on the relationship between capital flows and economic growth have highlighted the importance of capital flows on the economic development and have been debatable evidences on the determinants of capital flows (Hannan, 2018;Tchorek et al, 2017) which have motivated studies on this issue. Meanwhile, the information asymmetry has been identified as among the important factors that influence capital flows (Gordon & Bovenberg, 1996;Razin et al, 1998;Yousefinejad et al, 2018).…”

“…Similarly, Benić and Franić (2008) asserted that no single measure fully proxies the adverse selection in market because of its multidimensional features. Furthermore, studies by Tchorek et al (2017) and Hannan (2018) emphasised the relative importance of the evolution of both the global and country-specific factors in shaping the capital flow landscape. These factors have varied over time and the effects differ depending on the type of capital flows and the group of countries.…”