Emerging market capital flows and U.S. monetary policy

Abstract

This paper analyzes the drivers of net private capital flows to emerging market economies (EMEs), focusing in particular on the policies of the Federal Reserve. We argue that the role of the Federal Reserve in EME capital flows has been smaller than popularly believed. We first show that the run‐up in capital flows to EMEs predated the loosening of Fed policy, while flows slowed substantially between 2010 and 2015, even as the Fed's quantitative easing program continued to add to monetary stimulus. Both the initial surge in capital flows to EMEs and their subsequent decline are better explained by swings in commodity prices and EME output growth, a linkage which we confirm through panel data regressions on capital flows to 20 major EMEs. The anticipation of the normalization of Federal Reserve policy appears not to have played a predominant role in the decline of capital flows to EME between 2010 and 2015.

Extreme capital flow episodes from the Global Financial Crisis to COVID-19

“…First, surges are very poorly explained by global factors even in the pre-GFC period for advanced economies, while they do explain EME surges. Second, the drop of explanatory power of monetary policy post-GFC is specific to EMEs and is in contrast to the widely held conclusion that advanced economies monetary policy led to the taper tantrum sudden stops in EM, and more in line with recent reconsideration of the role played by US monetary policy during the taper tantrum (Clark et al, 2020). Third, the new role of oil prices in explaining stops is specific to EMEs, which thus be more sensitive to oil and commodity cycles.…”

Capital flows to low-income sub-Saharan Africa: an exploratory review

“…Given that many developing economies are commodity exporters, commodity prices have been found to play a role in influencing foreign investment in these countries. For example, Clark et al (2016) found a significant and positive relationship between changes in commodity prices and net capital inflows in emerging market economies. Figure 4 illustrates a strong relationship between commodity prices and capital inflows to low-income SSAn countries.…”

Emtia Oynaklık Endeksleri ve Fed Faiz Oranlarının Gelişen Ülkelerin Borsa Endekslerine Etkisi

“…Source: Data stream, FRED Federal Reserve Bank International portfolio investments (according to direct investments and other investments) are capital flows that are most sensitive to interest rate which are determined by the central banks of developed countries (Lim and Mohapatra, 2016). In mid 2013, the forecast of an increase in FED's interest rates has caused the loss of asset prices and the capital inflow for developing countries (Clark et al, 2016). Developing countries have been directly affected from the developed countries' monetary policies.…”

“…Graph-1 depicts the time series of OVX, GVZ, VIX and the FED effective funds rates over the years. The changes in the VIX which is considered as a risk measure in the global sense (Siriopoulos ve Fassas, 2012;Clark et al, 2016;Kurt-Cihangir, 2018) is one of the primary aspect influencing the decisions of the financial units. An increase in VIX that means an increase in the perception of risk in the global sense, in which case, the financial units show a tendency towards more stable markets/investment instruments.…”

“…Therefore, spillover effects of applied monetary policy by the central banks of the developed countries -especially FED-is a process that should be carefully managed. It is important to determine the effect of monetary policies -implemented by the developed countries-on the capital flows towards the developing countries (Fratzscher, et al, 2013;Broner et al, 2013;Janus and Riera-Crichton, 2013;Lim and Mohapatra 2016;Clark et al, 2016), as it will cause changes on the economic indicators and the asset prices of developing countries.…”