Ride the Wild Surf : An Investigation of the Drivers of Surges in Capital Inflows
Over the past 15 years, gross inflows to industrial and developing countries have enjoyed a wild ride. After reaching record highs in the run-up to the global financial crisis, they collapsed dramatically in 2008-09. As signs of global recovery reappeared, capital inflows resumed although at different speeds. The recovery in flows was faster and sharper in developing countries. This paper aims at understanding the (domestic and external) drivers of these surges in gross inflows using quarterly data for 67 countries from 1975 to 2010. It finds that domestic and external factors have significant explanatory power in driving surges of inflows. This finding holds for the sample of industrial countries whereas domestic factors play a significantly larger role in explaining surges to developing countries. Zooming into the findings shows that: (a) financial booms tend to attract massive capital inflows, (b) surges to either industrial or developing countries are driven by regional contagion, and (c) strong growth and natural resource abundance are keys to attract inflows of foreign capital into developing countries.
Summary: | Over the past 15 years, gross inflows to
industrial and developing countries have enjoyed a wild
ride. After reaching record highs in the run-up to the
global financial crisis, they collapsed dramatically in
2008-09. As signs of global recovery reappeared, capital
inflows resumed although at different speeds. The recovery
in flows was faster and sharper in developing countries.
This paper aims at understanding the (domestic and external)
drivers of these surges in gross inflows using quarterly
data for 67 countries from 1975 to 2010. It finds that
domestic and external factors have significant explanatory
power in driving surges of inflows. This finding holds for
the sample of industrial countries whereas domestic factors
play a significantly larger role in explaining surges to
developing countries. Zooming into the findings shows that:
(a) financial booms tend to attract massive capital inflows,
(b) surges to either industrial or developing countries are
driven by regional contagion, and (c) strong growth and
natural resource abundance are keys to attract inflows of
foreign capital into developing countries. |
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