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Board of Governors of the Federal Reserve SystemInternational Finance Discussion PapersNumber 1081, June 2013 --- Screen ReaderVersion*

# Capital Flows to Emerging MarketEconomies: A Brave New World?**

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Abstract:

We examine the determinants of net private capital inflows toemerging market economies. These inflows are computed fromquarterly balance-of-payments data from 2002:Q1 to 2012:Q2. Ourmain findings are: First, growth and interest rate differentialsbetween EMEs and advanced economies and global risk appetite arestatistically and economically important determinants of netprivate capital inflows. Second, there have been significantchanges in the behavior of net inflows from the period before therecent global financial crisis to the post-crisis period,especially for portfolio inflows, partly explained by the greatersensitivity of such flows to interest rate differentials and riskaversion. Third, capital control measures introduced in recentyears do appear to have discouraged both total and portfolioinflows. Fourth, in the pre-crisis period, there is some evidencethat greater foreign exchange intervention to curb currencyappreciation pressures brought more capital inflows down the line,but we cannot identify such an effect in the post-crisis period.Finally, we do not find statistically significant positive effectsof unconventional U.S. monetary expansion on total net EME inflows,although there does seem to be a change in composition towardportfolio flows. Even for portfolio flows, U.S. unconventionalpolicy is only one among several important factors.

Keywords: Emerging market economies, capital flows, capital controls, foreign exchange

JEL classification: F3, E5.

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# 1  Introduction

According to economic theory, free movement of capital acrossnational borders is beneficial to all countries, as it leads to anefficient allocation of resources that raises productivity andeconomic growth everywhere. In practice, however, as now appears tobe well recognized, large capital flows can also create substantialchallenges for policymakers. These challenges have recently come tothe forefront again for emerging market economies (EMEs). Aftertanking during the global financial crisis of 2008-09, net privatecapital flows to EMEs surged in the aftermath of the crisis andhave been volatile since then, raising a number of concerns inrecipient economies.1 To the extent that the volatility isdriven by the fickleness of international investors, it creates arisk of financial instability. Large inflows can also make moredifficult the pursuit of appropriate macroeconomic policies tomaintain solid economic growth without rising inflation. If, inresponse, authorities raise policy rates while allowing theircurrencies to appreciate, this leads to a loss of internationalcompetitiveness which could hurt export and growth performance. Butif they slow the pace of monetary tightening to deter inflows, orif they resist currency appreciation pressures throughintervention, the ability to follow appropriate independentmonetary policies is compromised. Such a course of action couldresult in excessive liquidity and economic overheating, creatingvulnerability to boom-bust cycles. And finally, if they resort tocapital controls, not only is it an open question how effectivethese may prove based on the past historical experience, but theuse of such controls also risks creating economic distortions thatcould weigh on economic activity over the longer term.

EMEs appear to have employed a mix of policy responses to tryand address these concerns. In response to the sharp rebound incapital flows after the global financial crisis, policymakersallowed some currency appreciation but also intervened in foreignexchange markets to partially stem currency appreciation pressures;several of them introduced some capital controls andmacroprudential measures; and they eased somewhat on policy rateincreases needed to stabilize their economies. With advancedeconomies providing powerful monetary stimulus to revive theirsluggish economies and the EMEs facing a plethora of capitalinflows amid strong recoveries, policy tensions arose between thesetwo groups of economies. Several EMEs argued that theadvanced-economy policies, including unconventional monetaryexpansion in the United States through large-scale asset purchases,were primarily responsible for the excessive flows of capital totheir economies and creating adverse spillover effects.

In light of these developments, concerns and policy tensions,our paper considers a number of important questions related to thebehavior of private capital flows to EMEs in recent years and thepolicy responses they have triggered in the recipient economies:(1) What are the main drivers of private capital flows into EMEs?(2) Has there been a sea-change in their behavior from before theglobal financial crisis to after? (3) Have the latest round ofcapital control measures introduced in several EMEs since thecrisis proved effective in slowing down these inflows? (4) To whatextent are capital inflows into EMEs exacerbated in the first placeby policies that allow only limited flexibility of the exchangerate? (5) How much has unconventional monetary policy easing in theUnited States spurred capital flows into EMEs? Despite asubstantial amount of recent work on aspects of these issues, theanswers to these questions are not settled. Our paper attempts toshed some further light.

The answer to the first question would seem to be crucial ininforming the debate about the appropriate policy responses tocapital inflows by EMEs. It would be particularly relevant whethersuch inflows were primarily a result of factors such asinternational investors' risk appetite, or of economic fundamentalsof the recipient countries, including their growth prospects.

The existing literature does not generally favor one determinantover another. Among the more recent studies, Byrne and Fiess (2011)find U.S. interest rates to be a crucial determinant of at leastthe common component of global capital flows to EMEs.2 Similarly, using a panel-data approach,IMF (2011a) finds loose policy in the advanced economies to be animportant determinant, but so also are the improved fundamentalsand growth prospects of EMEs. Ghosh et al. (2012) identify episodesof capital inflow surges and find a variety of factors to beimportant in increasing the likelihood of a surge to EMEs,including lower U.S. interest rates, greater global risk appetite,and a particular EME's own attractiveness as an investmentdestination.3 Focusing on effects of Federal Reservebalance sheet changes on net flows to emerging market-dedicatedfunds, Fratzscher et al. (2012) find that unconventional monetarypolicies in the United States have exerted sizable effects on netinflows. But they also conclude that the effects of U.S.unconventional policies have been relatively small compared toother factors. On the other hand, Forbes and Warnock (2012),focusing on gross flows, find no significant role for changes inglobal interest rates or in global liquidity (as measured by themoney supplies of key advanced economies) in affecting surges orstops of foreign inflows; however, like other studies, they do findglobal risk aversion to be an important and robust factor. Theirresults, though, are not purely for flows to EMEs, but focus oncross-border inflows into a large sample of countries that includesboth advanced and emerging economies. Consistent with the generalfindings in the literature, our results also point to severalfactors being important in driving EME capital inflows, namelygrowth and policy rate differentials as well as global riskappetite. Given this, one contribution of our work is to try togauge the importance of the different factors for the variabilityof capital inflows.

Turning to the effectiveness of capital controls, results basedon the historical experience prior to 2009 generally suggest thatcapital controls have been more successful in altering thecomposition of flows to a country than in changing the aggregatevolume, except perhaps in the very short run. (See, for example,Cardoso and Goldfajn, 1998; Cardenas and Barrera, 1997; Montiel andReinhart, 1999; De Gregorio et al., 2000; Clements and Kamil, 2009;Ostry et al., 2010; and Qureshi et al, 2011).4 In a more recentpaper, Forbes and Warnock (2012) look at a variety of capitalaccount restrictions and find virtually no effect of suchrestrictions on cross-border flows. Their sample period goesthrough 2009, but there is relatively little empirical evidence onthe effectiveness or otherwise of the cyclical types of capitalcontrols that several EME have introduced since 2009 in theaftermath of the global financial crisis, which we focus on.

With respect to the question of the role of limited exchangerate flexibility in creating a vicious circle of capital inflowsand currency appreciation pressures, some previous studies havealso considered the role of exchange rate regimes. For example, theGhosh et al. (2012) study mentioned earlier finds that while havinga more flexible exchange rate regime does not statisticallysignificantly affect the likelihood of a surge in capital flows,conditional on having a surge, it does diminish the magnitude ofthe surge. The magnitude of the surge is also positively related totheir measure of currency undervaluation.5 In this paper, we use adirect measure of foreign exchange intervention that has beencarefully constructed by Malloy (2013) to examine its importancefor EME capital flows in both the pre-crisis and post-crisisperiod.

Finally, regarding the impact of recent advanced-economymonetary policies on EME capital flows, despite much debate on thistopic, there have not been many empirical studies thatsystematically look at this channel, including isolating the impactof unconventional tools. Most discussions of the impact of monetaryexpansion in advanced economies are inferred from studies of theeffect of long-term U.S. interest rates (or other proxy for globalinterest rates) on the EME capital flows mostly in the pre-crisisperiod, and often do not cover the period of the recentunconventional monetary policy as part of their sample period. Oneimportant exception is the Fratzcher et al. (2012) study discussedabove, which focuses directly on the Federal Reserve's assetpurchase announcements and actual balance sheet changes. The effectmeasured, though, is on flows to EME-dedicated funds, which formonly a small part of total capital inflows to these economies. Inour paper, unlike in the existing literature, we isolate changes inlong-term U.S. interest rates that can be directly attributed tounconventional policies, and then examine the effect of suchchanges on EME balance-of-payments (BOP) capital flows.

The remainder of this paper is organized as follows. Asbackground, section 2 provides the main properties of capital flowsto EMEs over the past decade or so and the policy responses theyhave elicited in recent years. Section 3 presents the empiricalmethodology we utilize to answer the five questions posed in thispaper, compares this methodology to those of others, and describesthe data used in the paper. Section 4 presents our main results,interprets them, and briefly points to some robustness exercises wehave done. Section 5 concludes.

# 2  Main Features of Capital Flows toEMEs and Policy Responses

Figure 1 (top panel) shows the total net private capital inflowsinto major emerging Asian and Latin American economies since 2002,along with their components by type of investment.6 Forseveral years prior to the global financial crisis, these economiesreceived sizable net inflows of private capital. These net inflowsturned sharply negative (i.e. to net outflows) at the onset of thecrisis. They then surged in the second half of 2009 and 2010 asstrong economic recoveries took hold in these economies. But netinflows dried up again in the second half of 2011 with theintensification of the European crisis and the associated rise inglobal risk aversion, before picking up again as the easing offinancial stresses in Europe appeared to improve investorsentiment. Looking at components of the net inflows, foreign directinvestment (FDI, the green bars) has been relatively stable overthe years, with most of the volatility concentrated in portfolioflows (the blue bars) and banking and other flows (the redbars).7

The middle and bottom panels of figure 1 present the grossinflows and the gross outflows, separately. Note that India andMalaysia are excluded in these panels because they report only someof the components of gross flows by investment type.8 However,since these two countries' flows are relatively small, thedifference between gross inflows in the middle panel and the grossoutflows in the bottom panel comes fairly close to the net inflowsreported in the top panel. Interestingly, gross outflows mimic apattern similar to gross inflows - that is, when foreign investorsare increasing their holding of EME assets, EME investors are alsoincreasing their holdings of foreign assets. Yet, because thesesimilar movements in gross outflows are generally lower inmagnitude, the behavior of net inflows is similar to that of grossinflows with a fairly high correlation. The issue of using netinflows versus gross inflows is a topic of debate in theliterature, and we will return to this question in our methodologysection.

Figure 2 shows the cumulative net inflows since 2002, whichabstracting from valuation changes, can give a sense of how theoutstanding amounts of these investments have evolved. A noteworthyfeature of the cumulative flows is that the pre-crisis runup inflows was especially concentrated in banking and other investments(the red line), whereas the subsequent collapse during the crisisoccurred in both portfolio flows and banking flows. Also, thepost-crisis recovery was dominated by portfolio flows (the blueline). Finally, cumulative net inflows of FDI have been much biggerin magnitude than cumulative net inflows of portfolio or bankingand other investments.

Next we turn to the policy responses in EMEs that these capitalflows have elicited. First, as can be seen from figure 3, EMEpolicymakers in both emerging Asia and Latin America allowed theircurrencies to appreciate some in response to the sharp rebound incapital inflows after the global financial crisis, which resultedin less monetary stimulus than would have occurred under a fixedexchange rate regime. However, EME policymakers did not letexchange rates adjust completely freely. They leaned againstcurrency appreciation through intervention sales of domesticcurrency in the foreign exchange market, thereby accumulatingsignificant amounts of foreign exchange reserves, especially in thecase of emerging Asia, as shown in figure 4.

Intervention generally compromises the ability to followindependent monetary policies. Indeed, EME policymakers appear tohave tempered somewhat the policy rate increases that their strongpost-crisis recoveries seemed to warrant, for fear that policy rateincreases might attract even more inflows and thwart their attemptsto stabilize their economies. Figure 5 graphs the aggregate outputgaps and real policy rate of a select group of EMEs. The figureillustrates that following their sharp recoveries and amidoverheating pressures in 2009 and 2010, authorities startedreversing the earlier policy rate increases only with a significantlag. EMEs have also used more macroprudential measures in recentyears to strengthen their financial systems and target specificsectors, such as property markets, that may be especiallysusceptible to asset bubbles.

Finally, a number of countries also employed capital controlsseeking to slow capital inflows and currency appreciationpressures. Our paper constructs a database of these recentmeasures, which we will introduce later. For now, table 1illustrates the control measures by country, the type of flowsbeing targeted to be restricted, and the type of measure used.Capital controls had long been viewed with disfavor in the officialinternational community. But in recent years, there has been areassessment in both academic and policy circles of the role ofcontrols in reducing risks associated with capital flows. Thisreassessment has been led by the IMF, which now supports the use ofcontrols in certain, relatively limited, circumstances: when thedomestic currency is not undervalued, when the level of reserves isalready adequate, and when the economy is in danger of overheating,so that monetary easing to alleviate capital inflows would beundesirable (see, for example, IMF 2010, 2011a, 2012; Ostry et al.,2011). In laying down these conditions, the IMF emphasizes thatcontrols should not be used to substitute for necessarymacroeconomic policy adjustments.9

# 3  Methodology

## 3.1  Empirical Model

We model net private capital inflows to major EMEs in theemerging Asia and Latin America using quarterly panel data since2002. We will present estimation results for total net inflows andportfolio net inflows; we were less successful in modeling foreigndirect investment and banking and other flows individually. Thestart date of 2002 allows us to compare the period before theglobal financial crisis, when flows were also strong, to the surgein capital flows after the crisis. Specifically, the generalempirical model, variants of which we estimate, can be writtenas:
|  | (1) |
|--|-----|

The left hand side represents theratio of net private inflows () - either total orportfolio only - to country  during time period as a fraction of the country's nominal GDP(), and  is the number ofcross-sections (countries) in the panel. These flows as a share ofGDP are modeled as a function of fixed effects (if an observation pertains to country , 0 otherwise), a vector of variables that are likely toinfluence return differentials () (that arediscussed in more detail below), a measure of global risk aversion() that does not vary across countries andthus has no  subscript, and a variable capturing thenumber of capital control measures (). The's, the vector , , and  represent parameters to beestimated, and  is the unexplained portionof the variation in capital inflows for country during period .

The most important return differentials driving flows of netforeign investment to the EMEs are generally found to be thosebetween the EMEs and the advanced economies. In addition, returnsto foreign investors will be positively influenced by expectedappreciation of the currency of the country in which they areinvesting. Our stance here is that expected appreciation isdifficult to measure directly, but that intervention activitiessystematically aimed at keeping currencies from appreciatingincrease the expected rate of currency appreciation down the line,and thus are likely to induce capital inflows. Accordingly, returndifferentials in our empirical work are assumed to be related tothe following variables:
|  | (2) |
|--|-----|

where  and  represent,respectively, real GDP growth in country  and inan aggregate of the advanced economies;  and represent the monetary policy rates incountry  and in the United States, respectively;  measures foreign exchangeintervention undertaken by country ,  quarters ago, with positive values indicating interventionto contain currency appreciation pressures (leading to accumulationof foreign reserves), and negative values indicting intervention tocurb currency depreciation pressures (leading to decumulation offoreign reserves). Thus, the first three variables assumed toaffect return differentials are the economic growth differentialbetween a given EME and an aggregate of advanced economies, thepolicy rate differential between a given EME and the United States,and the amount of intervention undertaken on net over the past 8quarters as a share of GDP. Intervention is expressed as a share ofGDP because the dependent variable also expresses net capitalprivate inflows as a share of GDP. Note that we have used a policydifferential with the United States only, rather than with the AEaggregate, because most discussions of the impact of AE policies onEME capital flows focus primarily on U.S. policies, and U.S.interest rates are also used generally as a proxy for globalinterest rates in the empirical work. However, in practice, itmakes little difference if the U.S. policy rate is substituted byan aggregate AE policy rate.10 In addition to these threevariables, in the post-crisis period when the lower bound of zeroon the U.S. policy rate has been binding, return differentials arealso generally expected to be influenced by unconventional U.S.monetary expansion. Accordingly, we also include a variabledesigned to capture the effects of U.S. Large-Scale Asset Purchases(LSAPs), .

Based on (1) and (2), the empirical model can be expressedas:
|        |        |  | (3)    |
|--------|--------|--|--------|
|   |   |  |   |

## 3.2  Comparison With EarlierMethodologies

Much of the previous literature on the determinants of capitalflows to EMEs, such as Ghosh et al.(2012) and Forbes and Warnock(2012) mentioned above, has focused on identifying "surges" and"sudden stops," the presumption being that times of unusual flowsare different from normal times and may have differentdeterminants.11 While this seems to be a reasonablestrategy, it has the downside that it does not easily allow us tosee how much of the unusual flows is a result of outsized movementsin the explanatory variables that influence these flows in normaltimes as well, and how much truly cannot be explained by modelsthat apply during normal times. Moreover, with the periods ofunusual flows being, by definition, much less common than periodsof normal flows, it is difficult to identify how the determinantsof capital flows may have changed over time when considering onlysurges and stops. Yet one of the key questions with respect torecent EME capital flows is whether the resilience of theseeconomies through the global crisis has led to a new world in termsof what is driving these flows. We, therefore, want to investigatehow far we can get with the more traditional approach of estimatingthe same model irrespective of the size of the flows, but lookingfor structural breaks at different times.

Another point of debate in the literature is whether focusing ongross capital inflows (featuring actions of non-resident investorsonly) or net inflows (which also take into account the action ofdomestic residents in foreign markets) is more appropriate, andwhether it makes any difference to the results. For example, in theForbes and Warnock (2012) study, the authors argue that thedistinction is material because episodes of surges measured by netinflows - the usual practice in the literature - result, in fact,both from cases of sharp retrenchments by domestic investors oftheir investments abroad, as well as from cases of genuine surgesof investment into the country by foreign investors. As indicatedearlier, we do not identify surges or retrenchments, but insteadlook at investment flows during all times, and our earlierdiscussion of the behavior of gross versus net flows for theeconomies we are studying suggests that the pattern of gross vs.net capital inflows is similar. Conceptually, whether to focus onnet inflows or gross inflows would seem to depend on the particularquestion at hand. Thus, net inflows may be more relevant forexchange rate appreciation and general overheating concerns,whereas gross flows may be more relevant for financial stabilityissues and the capacity of EME financial systems to effectivelyintermediate the flows. Given the issues we are interested in, wereport results on net inflows as our core results, but as part ofour robustness checks, we discuss in the Appendix how the resultsdiffer if instead we use gross inflows.12

The set of countries used also differs across studies ofcross-border flows of capital. As we mentioned earlier, Forbes andWarnock (2013) use a mixture of advanced and emerging marketeconomies, but for the set of issues at hand we would want to focuson the EMEs only. Other papers discussed before (for example, Ghoshet al., 2012; Fratzcher et al., 2012; Byrne and Fiess, 2011; andIMF, 2011a) use a mixture of EMEs. The issues we are mainlyinterested in, however - such as concerns about real exchange rateappreciation pressures, spillover effects of advanced-economyexpansionary policies, the effectiveness of recent capital controls- would seem to apply with particular force to the emerging Asianand Latin American EMEs. A very different set of considerations andissues applies to eastern European economies, for example. Evenwithin the Asian EMEs, important world financial hubs like HongKong and Singapore have much larger gross capital inflows andoutflows, a large portion of which may not be influenced by thesame variables that are relevant for other EMEs. Accordingly, inour benchmark results we focus our analysis on emerging Asian andLatin American economies, excluding Hong Kong and Singapore. Theeconomies we include are some of the largest recipients of privatecapital inflows among emerging markets. In our robustness results(reported in the Appendix), we also study what implications thatincluding other EMEs, such as those in eastern Europe, has for ourresults.

In discussing our methodology, we also want to raise the issueof whether to include fixed effects or not. It would seem naturalto do so, but one relevant consideration is that there are alsolong-lasting growth differentials between EMEs and AEs that arisefrom their long-term growth potentials being different. To theextent that such differences are more or less constant over time,but may differ from country to country, they would likely show upin fixed effects and diminish the importance of the growthdifferential variable. So, one interpretation of fixed effectscould be that they are capturing long-lasting growth differentialsbetween countries. On the other hand, anything else that isdifferent between countries that does not vary over time but thataffects capital flows to them would also show up in the fixedeffects. Based on these considerations, we present both models thatinclude and do not include fixed effects.

Finally, in contrast to our paper, some other studies approachthe issue of the determinants of capital flows by first isolatingthe common component of such flows across countries. Byrne andFiess (2011) do this in the context of emerging markets, by firstidentifying the common component of EME capital flows, and then bystudying whether this common component has a stochastic trend andwhat are its determinants. They also find a significant role forhuman capital and the quality of institutions in driving capitalflows.13

## 3.3  Data and Measurement

Our core results are based on a balanced, quarterly panel dataset that covers 12 EMEs from emerging Asia and Latin America overthe period 2002:Q1 to 2012:Q2. This sample period covers not onlythe global wave of capital flows from before the 2008-09 crisis(see IMF, 2011a), but also the post-crisis surge through mid-2012.We have discussed in the methodology section above our rationalefor focusing on EMEs from these regions. The EMEs included areseven Asian economies (India, Indonesia, Korea, Malaysia, thePhilippines, Taiwan and Thailand) and five Latin American ones(Argentina, Brazil, Chile, Colombia and Mexico). The basic sampleexcludes China, for which quarterly balance of payments (BOP) dataare not available prior to 2010; as discussed earlier, it alsoexcludes Hong Kong and Singapore, whose capital flows are notdetermined by the usual EME considerations, given their status asfinancial centers. However, for the robustness checks, details ofwhich are in the Appendix, we use an extended sample of 28 EMEsfrom Asia (including China, Hong Kong and Singapore), LatinAmerica, and emerging Europe.

### 3.3.1  Capital Flows and MacroeconomicIndicators

To construct the dependent variables, we use quarterly BOP dataon net private capital inflows expressed in nominal U.S. dollarsand normalized by the quarterly nominal GDP of the recipienteconomy. In separate specifications, our dependent variables arethe total net flows and, alternatively, the portfolio net flows,each normalized by GDP.14

Turning to explanatory variables, the economic growthdifferential is measured as the difference between four-quarterreal GDP growth rates in each EME and an aggregate of advancedeconomies.15 As shown in Figure 6 (top panel),aggregate real GDP growth in EMEs (the red line) has consistentlyoutpaced that in the advanced economies (the blue line), and thegrowth differential (the orange bars) has fluctuated over thesample period. Note that the growth differential widened inlate-2009 and early-2010, reflecting the faster pace of recoveryfrom the crisis in the EMEs. However, as the EMEs slowed morerecently, the growth differential narrowed, although it remainssizeable.

The policy interest rate differential is computed as thedifference between the nominal policy rate for each EME and theU.S. Federal Funds rate. As shown in Figure 6 (middle panel), theinterest rate differential (the orange bars) has been positive, butfluctuated notably over the sample period. During the post-crisisrecovery, the differing cyclical positions of the EMEs and advancedeconomies called for different monetary policy settings, and droveup the interest rate differential. However, over the past severalquarters, several EMEs have been lowering policy rates, leading tosome narrowing of the interest rate differentials.

As an indicator of global risk appetite or the lack thereof, weuse the quarterly average of the Volatility Index (VIX) computed bythe Chicago Board Options. This is a measure of the impliedvolatility of the S&P 500 index, and serves in our regressionsas a proxy for the combination of perceived risk and risk aversion.Indeed, Figure 6 (bottom panel) shows that the flows to emergingmarket-dedicated funds (the red line) have been correlated with theVIX index (the blue line, plotted on an inverted scale so that amovement in the upper direction represents more appetite for riskand less risk aversion). Thus, capital flows to EMEs plunged duringthe investor panic after Lehman Brothers in 2008, and again as theEuropean situation worsened in the second half of 2011 and in May2012.16

Summary statistics on these explanatory variables are providedin table 2.17

### 3.3.2  Capital Control Measures

We construct a novel database for the new measures attempting tocontrol capital inflows introduced since the global financialcrisis by the EMEs in our sample. We have compiled these measuresfrom local press releases and news bulletins since 2009. We havealready mentioned table 1, which illustrates these measures bycountry, according to the type of inflows targeted and the type ofmeasures used. To give a bit more detail here, among the measuresrestricting portfolio inflows, taxes on investments by foreignersapply either to the total volume of inflows (Brazil), or to theforeign investors' income from holding local government bonds (inKorea and Thailand). Restrictions on asset holdings include aminimum holding requirement in Indonesia on the short-term billsissued by the central bank.18 To restrict banking inflows,countries have used taxes on short-term external borrowing orlimits on banks' exposure to foreign exchange derivatives, whichseek in part to reduce the short-term external debt that bankswould use to hedge these derivatives. Finally, a number of EMEshave increased the required reserves on banks' liabilitiesdenominated in foreign currencies.19

Keeping track of the measures to control capital inflowsintroduced by the economies in our sample since 2009 - with five ofthe 12 EMEs having introduced such measures - we construct twotypes of variables, shown in Figure 7. First, we use the cumulativenumber of measures in place in any given quarter (the blue/solidlines). Second, we also use the number of new measures introducedin any given quarter (the red/dashed lines), which is the firstdifference of the number of measures in place.20 As an example, inBrazil, authorities introduced new measures in 2009:Q4 (when theIOF tax was reinstated on foreign investment in both equity andfixed income) and again in 2010:Q4 (when the IOF on fixed incomeand mutual fund investments was raised twice, and was also extendedto derivatives). The IOF on mutual fund investments was lowered inlate 2010, but authorities then raised the unremunerated reserverequirements on banks' short dollar positions, and imposed andraised the IOF on banks' short-term external loans in 2011:Q2 and2011:Q3.21

### 3.3.3  Foreign ExchangeIntervention

To study the effect of foreign exchange (FX) intervention oncapital flows, we use data on central bank FX intervention that areconstructed by Malloy (2013). He compiles the degree ofintervention either from published reports provided by certain EMEson their intervention activities or, if such reports are notavailable, from monthly changes in central bank reserves adjustedfor exchange rate valuation effects. Positive values reflectpurchases of foreign currency and thus intervention to preventcurrency appreciation. The data are available for nine of the 12EMEs in our core sample (Argentina, Chile and Malaysia areexcluded).22

### 3.3.4  Large Scale Asset Purchases(LSAPs)

We use several measures to assess the effect of unconventionalU.S. monetary policy on capital flows to EMEs. First, we useindicator variables to assess whether the behavior of flows isunusual during the initial announcements and the implementationperiods of the first two rounds of large-scale asset purchases(LSAP) by the Federal Reserve. The indicator variable is equal to 1for quarters when the programs were first announced or when theamount of purchases was extended, using the standard announcementdates documented by the literature (see Gagnon et al., 2011,Krishnamurthy and Vissing-Jorgensen, 2011, and Bauer, 2012). The "implementation'' indicator variable is equal to 1 for the durationof each program. Second, we use the yields on 10-year U.S. treasurybonds to try to capture the effect of unconventional monetaryeasing. Third, we use net asset purchases by the Federal Reservefrom 2003:Q1 to 2012:Q2 as an instrumental variable to try toisolate more directly the change in Treasury yields that could beattributed to unconventional U.S. monetary policy.23

# 4  Core Results

## 4.1  The Basic Model

We first estimate a basic model without the foreign exchangeintervention and capital control variables, separately for thepre-crisis and post-crisis periods. The intervention data are onlyavailable for a subset of our countries, and our database does notcover cyclical capital controls before the crisis. Since one of ourgoals is to compare the pre-crisis to the post-crisis flows, westart off with a model with the same variables over the twoperiods.24 The empirical models focus onexplaining both total and portfolio net capital inflows. However,we do not estimate the model separately for the FDI or the bankingand other flows components. FDI flows have been relatively stable,and banking flows are influenced by many additional factors, suchas advanced economy regulations, leverage, and banking sectorequity (see Brookings, 2012 and Bruno and Shin, 2013b).

Table 3 presents the results of the basic model with total netinflows and portfolio net inflows, both expressed as a percent ofGDP, as the alternative dependent variables. As described earlier,the real GDP growth differentials, the policy rate differentials(both expressed in percentage points), and global risk aversion (asmeasured by the VIX index) are the explanatory variables. Thepre-crisis sample period is 2002:Q1 to 2008:Q2, ending just beforethe collapse of Lehman Brothers, and the post-crisis period is2009:Q3 to 2012:Q2, with the start date of this periodcorresponding to the quarter by which flows had definitivelyrecovered from their weakness during the crisis.25 Bothsimple OLS estimates and estimates with fixed effects (FE) areprovided.

In general, the explanatory variables come in statisticallysignificant and with the expected sign, and the magnitudes of theestimated effects appear to be economically significant aswell.26 In both the pre-crisis andpost-crisis period, the main determinants of total net inflows(columns 1-4) are the growth differentials and policy ratedifferentials, whereas risk aversion does not come in statisticallysignificant. A one percentage point increase in real GDP growthdifferentials is associated with additional total net privateinflows of 0.3 to 0.5 percent of GDP, with the effects about equalfor the pre- and post-crisis periods. A one percentage pointincrease in the policy rate differential, when statisticallysignificant, is associated with additional total net inflows of 0.2to 0.7 percent of GDP, with the lower end of the range applying tothe pre-crisis period and the upper end of the range applying tothe post-crisis period.

The story of the determinants of portfolio net inflows issomewhat different (columns 5-8). Unlike in the case of total netinflows, global risk aversion plays an important part in explainingportfolio flows. As we would expect, greater global risk aversion,measured as an increase in the VIX index, has a negative effect onnet portfolio inflows, and the effect is generally statisticallysignificant. Policy interest rate differentials still matter forthe models without FE, with a one percentage-point increase in thisdifferential raising net portfolio inflows by 0.16 percent of GDPin the pre-crisis period and by about twice as much, 0.34 percentof GDP, in the post-crisis period. Once FE are included, theimportance of the policy rate differential diminishes in terms ofstatistical significance. Growth differentials appear to be muchless important for portfolio inflows than they were found to be fortotal inflows, especially in the FE model. The diminishedsignificance of growth and interest rate differentials when FE areincluded is consistent with the idea that these fixed effects maypartly be capturing the long-standing growth potential and thelong-run interest rate differentials between EMEs and AEs.

The previous literature often divides variables driving thecapital flows to EMEs into the so-called "pull" and "push" factors.The variables related to the EMEs themselves are regarded asfactors "pulling" flows into these economies, while the rest of theworld variables are considered factors "pushing" capital flows intothese economies. The usual interpretation seems to be that "push"brings in the problematic kind of flows, while "pull" brings in theacceptable kind. We are not especially fond of this distinction.For example, whether growth differentials widen because foreigngrowth is low or EME growth is high, in both cases it is economicfundamentals at work driving the flows, which should not be a causefor alarm.27 In any case, the F-statisicsreported at the bottom of table 3 suggest that the null hypothesis- according to which the EME and AE growth effects and the EME andU.S. policy rate effects, respectively, are jointly equal inmagnitude but of opposite signs - cannot be rejected. As such, inwhat follows we proceed with the model expressed in growth andpolicy rate differentials. However, to compare our results to thosefrom other studies, the robustness results in the Appendix presentestimates for which the growth and policy differentials areseparated into the individual variables that make up thedifferential.

In general, our results so far support the previous literature(discussed earlier) that finds, on balance, a variety of factors tobe important in influencing capital flows to EMEs.

### 4.1.1  How Important are the DifferentDrivers?

The coefficients given in table 3 by themselves do not directlytell us the economic importance of the different variables impliedby the estimated model. One way to gauge the economic importance ofa particular variable is to compare the fitted value from the fullmodel with the model prediction under the counterfactual that keepsthe variable of interest at its initial value, rather than allowingit to evolve as it did in reality. Figure 8 reports the results ofthis exercise for the total net inflows model, for both thepre-crisis period and the post-crisis periods, using the FE model.For the pre-crisis period, the figure shows that if the policy ratedifferential had been kept constant at its initial value, it wouldhave made little difference to the predicted value of the total netcapital inflows, suggesting that policy rate differentials were notan economically important driving force behind the total netinflows. In contrast, if the growth differential or VIX variableswere kept constant, this makes a substantial difference to thepredicted values, suggesting that these two variables wereeconomically more significant. In the post-crisis period, all threevariables appear to matter quite a bit, with their economicimportance roughly equal.

Figure 9 presents the corresponding results for the model withnet portfolio inflows. In both periods, global risk aversionappears to the most important factor, while the growth and policyrate differentials appear to matter relatively less, especially inthe pre-crisis period.

### 4.1.2  How Different is the Post-CrisisPeriod From the Pre-Crisis Period?

Alarm bells were ringing particularly loud with respect tosurges of capital flows to EMEs in the late 2009 and 2010 period,with some arguing that this was another particularly acute exampleof the volatility of capital flows problem. Others, however, werearguing that, after having proved their relative resilience to theglobal financial crisis, the EMEs were entering a brave new worldwhere capital flows may be permanently higher, largely driven bymacroeconomic fundamentals.28 With our sample period going up to2012:Q2, our data set allows us to examine more systematically ifand how the post-crisis period differs from the pre-crisis period.29

We begin by asking if the post-crisis behavior of net inflowswould be considered unusual relative to what the FE modelsestimated over the pre-crisis period would predict, given theactual evolution of the determining variables. Figure 10 presentsthe results, with the flows converted into billions of U.S. dollars(from shares of GDP) and cumulated to provide a clearer picture oftheir evolution. For the total net inflows model, shown in the leftpanel, after the crisis, the actual cumulative net inflows (thegreen line) have been growing at a consistently faster pace thanthe pre-crisis model would have predicted (the orange line). Thiscan be seen by the slope of the green line being greater than theslope of the orange line in the post-crisis period. Initially, thehigher-than-predicted growth rate was just making up for thegreater-than-expected loss of flows that occurred during thecrisis, but although these losses had been overcome by aroundlate-2010, cumulative flows continued to rise at a faster pace.Thus, there is some evidence of acceleration of total net inflowsrelative to what the pre-crisis model would predict.

The evidence of acceleration relative to the pre-crisis modelprediction (using the FE model) is much stronger for portfolioflows. Interestingly, for cumulative portfolio flows, the model isable to account for the fall during the crisis period. Riskaversion is an important variable in the pre-crisis model, and italso rose sharply during the crisis, which accounts for thisresult. However, the pre-crisis period model would have predictedcumulative flows to remain subdued in the post-crisis period,whereas actual cumulative flows took off.

In sum, total cumulative net inflows have been somewhat higherin the post-crisis period than the pre-crisis model would have beenpredicted, but the sea-change appears to be in the behavior ofcumulative net portfolio inflows. One possibility might be thatflows have simply become less able to be explained by the variablesin the model, but the  values from the FEregressions do not support that. On the contrary, the fits of boththe total inflows model and the portfolio inflows models haveincreased in the post-crisis period.

Another possibility is that the sensitivities to the determiningvariables have changed from before the crisis to after the crisis,and table 4 presents some structural break tests to asses this.Essentially table 4 re-estimates the model presented in table 3earlier in such a way that the hypothesis that the effects of theexplanatory variables have changed in the post-crisis period can beeasily tested. This is done by introducing interaction terms of theexplanatory variables with a post-crisis dummy variable. The firstthree rows reproduce the estimates of the pre-crisis period intable 3; the next three rows represent the difference betweeneffects in the post-crisis period and those in the pre-crisisperiod. (If we add these effects to the corresponding effects inthe first three rows, we will get the total effect for thepost-crisis period reported in table 3.)

Consider first the structural break tests for the total netinflows model and the differences in the post-crisis period. Thepolicy rate differential has much bigger effects in the post-crisisperiod compared to the pre-crisis period, although the differenceis statistically significant only for the OLS model (column 2). Forthe FE model, which was used in figure 10, while a percentage pointincrease in the policy rate differential in the pre-crisis periodwould enhance net total inflows by a negligible amount, in thepost-crisis period, the effect would be 0.7 percent of GDP. Thisappears to be the main reason behind flows being stronger than thepre-crisis model would predict.

For the portfolio flows model, the sensitivity to policy ratedifferentials increases statistically significantly in thepost-crisis period (column 4), again from a negligible effect inthe pre-crisis period to a 0.6 percent of GDP effect in thepost-crisis period. The sensitivity to risk aversion also goes upin magnitude (by about 70 percent) for the post-crisis period. Thedifference from the pre-crisis period is statisticallyinsignificant, although economically large.

On balance, we would conclude that there have been somestructural changes in the sensitivities of flows to policy ratedifferentials and to risk aversion that do make the post-crisisperiod different from the pre-crisis period, with the implicationsfor portfolio flows for the two periods being especially stark. Butthe changes are not always precisely enough determined to bestatistically significant.

## 4.2  The Extended Model

### 4.2.1  Capital Controls

Table 5 presents the results of adding the capital controlvariables we have constructed for the post-crisis period to thebasic model. Recall that these variables are, alternatively, thenumber of capital control measures in place every quarter and thecontemporaneous and lagged number of new capital control measuresintroduced every quarter.30

The results suggest that the new capital control measuresintroduced since 2009 have exerted a significant dampening effecton inflows. Specifically, the number of capital control measures inplace variable has a negative and statistically significantcoefficient for both total flows (columns 1-2) and portfolio flows(columns 5-6).31 In addition, the number of*new* measures introduced every quarter also have negative andstatistically significant effects on capital inflows, althoughthese effects occur with a bit of a lag (columns 3-4 and7-8).32 The introduction of these capitalcontrol variables does not take away from the importance of thegrowth and interest rate differentials as well as VIX that werereported earlier in table 3.33 Note that the capital controlsdid not prevent a surge of flows in the post-crisis period, but theresults suggest that flows would have been even higher in theabsence of these controls.

The lagged relation between new capital controls and capitalflows is consistent with the findings in existing literaturesuggesting that investors take time to adjust their portfolios (seeForbes et al., 2012). In addition, since our database only includesthe original capital control measures - and not the subsequentmeasures introduced to close loopholes - the lagged relationbetween controls and flows also suggests a weaker effect initially,but which becomes stronger as loopholes are effectively closed overtime.

### 4.2.2  Foreign ExchangeIntervention

Table 6 reports the results for the effect of foreign exchange(FX) intervention by EME central banks on net capital inflows inthe pre-crisis period. Recall that our variable measures thecumulative intervention undertaken over the previous two years(i.e. quarters  to ). The useof intervention over the previous two years helps to overcome theendogeneity problem that might arise due to EMEs interveningcontemporaneously in response to strong capital inflows.34 Ourresults indicate that lagged FX purchases had a positive andstatistically significant effect on capital inflows during thepre-crisis period, for both total and portfolio net flows.Specifically, $1 billion of intervention brought in about $0.2billion of portfolio net inflows and about $0.45 billion of totalnet inflows. The results are consistent with the view that theundervaluation of some EME currencies resulting from FX purchasesgenerates greater expectation of future currency appreciation,thereby increasing expected return differentials in favor of EMEsand enhancing capital flows to these economies.35

For the post-crisis period (not reported), we could not identifyany strong effect that intervention brought in significantly moreinflows down the road. We attribute this to several factors. First,the crisis period was unusual, and the use of lagged FXintervention over the past two years means that intervention fromthe crisis period would be used to inform about flows during thepost-crisis period. But in the crisis period, intervention waseither low or skewed toward FX sales to prevent currencydepreciations, while the net inflows to EMEs rebounded quitequickly after the crisis, which tends to create a negativecorrelation between the two variables. Second, if to address thisissue we cut the start of the post-crisis sample period by twoyears, this leaves too few observations even with a panel setting,to get meaningful estimates. Third, the data suggest significantcorrelation between FX intervention and some of the otherexplanatory variables in the post-crisis period, such as capitalcontrols, making it difficult to isolate the effect of interventionby itself. Notably, as shown in column 5 of table 6, even aftertaking into account a time trend in the number of capital controlsin place and fixed effects, FX intervention in the past to stemcurrency appreciation pressures tends to be followed by theimposition of capital controls, with this effect beingstatistically significant. This result is consistent with thenotion that FX intervention encouraged capital inflows to EMEs, inturn forcing countries to introduce capital controls to discouragethese inflows. But it is also consistent with the idea that inresponse to expectations of large capital inflows, countries use avariety of measures, including first direct FX interventionfollowed by capital controls.

### 4.2.3  Unconventional U.S. MonetaryPolicy

After policy interest rates had reached the zero lower bound andwith their economic recoveries still fragile, a number of AEcentral banks, including the Federal Reserve, resorted tounconventional monetary expansion in efforts to continue to boosteconomic activity. It is important to emphasize that theseunconventional monetary policies are just another form of monetaryeasing, made necessary because of hitting the zero lower bound onthe policy rate; these policies work much through the samechannels, by affecting interest rates in the economy to whichprivate spending is sensitive. Indeed, there is some evidence thatsuch unconventional policies in the U.S. lowered yields on U.S.long-term Treasury bonds and similar securities (see D'Amico andKing, 2013, D'Amico et al., 2012, and Gagnon et al., 2011). Inturn, it has been suggested that lower yields on longer-term U.S.securities may have encouraged capital flows to EMEs (see Fratzcheret., 2012, and IMF, 2011a). We provide some new evidence on this,using several variables related to U.S. LSAPs.

First, table 7 presents results from the inclusion of LSAPindicator variables that were mentioned earlier and are shown infigure 11. These indicator variables are equal to 1 for thequarters in which LSAPs are initially announced and the quartersduring which LSAP programs are still in place. In addition to thisvariable, the models include the earlier growth differential,policy rate differential, and risk aversion variables (but withinteraction terms for the crisis- and post-crisis periods), as wellas capital controls in place. Note that the crisis period has beenincluded in these regressions, unlike those reported earlier. Thisis because the first round of LSAPs began during the crisis, andthe variation of LSAPs over the sample this provides seems to benecessary to determine their effects on capital flows moreprecisely. Turing to the specific results in table 7, as we foundbefore, the sensitivity of capital flows to policy ratedifferentials appears to be higher during the post-crisis period.Interestingly, for the crisis period, the interaction coefficienton the growth differential is negative and about the same inmagnitude as the growth differential coefficient for the pre-crisisperiod, suggesting that the growth differentials ceased to be adeterminant of capital flows during the crisis period. With respectto unconventional U.S. monetary policy, the coefficients on theindicator variables for LSAP announcements and implementation arenot statistically significant for the total net inflows (columns1-4), but are positive and statistically significant for theportfolio net inflows (columns 5-8).36

These results suggest that LSAPs changed the composition of EMEnet capital inflows toward portfolio flows, an issue which we nowinvestigate further. To do so, we first directly include the10-year Treasury bond yield among the explanatory variables, alongwith the other variables (see columns 1-2 and 5-6 of table 8).Again, we do not find the Treasury yields to have a statisticallysignificant effect on the total net inflows, but the coefficient ofthe yield variable in the portfolio investment equation isstatistically significant and negative. During the crisis period,the effect of Treasury yields on portfolio flows appears larger, asthe slope interaction coefficient is negative and statisticallysignificant. This suggests that the first LSAP program initiatedduring the crisis - which coincided with net capital outflows fromthe EMEs - helped to contain some of the portfolio outflows fromEMEs. During the post-crisis period, the effect of U.S. Treasuryyields on portfolio investment equation is still negative; thepositive slope interaction term indicates that the effect issmaller than in the pre-crisis period, but this interaction term isnot statistically significant. The results are consistent with theexisting literature showing that U.S. Treasury yields have affectedcapital flows to EMEs in significant ways (see, for example, IMF,2011a). However, we find no evidence that the effect of Treasuryyields has been more pronounced in the post-crisis period than inthe pre-crisis period.

U.S. Treasury yields, of course, are also affected by factorsother than U.S. monetary policy actions. In an attempt to isolatemore directly the effects of unconventional monetary policy onTreasury yields, we use the LSAPs undertaken by the Federal Reserveas an instrument to compute the change in the U.S. 10-year bondyield that could be attributed to the unconventional U.S. monetarypolicy. Specifically, we first regress the yields (in percentagepoints) on asset purchases one quarter ahead (in billions of U.S.dollars) over the interval from 2003:Q1 to 2012:Q2. (These twovariables are shown in figure 12.) The one-quarter ahead value ofasset purchases, rather than the contemporaneous value, fitsbetter, which perhaps is not surprising given that LSAPs areanticipated to some degree and announcements precede the actualpurchases.37 Next, we use the difference betweenthe actual yield and what the yield would have been without LSAPsas representing the effect of LSAPs on the yield. As can be seenfrom columns 3-4 of table 8, total net EME capital inflows do notappear to be statistically significantly affected by the yieldchanges related to LSAPs, but portfolio flows (columns 7-8) arenegatively and statistically significantly affected, once againsuggesting that LSAPs have affected the composition of flows.Specifically, a 10 basis point-reduction in the Treasury bondyields related to LSAPs is associated with enhanced net portfoliocapital flows to EMEs of about 0.2 percent of the recipients' GDP.The results on the other variables are pretty similar to thosereported in table 7.

### 4.2.4  Robustness Checks

To facilitate an easier comparison with other studies in thisliterature, we examined the robustness of our results to severalalternative specifications. These include separating out the EMEand advanced-economy growth differentials into the individualgrowth rates and policy rates, adding smaller countries in emergingAsia and Latin America, adding emerging European countries as welland allowing regional effects, using Credit Suisse's global riskappetite index (GRAI) instead of VIX, and focusing on gross inflowsrather than net inflows. Most of the results were fairly robustqualitatively, but some important quantitative differences could beobserved. These robustness results are discussed in detail in theAppendix to this paper.

# 5  Conclusions

We conclude by giving the answers to the questions we posed thatare suggested by our empirical work.

First, consistent with the evidence presented in previousstudies, we find net capital flows to EMEs to be determined in theexpected manner and statistically significantly by a number ofdifferent factors, including growth differentials, policy ratedifferentials, and global risk aversion. In terms of the economicimportance of these factors, in the post-crisis period all threeappear to be equally important for both total net inflows andportfolio net inflows, whereas in the pre-crisis period growthdifferentials were relatively more important for total inflowswhile risk aversion was relatively more important for portfolioinflows.

Second, we find that there have been some important andsignificant changes in the behavior of capital flows to EMEs frombefore the crisis to after. If we apply the pre-crisis model to thepost-crisis behavior of the determining variables, the modelsomewhat underpredicts total net capital inflows, but vastlyunderpredicts portfolio net inflows. However, these results are notdue to an increase in inherent instability of the flows, but due tochanges in the sensitivity of the flows to some of the explanatoryvariables. Primarily, the sensitivity of portfolio flows to policyrate differentials and to risk aversion appears to have increasedduring the post-crisis period.

Third, using a novel data set that we constructed of capitalcontrol measures that several EMEs have used in recent years, wefind that these measures appear to have had some effect indampening capital inflows to these EMEs. While some case studiesreach similar conclusions, we are not aware of any previouscross-country study that looks at these effects for the latestcapital controls introduced since mid-2009.

Fourth, our results from the pre-crisis period strongly suggestthat when countries step up their foreign currency intervention tocounter currency appreciation pressures, this intervention tends tobe followed by stronger inflows of capital. This is consistent withthe idea that such interventions create expectations of futurecurrency appreciations that induce more capital inflows. However,we cannot identify such an effect in the post-crisis period. Somepreliminary results suggest that this may be because of thecorrelation of the intervention variable with other importantdeterminants of flows, such as capital controls, in the post-crisisperiod.

Finally, we do not find statistically significant effects ofunconventional U.S. monetary policy expansion on total net inflowsof capital into EMEs. The evidence suggests that such policies haveaffected only the composition of flows toward portfolio flows.Moreover, the inclusion of variables related to unconventional U.S.monetary policies does not drive out or detract from the importanceof other determinants of EME flows. Thus, even looking at justportfolio flows, unconventional U.S. monetary policy appears to beonly one among several important factors.

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Taylor, Mark and Lucio Sarno, 1997. Capital flows to developingcountries: long- and short-term determinants. The World BankEconomic Review, 11(3), 451-470, September.

Figure 1: Net and Gross Private Capital Flows to EMEs

Source: Balance of payments (BOP) data collected from national sources. Gross inflows are BOP liabilities, and consistof the non-residents' purchases of domestic assets net of sales. Gross outflows are BOP assets, and consist of theresidents' purchases of foreign assets net of sales. Net inflows represent the difference between gross inflows andoutflows. Panels (b) and (c) do not include India and Malaysia, for which some gross inflow components are notavailable. Note that a gross outflow is reported in panel (c) with the plus sign, in contrast with the usual BOP practice.

Figure 2: Cumulative Net Inflows to EMEs

Source: BOP data collected from national sources.

Figure 3: Real Effective Exchange Rates in EMEs

Source: Federal Reserve Board.

Figure 4: Reserves Accumulation Since End-2005

Source: Haver Analytics.

Figure 5: Real Policy Rates and Output Gaps: Aggregate of Selected EMEs

Source: Federal Reserve Board staff calculations. The output gap is expressed as the percent deviation of realGDP from its potential level, where the potential level is the Hodrick-Prescott trend of log-real GDP over1994:Q4-2012:Q2. The aggregate is weighted in proportion to each country's share in U.S. exports.

Figure 6: Some Key Determinants of Net Inflows to EMEs

Source: Haver Analytics for quarterly real GDP (expressed as the 4-quarter percent change) and the nominalpolicy interest rates; Emerging Portfolio Fund Research for flows to EME-dedicated funds; Bloomberg forVIX.

Figure 7: Number of Capital Control Measures Introduced in EMEs Since 2009

Source: Authors' calculations from national press releases and media articles.

Figure 8: Fitted Values vs. Counterfactuals for Total Net Inflows

Note: The fitted values and counterfactuals are based on the model with country fixed effects, estimatedseparately for the periods 2002:Q1-2008:Q2 and 2009:Q2 to 2012:Q2. The counterfactuals are the fittedvalues obtained under the assumption that a particular determinant was equal to its initial value for eachinterval.

Figure 9: Fitted Values vs. Counterfactuals for Portfolio Net Inflows

Note: The fitted values and counterfactuals are based on the model with country fixed effects, estimatedseparately for the periods 2002:Q1-2008:Q2 and 2009:Q2 to 2012:Q2. The counterfactuals are the fittedvalues obtained under the assumption that a particular determinant was equal to its initial value for eachinterval.

Figure 10: Shifting Behavior of Net Inflows Since 2008-09

Note: The model predictions are based on results from the model with fixed effects estimated over theperiod 2002:Q1 to 2008:Q2.

Figure 11: Indicator Variables for LSAP Events

Note: The "initial announcements" variable equals 1 in 2008:Q4 and 2009:Q1 for QE1 and in 2010:Q3 and 2010:Q4 forQE2, when the corresponding programs were announced or extended. The "implementation" variable equals 1 for2008:Q4-2010:Q1 and 2010:Q3-2011:Q2.

Figure 12: LSAP Purchases

Source: Bloomberg (for the Treasury bond yield) and the Federal Reserve (for asset purchases). The net assetpurchases are obtained as the change in the end-of-quarter total holdings of agency debt securities, mortgage-backedsecurities, and U.S. Treasury securities by the Federal Reserve.

Table 1: Capital Control Measures Introduced in EMEs Since 2009
| Country                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         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banking flows:       Required reserves on FX liabilities |
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| Oct, Nov 09R,       Oct, Dec 10R,       Jul, Dec 2011R                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Mar, Jun 10,       Apr 11                                         |                                                                          | Jun, Dec 10                                                               | Dec 10R                                                                        |
| Nov 10R,       Jan 12RJul 11Apr 11Nov 09D, Jan 10,       Jun 10D, Jun 11D,       Nov 12D Taiwan Nov 09R       Nov 10R Dec 10DJan, Dec 10RThailandOct 10R    
Source: Authors' calculations from national press releases and media articles (also see Figure 7). "R"denotes measures that discriminate by residency and "D" denotes limits on banks' FX derivatives positions.

Table 2: Summary Statistics
Period/VariableObs.Mean       %Std. Dev.       %-pointsMin       %Max       %Pre-crisis period (2002q1-2008q2):       tot_ngdp3120.555.73-32.8118.50Pre-crisis period (2002q1-2008q2):       port_ngdp312-0.334.30-17.0816.49Pre-crisis period (2002q1-2008q2):       growth_diff_ae3122.952.76-16.129.11Pre-crisis period (2002q1-2008q2):       growth_eme3125.192.92-15.2211.83Pre-crisis period (2002q1-2008q2):       growth_ae3122.240.630.893.26Pre-crisis period (2002q1-2008q2):       policy_rate_diff_us3122.944.60-4.6025.18Pre-crisis period (2002q1-2008q2): policy_rate_eme3125.824.390.4926.44Pre-crisis period (2002q1-2008q2): policy_rate_us3122.871.611.005.26Pre-crisis period (2002q1-2008q2):        treas_10yr_us 3124.370.413.605.08Pre-crisis period (2002q1-2008q2):       vix31218.396.3311.0335.07Pre-crisis period (2002q1-2008q2):       interv_2y_ngdp2342.142.49-1.7512.11Crisis period (2008q3-2009q2):       tot_ngdp48-2.479.56-38.9617.21Crisis period (2008q3-2009q2):       port_ngdp48-1.976.01-27.747.74Crisis period (2008q3-2009q2):       growth_diff_ae483.623.88-4.4510.78Crisis period (2008q3-2009q2):       growth_eme480.254.62-9.598.09Crisis period (2008q3-2009q2):       growth_ae48-3.371.93-5.14-0.39Crisis period (2008q3-2009q2):       policy_rate_diff_us484.583.41-1.3513.22Crisis period (2008q3-2009q2):       policy_rate_eme485.303.490.5313.75Crisis period (2008q3-2009q2):       policy_rate_us480.710.740.181.96Crisis period (2008q3-2009q2):       treas_10yr_us 483.260.412.703.84Crisis period (2008q3-2009q2):       vix4840.4112.7825.0758.54Crisis period (2008q3-2009q2):       interv_2y_ngdp362.223.23-5.079.93Post-crisis period (2009q3-2012q2):       tot_ngdp1441.874.74-12.3723.43Post-crisis period (2009q3-2012q2):       port_ngdp1441.074.43-12.7522.03Post-crisis period (2009q3-2012q2):       growth_diff_ae1443.902.92-10.0412.69Post-crisis period (2009q3-2012q2):       growth_eme1445.093.38-8.7913.65Post-crisis period (2009q3-2012q2):       growth_ae1441.201.81-3.873.06Post-crisis period (2009q3-2012q2):       policy_rate_diff_us1443.782.680.1112.19Post-crisis period (2009q3-2012q2):       policy_rate_eme1443.912.670.2712.28Post-crisis period (2009q3-2012q2):       policy_rate_us1440.140.040.080.19Post-crisis period (2009q3-2012q2):       treas_10yr_us 1442.890.651.813.70Post-crisis period (2009q3-2012q2):       vix14422.804.3717.4830.58Post-crisis period (2009q3-2012q2):       interv_2y_ngdp1083.113.50-3.7511.94
Table 3: Determinants of Net Private Capital Inflows: Basic Results*
Dependent variable:(1)       Total net inflows/NGDP(2)Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPInterval:2002q1-2008q22002q1-2008q2:2009q3-2012q2:2009q3-2012q2:2002q1-2008q2:2002q1-2008q2:2009q3-2012q2:2009q3-2012q2:Model:OLSFEOLSFEOLSFEOLSFEgrowth_diff_eme-ae0.48***       (0.12)0.43***       (0.13)0.34***       (0.13)0.53       (0.14)0.17*       (0.091)0.16***0.045       (0.095)0.060       (0.13)0.19       (0.13)policy_rate_diff_eme-us0.22***       (0.073)0.0047       (0.16)0.63***       (0.14)0.70*       (0.38)0.16***       (0.055)-0.055       (0.11)0.34**       (0.14)0.58       (0.35)vix-0.060       (0.051)-0.036       (0.052)-0.12       (0.084)-0.12       (0.079)-0.095**       (0.038)-0.075**       (0.037)-0.13       (0.083)-0.13*       (0.072)Constant-0.40       (1.09)-2.59*       (1.53)0.93       (2.09)-0.66       (2.28)0.43       (0.83)-0.45       (1.09)2.42       (2.07)2.19       (2.07)Observation312312144144312312144144R-squared0.0630.1540.1580.3190.0460.2270.0550.357F-test 10.402.06  0.110.94  Prob > F0.670.13  0.890.39  F-test 2  0.110.12  0.0830.060Prob > F  0.740.73  0.770.81
Standard errors in parentheses

*** pp>
Note: F-test 1 refers to the joint null hypothesis that the coefficients on EME growth and AE growth, as well as on the EME policy rate and the U.S. policyrate are equal in magnitude but opposite in sign. Similarly, F-test 2 refers to the null hypothesis that the coefficients on EME growth and AE growth areequal but opposite in sign. For the post-crisis period, F-test 1 is not applicable, because the U.S. policy rate was zero, and hence the policy rate differentialis driven entirely by changes in the EME policy rate. *Economies included are India, Indonesia, Malaysia, the Philippines, South Korea, Taiwan, andThailand from emerging Asia, and Argentina, Brazil, Chile, Colombia, and Mexico from Latin America.

Table 4: Structural Break Tests for the Determinants of Net Inflows*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(4)       Portfolio net inflows/NGDP(5)       Portfolio net inflows/NGDPInterval:2002q1-2012q22002q1-2012q2:2002q1-2012q2:2002q1-2012q2:Model:OLSFEOLSFEgrowth_diff_eme-ae0.48***       (0.11)0.43***       (0.12)0.17*       (0.092)0.045       (0.094)policy_rate_diff_eme-us0.22***       (0.069)0.0047       (0.15)0.16***       (0.056)-0.055       (0.11)Vix-0.060       (0.048)-0.036       (0.048)-0.095**       (0.039)-0.075**       (0.037)post-crisis * growth_diff_eme-ae-0.14       (0.19)0.095       (0.21)-0.11       (0.15)0.15       (0.16)post-crisis * policy_rate_diff_eme-us0.41**       (0.18)0.69       (0.49)0.17       (0.15)0.63*       (0.37)post-crisis * Vix-0.061       (0.11)-0.086       (0.11)-0.030       (0.090)-0.053       (0.082)post-crisis 1.33       (2.69)-2.75       (4.21)2.00       (2.19)-2.45       (3.19)Constant-0.40       (1.02)1.42       (2.32)0.43       (0.83)2.81       (1.76)Observation456456456456R-squared0.0970.2040.0700.286
Standard errors in parentheses, *** pp>
Note: post-crisis is an indicator variable that equals 1 for the period 2009:Q3-2012:Q2. The fixed effects, when included (columns 2 and 4), are allowed tovary across the pre-crisis and post-crisis periods. *Economies included are the same as in table 3.

Table 5: The Effect of Capital Controls on Net Inflows*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)       Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPInterval:2009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q2Model:OLSFEOLSFEOLSFEOLSFEgrowth_diff_eme-ae0.23*       (0.13)0.43***       (.15)0.30**       (0.13)0.50       (0.14)-0.029       (0.13)0.090       (0.13)0.036       (0.13)0.18       (0.13)policy_rate_diff_eme-us0.84***       (0.14)0.84**       (0.39)0.83***       (0.15)0.90**       (0.40)0.51***       (0.15)0.72**       (0.35)0.48***       (0.15)0.82*       (0.36)Vix-0.13       (0.080)-0.13*       (0.078)-0.12       (0.082)-0.12       (0.079)-0.13       (0.081)-0.13*       (0.070)-0.12       (0.083)-0.13*       (0.071)capital_controls_in_place-0.54***       (0.15)-0.44**       (0.21)  -0.44***       (0.15)-0.45**       (0.19)  new_capital_controls  -0.43       (0.50)-0.37       (0.53)  0.057       (0.51)-0.076       (0.48)1_new_capital_controls  -0.43       (0.51)-0.36       (0.55)  -0.77       (0.51)-0.96*       (0.50)12_new_capital_controls  -0.97*       (0.52)-0.79       (0.56)  -0.98*       (0.52)-1.05**       (0.50)13_new_capital_controls  -1.26**       (0.53)-1.04*       (0.55)  -0.59       (0.53)-0.59       (0.49)Constant1.54       (2.01)-0.00087       (2.27)1.04       (2.04)-0.51       (2.27)2.93       (2.02)2.86       (2.05)2.37       (2.05)2.14       (2.05)Observations144144144144144144144144R-squared0.2340.3420.2260.3450.1130.3850.1020.393
Standard errors in parentheses*** pp>
Note: capital_controls_in_place is the number of capital control measures introduced since 2009 that are in place in any given quarter. new_capital_controls is thenumber of new capital control measures introduced in a given quarter (l, l2, l3 indicate lagged values). *Economies included are the same as in table 3.

Table 6: The Effect of Foreign Exchange Intervention on Net Inflows*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Portfolio net inflows/NGDP(4)       Portfolio net inflows/NGDP(5)       No. of capital controls in placeInterval:2002q1-2008q22002q1-2008q22002q1-2008q22002q1-2008q22009q3-20012q2Model:OLSFEOLSFEFEgrowth_diff_eme-ae0.32*       (0.17)0.22       (0.21)0.16       (0.11)0.0044       (0.13) policy_rate_diff_eme-us0.11       (0.082)0.062       (0.16)0.11*       (0.055)0.053       (0.10) Vix-0.061       (0.051)-0.043       (0.051)-0.071**       (0.034)-0.053       (0.033) fx_intervention0.085       (0.15)0.45**       (0.18)-0.13         (0.10)0.20*       (0.12)0.20**       (0.095)trend    0.35***       (0.048)Constant0.94       (1.22)-3.60**       (1.82)0.81       (0.82)-3.89***       (1.17)-71.3***       (9.79)Observations234234234234108R-squared0.0240.1270.0560.2200.731
Standard errors in parentheses*** pp>
Note: fx_intervention is the extent of net foreign exchange intervention, expressed in U.S. dollars, cumulated over the previous 8 quarters (i.e.lagged t-1 to t-9), expressed as a percent of contemporaneous quarterly nominal GDP expressed in the same units. Since flows on the lefthand side are also normalized by the same nominal GDP, the coefficient on fx_intervention in columns (1)-(4) has the interpretation of theeffect on capital flows in billions of dollars of a $1 billion net FX intervention over the previous two years. Data on intervention generouslyprovided by Matt Malloy-see Malloy (2013) for a description. *Economies included are the same as in table 3.

Table 7: Behavior of Net Flows to EMEs During LSAP Events*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)       Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPModel:OLSFEOLSFEOLSFEOLSFEInterval:2002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q2d_lsap_announcements1.09 (1.12)1.10       (1.07)  1.51*       (0.87)1.44*       (0.82)  d_lsap_implementation  1.02       (0.88)0.96       (0.85)  1.26*       (0.69)1.19*       (0.65)growth_diff_eme-ae0.46***       (0.12)0.47***       (0.13)
0.48***       (0.12)0.48***       (0.13)0.17*       (0.094)0.094       (0.097)0.19**       (0.094)0.11       (0.098)policy_rate_diff_eme-us0.21***       (0.074)0.12       (0.13)0.22***       (0.074)0.13       (0.13)0.16***       (0.058)0.045       (0.10)0.17***       (0.058)0.054       (0.10)Vix-0.073       (0.047)-0.063       (0.046)-0.063       (0.048)-0.054       (0.046)-0.093**       (0.037)-0.086**       (0.035)-0.080**       (0.037)-0.074**       (0.036)crisis * growth_diff_eme-ae-0.46*       (0.24)-0.42*       (0.23)-0.49**       (0.24)-0.44*       (0.23)-0.36*       (0.19)-0.41**       (0.18)-0.39**       (0.19)-0.45**       (0.18)crisis * policy_rate_diff_eme-us0.65**       (0.26)0.54**       (0.26)0.65**       (0.26)0.54**       (0.26)0.18       (0.21)0.24       (0.20)0.19       (0.21)0.24       (0.20)crisis * vix-0.099*       (0.051)-0.093*       (0.048)-0.11**       (0.052)-0.100**       (0.050)-0.0014       (0.039)-0.00069       (0.037)-0.0089       (0.041)-0.0076       (0.039)post-crisis * growth_diff_eme-ae-0.20       (0.20)-0.12       (0.19)-0.27       (0.21)-0.18       (0.20)-0.16       (0.15)-0.060       (0.15)-0.24       (0.16)-0.14       (0.16)post-crisis * policy_rate_diff_eme-us0.65***       (0.20)0.54**       (0.21)0.63***       (0.21)0.52**       (0.21)0.38**       (0.16)0.26       (0.16)0.36**       (0.16)0.24       (0.16)post-crisis * vix-0.0047       (0.053)-0.0092       (0.052)-0.010       (00.54)-0.014       (0.052)0.044       (0.041)0.048       (0.040)0.038       (0.042)0.042       (0.040)capital_controls_in_place-0.52***       (0.20)-0.38*       (0.20)-0.50**       (0.20)-0.36*       (0.20)-0.42***       (0.15)-0.34**       (0.16)-0.40**       (0.15)-0.32**       (0.16)Constant-0.068       (0.97)-1.41       (1.28)-0.32       (0.99)-1.61       (1.29)0.38       (0.76)0.31       (0.99)0.062       (0.77)0.063       (0.99)Observations504504504504504504504504R-squared0.1390.2340.1400.2340.0950.2160.0960.216
Standard errors in parentheses, *** pp>
Note: *d_lsap_announcements* is an indicator variable equal to 1 for the quarters in which the initial announcements of LSAPs, so-called "QE1" and "QE2," and thedecisions to continue them were made (2008:Q4, 2009:Q1, 2010:Q3 and 2010:Q4). *d_lsap_implementation* is equal to 1 for the entire duration of the "QE1" and"QE2" programs (2008:Q4-2010:Q1 and 2010:Q3-2011:Q2). *Economies included are the same as in table 3.

Table 8: Effects of LSAP Purchases on Net Inflows Through the 10-Year U.S. Treasury Bond Yields*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)       Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPModel:OLSFEOLSFEOLSFEOLSFEInterval:2002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q22002q1-2012q2treas_10yr_us-0.38       (0.57)-0.53       (0.58)  -0.64       (0.44)-0.86*       (0.44)  treas_10yr_us * crisis-0.057       (0.76)0.011       (0.72)  -1.36**       (0.59)1.23**       (0.55)  treas_10yr_us * post-crisis0.63       (0.64)0.62       (0.61)  0.66       (0.49)0.70       (0.47)  lsap_purchases_effect  -1.63       (1.64)-1.60       (1.57)  -2.35*       (1.31)-2.18*       (1.24)growth_diff_ae0.47***       (0.12)0.47***       (0.13)0.26       (0.16)0.24       (0.18)0.16*       (0.095)0.062       (0.098)0.22*       (0.13)0.12       (0.15)Policy_rate_diff_us0.21***       (0.075)0.088       (0.14)0.19**       (0.080)0.12       (0.14)0.16***       (0.058)-0.0097       (0.11)0.18***       (0.064)0.064       (0.11)Vix-0.066       (0.050)-0.055       (0.049)-0.036       (0.056)-0.030       (0.054)-0.11***       (0.039)-0.099***       (0.037)-0.092**       (0.045)-0.084*       (0.043)crisis * growth_diff-0.49*       (0.25)-0.45*       (0.25)-0.28       (0.26)-0.27       (0.25)-0.25       (0.20)-0.30       (0.19)-0.42**       (0.21)-0.46**       (0.20)crisis * policy_diff0.65**       (0.27)0.52**       (0.26)0.68**       (0.26)0.62**       (0.26)0.24       (0.21)0.28       (0.20)0.18       (0.21)0.25       (0.20)crisis * vix-0.091       (0.071)-0.091       (0.068)-0.14**       (0.060)-0.14**       (0.058)0.095*       (0.055)0.082       (0.052)-0.0071       (0.048)-0.0082       (0.046)post-crisis * growth_diff-0.27       (0.22)-0.17       (0.21)-0.024       (0.23)0.068       (0.23)-0.20       (0.17)-0.083       (0.16)-0.23       (0.18)-0.12       (0.18)post-crisis * policy_diff0.62**       (0.21)0.49**       (0.22)0.67***       (0.21)0.57***       (0.21)0.34**       (0.16)0.19       (0.17)0.36**       (0.16)0.26       (0.17)post-crisis * vix-0.082       (0.095)-0.091       (0.091)-0.042       (0.058)-0.050       (0.057)-0.048       (0.074)-0.058       (0.069)0.053       (0.046)0.052       (0.045)no_meas_ext-0.53***       (0.20)-0.40*       (0.21)-0.51***       (0.20)-0.34*       (0.20)-0.44***       (0.15)-0.39**       (0.16)-0.40**       (0.16)-0.33**       (0.16)Constant1.38       (2.78)0.62       (2.80)-0.040       (1.08)-0.29       (2.16)3.55       (2.16)4.31**       (2.14)0.14       (0.86)1.10       (1.72)Observation504504468468504504468468R-squared0.1400.2350.1270.2330.1060.2270.0930.216
Standard errors in parentheses, *** pp>
Note: lsap_purchases_effect is the difference between the actual 10-year U.S. Treasury bond yield and an estimate of what the yield would have been without LSAPs.To construct this effect, we regress the 10-year U.S. Treasury bond yields on Fed purchases one quarter ahead over the period 2003:Q1-2012:Q2 and subtract fromthe fitted value the estimated constant and error terms. *Economies included are the same as in table 3.
Appendix: Capital Flows to Emerging Market Economies: A Brave New World?38
This appendix explores the robustness of our main results from the paper to several alternative specifications. These include: (1) decomposing the growth and policy rate differentials  into separate emerging market economy (EME) and advanced-economy (AE) variables; (2)  adding smaller countries in emerging Asia and Latin America; (3) adding emerging Euro-  pean countries as well and allowing for regional effects; (4) using Credit Suisse's global risk  appetite index (GRAI) instead of VIX; and (5) focusing on gross inflows rather than net  inflows.
A  RobustnessA.1  Decomposing Differentials into EME and Rest-of-the WorldVariables
To compare our results to others in the literature, we have separated the growth and policyrate differentials into their relative counterparts, namely the growth of EMEs separated fromthe growth of their AE trading partners, and the policy rates of EME separated from theU.S. policy rate. The results are presented in table A1. First, they show that the coefficientsare generally of the expected sign, positive on EME growth and EME policy rates, andnegative on AE growth and the U.S. policy rate. They are also roughly equal in magnitudein several cases, suggesting the differential models may be a fairly reasonable approximationto the more general models. Second, considering statistical significance, the EME variablesand sometimes also the AE/U.S. variables are significance for total inflows (columns 1-4).For portfolio inflows, the significance of EME variables declines, and the AE variables areno longer significant (columns 5-8). Note, though, that since the AE growth and the U.S. policy rate do not differ across the cross-sections in the panel, it is a taller order for them tocome out statistically significant. Finally, of course, we cannot estimate the effect of the U.S.policy rate in the post-crisis period because of a lack of variation in this variable given thethe zero lower bound; hence, in the post-crisis period, the policy rate differentials entirely reflect changes in the EME policy rates.39
A.2  Sensitivity to Adding Other Countries From Asia and LatinAmerica
Additional economies are included from emerging Asia (Hong Kong, Singapore, and Chinastarting in 2010) and from Latin America (Costa Rica, Peru, Uruguay and Venezuela).Note that due to only partial availability of data for the whole sample period, includingthe unavailability of quarterly Chinese data before 2010, the sample becomes an unbalancedpanel. Overall, our core results are fairly robust to adding these additional economies fromemerging Asia and Latin America, although there are some important differences. In theresults for 17 EMEs reported in table A2 (with all the additional countries from aboveadded, except the international financial centers Hong Kong and Singapore), generally thegrowth and policy interest rate differentials still affect capital flows positively and globalrisk aversion negatively, as in the results reported in table 3 of the paper. However, oneexception is that for pre-crisis total net inflows, the policy rate differential switches in signand is not statistically significant. In addition, when the Asian financial centers Hong Kongand Singapore are added to the sample (see table A3), for the portfolio flows model, the effectof growth differentials switches sign to become negative for the post-crisis period and actuallyis statistically significance negative. This reinforces our argument made earlier that flowsto these international financial sectors may not be determined by the same considerationsas those for other EMEs.
A.3  Regional Effects and Adding Countries From Emerging Europe
One interesting question is whether the sensitivity of capital flows to their main driversdiffers across regions. To address this question, we add countries from emerging Europe tothe sample, in addition to those from Asia and Latin America reported above, excludingHong Kong and Singapore. The following economies from emerging Europe are added to the sample: Croatia, Czech Republic, Hungary, Kazakhstan, Latvia, Poland, Romania, Russiaand Ukraine, which takes the sample to 26 EMEs. We also add interaction terms for thegrowth and policy rate differentials as well as VIX with regional dummy variables for LatinAmerica and emerging Europe to see if the effects of these variables differ across regions.With emerging Asia as the baseline, the coefficients on these interaction terms measure howdifferent the effects are for Latin America and Eastern Europe, respectively, compared toAsia. The results for the Asia effects, reported in the top three rows of table A4, reinforce ourcore results from table 3 of the main paper that growth differentials, policy rate differentials,and risk aversion all matter. In particular, risk aversion is now statistically significant foremerging Asia for both sub-periods and both specifications. But differences across regionsare clearly visible. In particular, policy rate differentials appeared to matter significantlyless in Latin America than in Asia in the pre-crisis period. And, for total net inflows, riskaversion is also less important for Latin America for both periods. For emerging Europe,risk aversion also appears to be play a significantly smaller role than in Asia in driving totalnet inflows.
A.4  Alternative Measure of Global Risk Aversion
As an alternative to VIX, we use Credit Suisse's Global Risk Appetite Index (GRAI) as ameasure of global appetite for risk. GRAI is obtained as the coefficient from regressing thestock returns from a number of AEs and EMEs (computed over six-month intervals) on stockprice volatility of the preceding 18 months. A tighter link between past stock price volatilityand future stock returns is assumed to signal greater willingness to take more risk and, thusan increase in the GRAI indicates an increase in global risk appetite. Indeed, the results intable A5 show that GRAI is positively related to the EME capital flows and is statisticallysignificant in nearly the same specifications as in table 3 of the paper, while the results forother determinants are also preserved.
A.5  Gross vs. Net Capital Flows
We examine whether the results based on gross capital inflows to EMEs support our previous findings for net capital inflows. Due to the data limitations discussed earlier, when lookingat gross inflows, we had to drop India and Malaysia from our sample of 12 core EMEs.The results for gross inflows, shown in table A6 of the appendix, are somewhat differentfrom those on net inflows reported in table 3 of the paper. In particular, there is still someevidence of the importance of growth differentials for total gross capital inflows, but not asmuch for policy rate differentials. However, the evidence for the importance of risk aversion is much stronger than in table 3, reinforcing those results.

Finally, as shown in table A7, the original results on capital controls are preserved in themodel with gross inflows. All else equal, the number of measures in place and the number ofnew measures still dampen gross inflows of capital, both for total inflows and for portfolioinflows. And, in the specifications with capital controls, the effects of growth differentialsand policy rate differentials on gross inflows are qualitatively fairly similar to the effects onnet inflows reported in Table 5, although not quite as strong. Overall, the magnitude of theeffects are different but the main conclusions still go through with the models that utilizegross inflows.

Table A1: Determinants of Net Inflows Decomposed by EMEs and Advanced Economy Factors, 12 EMEs*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)       Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPInterval:2002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q22002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q2Model:OLSFEOLSFEOLSFEOLSFEgrowth_eme0.49***       (0.12)0.40***       (0.13)0.34***       (0.13)0.53***       (0.14)0.17*       (0.092)0.028       (0.096)0.061       (0.13)0.19       (0.13)growth_ae-0.71       (0.63)-0.76       (0.61)-0.41*       (0.24)-0.60**       (0.24)0.048       (0.48)0.12       (0.44)-0.0014       (0.24)-0.15       (0.22)policy_rate_eme0.20***       (0.076)-0.21       (0.19)0.64***       (0.14)0.77*       (0.40)0.16***       (0.057)-0.15       (0.14)0.34**       (0.14)0.59       (0.36)policy_rate_us-0.38*       (0.22)-0.28       (0.22)  -0.19       (0.17)-0.097       (0.16)  vix-0.090       (0.063)-0.086       (0.061)-0.13       (0.086)-0.13       (0.081)-0.086*       (0.048)-0.084*       (0.044)-0.12       (0.085)-0.12*       (0.073)Constant1.19       (2.40)0.37       (2.52)1.00       (2.18)-1.72       (4.63)-0.15       (1.82)0.049       (1.82)2.18       (2.17)-1.48       (4.21)Observations312312144144312312144144R-squared0.0660.1650.1610.3220.0470.2320.0560.359
Standard errors in parentheses*** pp>
* Economies included are those included in table 3 of the paper: India, Indonesia, Malaysia, the Philippines, South Korea, Taiwan, and Thailand fromemerging Asia, and Argentina, Brazil, Chile, Colombia, and Mexico from Latin America.

Table A2: Determinants of Net Inflows, 17 EMEs From Emerging Asia and Latin America*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)       Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPInterval:2002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q22002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q2Model:OLSFEOLSFEOLSFEOLSFEgrowth_diff_eme-ae0.23***       (0.079)0.16*       (0.083)0.33***       (0.11)
0.31**

(0.13)
0.061       (0.053)0.0058       (0.057)-0.023       (0.087)0.11       (0.099)policy_rate_diff_eme-us-0.028       (0.064)-0.049       (0.11)0.24**       (0.10)0.45       (0.33)0.088**       (0.043)-0.063       (0.078)0.12       (0.082)0.46*       (0.25)vix-0.0082       (0.052)-0.012       (0.048)-0.094       (0.078)-0.096       (0.072)-0.074**       (0.035)-0.057*       (0.033)-0.082       (0.063)-0.087       (0.055)Constant0.079       (1.08)8.52***       (1.93)1.86       (1.94)-5.58       (5.20)0.44       (0.72)0.60       (1.33)2.27       (1.58)-4.26       (3.97)Observations372372202202372372202202R-squared0.0300.2680.0620.2690.0230.2180.0210.329
Standard errors in parentheses, *** pp>
*Economies included are those in table 3 of the paper plus China (with data starting in 2010:Q1), Costa Rica, Peru, Uruguay, and Venezuela. The international financial centers(Hong Kong and Singapore) are excluded.

Table A3: Determinants of Net Inflows, 19 EMEs From Emerging Asia and Latin America Including Financial Centers*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)       Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPInterval:2002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q22002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q2Model:OLSFEOLSFEOLSFEOLSFEgrowth_diff_eme-ae0.23**       (0.094)0.15*       (0.088)0.21       (0.13)0.31**       (0.15)0.022       (0.11)-0.038       (0.11)-0.21       (0.15)-0.28*       (0.17)policy_rate_diff_eme-us0.14*       (0.076)-0.055       (0.12)0.27**       (0.13)0.48       (0.45)0.31***       (0.089)-0.0014       (0.15)0.39***       (0.14)0.21       (0.49)vix-0.019       (0.059)0.0062       (0.049)-0.13       (0.10)-0.13       (0.092)-0.20***       (0.069)-0.15***       (0.059)-0.076       (0.11)-0.073       (0.10)Constant-1.59       (1.25)8.26***       (2.10)2.82       (2.52)0.69       (2.84)0.30       (1.47)2.26       (2.53)0.67       (2.73)3.56       (3.11)Observations424424226226424424226226R-squared0.0170.4000.0300.2760.0430.3820.0600.288
Standard errors in parentheses, *** pp>
*Economies included are those in table A2 plus the international financial centers (Hong Kong and Singapore).

Table A4: Determinants of Net Inflows, 26 EMEs*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)       Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPInterval:2002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q22002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q2Model:OLSFEOLSFEOLSFEOLSFEgrowth_diff_eme-ae0.20       (0.26)0.17       (0.30)0.46***       (0.17)0.49**       (0.22)0.16       (0.16)0.0036       (0.19)-0.051       (0.14)-0.080       (0.17)policy_rate_diff_eme-us0.44**       (0.20)0.80**       (0.35)0.41       (0.29)-0.21       (0.80)0.45***       (0.12)0.41*       (0.22)0.30       (0.23)-0.77       (0.64)vix-0.26***       (0.063)-0.14*       (0.075)-0.30***       (0.083)-0.27**       (0.12)-0.14***       (0.038)-0.14***       (0.047)-0.14**       (0.067)-0.22**       (0.093)growth_diff_eme-ae * d_latam-0.15       (0.27)-0.017       (0.32)-0.40*       (0.24)-0.54*       (0.30)-0.16       (0.16)0.0039       (0.20)-0.027       (0.19)0.19       (0.24)policy_rate_diff_eme-us * d_latam-0.63***       (0.22)-1.00***       (0.38)-0.43       (0.31)0.96       (0.90)-0.38***       (0.13)-0.55**       (0.24)-0.24       (0.25)1.56*       (0.72)vix * d_latam0.14**       (0.066)0.23**       (0.11)0.24***       (0.077)0.34**       (0.16)-0.0081       (0.039)0.15**       (0.069)0.028       (0.062)0.25*       (0.13)growth_diff_eme-ae * d_emeurope0.039       (0.29)-0.023(0.36)-0.70***       (0.21)-0.65**       (0.27)-0.44**       (0.17)0.090       (0.23)-0.043       (0.17)0.036       (0.22)policy_rate_diff_eme-us * d_emeurope-0.71***       (0.23)-1.07***       (0.39)-0.54       (0.33)-0.26       (1.05)-0.35**       (0.14)-0.20       (0.24)-0.50*       (0.27)0.32       (0.84)vix * d_emeurope0.40***       (0.069)0.029       (0.10)0.23***       (0.073)0.047       (0.16)0.088**       (0.042)0.017       (0.064)0.090       (0.059)0.081       (0.13)Constant4.09***       (0.98)8.23**       (3.54)4.50**       (1.75)-13.9**       (6.65)1.37**       (0.59)-1.36       (2.22)3.34**       (1.41)-11.8**       (5.32)Observations593593310310593593310310R-squared0.1800.3980.0820.2960.0750.2510.0300.271
Standard errors in parentheses, *** pp>
*Economies included are those in table A2 plus Croatia, Czech Republic, Hungary, Kazakhstan, Latvia, Poland, Romania, Russia, and Ukraine.

Table A5: Determinants of Net Inflows With GRAI as Risk Variable, 12 EMEs*
Dependent variable:(1)       Total net inflows/NGDP(2)       Total net inflows/NGDP(3)       Total net inflows/NGDP(4)       Total net inflows/NGDP(5)       Portfolio net inflows/NGDP(6)       Portfolio net inflows/NGDP(7)       Portfolio net inflows/NGDP(8)       Portfolio net inflows/NGDPInterval:2002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q22002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q2Model:OLSFEOLSFEOLSFEOLSFEgrowth_diff_eme-ae 0.49***       (0.12)0.43***       (0.13)0.30**       (0.13)0.49***       (0.14)0.19**       (0.091)0.054       (0.095)0.032       (0.13)0.16       (0.13)policy_rate_diff_eme-us 0.21***       (0.073)-0.010       (0.15)0.66***       (0.14)0.92**       (0.42)0.16***       (0.055)-0.080       (0.11)0.35**       (0.14)0.76**       (0.38)grai0.12       (0.12)0.071       (0.12)0.25       (0.16)0.25       (0.16)0.21**       (0.094)0.16*       (0.088)0.17       (0.16)0.21       (0.15)Constant-1.67***       (0.59)-3.39***       (1.15)-1.77**       (0.86)-3.34**       (1.42)-1.61***       (0.45)-2.09**       (0.83)-0.38       (0.86)-0.63       (1.30)Observations312312144144312312144144R-squared0.0610.1530.1610.3190.0420.2550.0470.351
Standard errors in parentheses, *** pp>
*Economies included are those in table 3 of the paper.

Table A6: Determinants of Gross Inflows, 10 EMEs*
Dependent variable:(1)       Total gross inflows/NGDP(2)       Total gross inflows/NGDP(3)       Total gross inflows/NGDP(4)       Total gross inflows/NGDP(5)       Portfolio gross inflows/NGDP(6)       Portfolio gross inflows/NGDP(7)       Portfolio gross inflows/NGDP(8)       Portfolio gross inflows/NGDPInterval:2002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q22002q1-2008q22002q1-2008q22009q3-2012q22009q3-2012q2Model:OLSFEOLSFEOLSFEOLSFEgrowth_diff_eme-ae 0.069       (0.12)0.11       (0.12)0.19       (0.15)0.34**       (0.14)-0.031       (0.082)-0.048       (0.080)0.094       (0.093)0.21**       (0.096)policy_rate_diff_eme-us -0.17**       (0.069)-0.22       (0.15)0.15       (0.15)-0.47       (0.41)-0.073       (0.047)-0.13       (0.094)0.064       (0.095)-0.025       (0.29)vix-0.18***       (0.051)-0.17***       (0.050)-0.25**       (0.097)-0.24***       (0.081)0.10***       (0.035)-0.097***       (0.032)-0.15**       (0.060)-0.14**       (0.057)Constant7.88***       (1.09)9.52***       (2.31)9.63***       (2.39)6.22*** (2.27)3.51***       (0.74)4.56***       (1.49)5.08***       (1.49)2.72*       (1.61)Observations260260120120260260120120R-squared0.0850.2230.0710.4020.0480.2610.0570.222
Standard errors in parentheses, *** pp>
*Economies included are those in table 3 of the paper minus India and Malaysia, for which gross inflows are only partially available.

Table A7: The Effect of Capital Controls on Gross Inflows, 10 EMEs*
Dependent variable:(1)       Total gross inflows/NGDP(2)       Total gross inflows/NGDP(3)       Total gross inflows/NGDP(4)       Total gross inflows/NGDP(5)       Portfolio gross inflows/NGDP(6)       Portfolio gross inflows/NGDP(7)       Portfolio gross inflows/NGDP(8)       Portfolio gross inflows/NGDPInterval:2009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q22009q3-2012q2Model:OLSFEOLSFEOLSFEOLSFEgrowth_diff_eme-ae 0.088       (0.14)0.30**       (0.15)0.19       (0.15)0.32**       (0.14)0.037       (0.091)0.087       (0.098)0.080       (0.091)0.18*       (0.093)policy_diff_eme-us 0.41**       (0.16)-0.39       (0.43)0.40**       (0.17)-0.47       (0.44)0.20**       (0.10)0.22       (0.29)0.19*       (0.10)0.30       (0.30)vix-0.26***       (0.091)-0.25***       (0.081)-0.25***       (0.094)-0.24***       (0.083)-0.15**       (0.058)-0.15***       (0.055)-0.14**       (0.059)-0.14**       (0.055)capital_controls_in_place-0.61***       (0.16)-0.15       (0.20)  -0.32***       (0.099)-0.46***       (0.14)  new_capital_controls  -0.66       (0.53)0.063       (0.51)  0.25       (0.33)0.038       (0.34)1_new_capital_controls  -0.69       (0.54)0.23       (0.53)  -0.51       (0.34)-0.77**       (0.35)12_new_capital_controls  -0.93*       (0.55)0.029       (0.54)  -0.87**       (0.34)-1.05***       (0.36)13_new_capital_controls  -1.19**       (0.55)-0.34       (0.53)  -0.66*       (0.35)-0.77**       (0.35)Constant10.4***       (2.26)6.48***       (2.30)9.71***       (2.32)6.26***       (2.32)5.48***       (1.44)3.54**       (1.55)4.96***       (1.45)2.73*       (1.55)Observations120120120120120120120120R-squared0.1800.4050.1570.4060.1360.2970.1510.313
Standard errors in parentheses*** pp>
Note: capital_controls_in_place is the number of capital control measures introduced since 2009 that are in place in any given quarter. new_capital_controls is thenumber of new capital control measures introduced in a given quarter (l, l2, l3 indicate lagged values). *Economies included are those in table 3 of the paper minus Indiaand Malaysia, for which gross inflows are only partially available.
Footnotes
*  Shaghil Ahmed ([email protected]) is an Assistant Director andAndrei Zlate ([email protected]) is an Economist in theInternational Finance Division of the Board of Governors of theFederal Reserve System, Washington, DC 20551. We would like tothank Joseph Byrne, Neil Ericsson, Steven Kamin, PatriceRobitaille, Frank Warnock, and participants at the fourth BIS-CCAresearch conference held at the Central Bank of Chile for theirvery helpful comments, as well as Andrew Brooks, Quoctrung Bui, andZina Saijid for excellent research assistance. We are immenselygrateful to Matt Malloy for providing his foreign exchangeintervention data to us. The views in this paper are solely theresponsibility of the authors and should not be interpreted asrepresenting the views of the Board of Governors of the FederalReserve System or any other person associated with the FederalReserve System.  Return to text

1.  This paper, and the related literature we discuss, deals withprivate capital flows to EMEs. Even with strong private net capitalinflows into EMEs in the pre- and post-global financial crisisperiods, it is worth noting that total capital has flown "uphill"from the EMEs to the advanced economies because outflows throughofficial channels (reserves accumulation) have been bigger. Therole the influx of total capital into the United States played inlowering long-term U.S. yields in the runup to the global crisishas also been an important subject of discussion. See, for example,Bernanke (2005, 2007) and Bernanke et al. (2011).  Return to text

2.  There is an earlier literature focusing on heavy capital inflows toEMEs in the late 1980s and early 1990s. See, for example, Calvo,Leiderman, and Reinhart (1996), who found cyclical movements inworld interest rates to be important. See also Taylor and Sarno(1997) who focused on the determinants of large portfolio flowsfrom the United States to Latin America and Asia and found globaland country-specific factors to be equally important. Return to text

3.  See, also, IMF (2011b).  Return totext

4.  Among individual country studies, De Gregorio et al. (2000) focuson Chile over the period 1991-98; Cardenas and Barrera (1997) andClements and Kamil (2009) focus on Colombia over the periods1993-98 and 2007-08, respectively; Cardoso and Goldfajn (1998)focus on Brazil over the mid-1990s; and Coelho and Gallagher (2010)focus on Colombia and Thailand in the run-up to the 2008-09 crisis.Among panel studies, Montiel and Reinhart (1999) use an indexmeasuring the incidence and intensity of capital accountrestrictions for 15 EMEs over the period 1990-96, and Binici,Hutchison, and Schindler (2009) use a measure of capital accountrestrictions from the IMFs' AREAER database for 74 countries.Miniane (2004) and Pasricha (2012) examine properties of capitalcontrol measures based on the IMF's AREAER classification ofcapital account restrictions. More broadly, Ostry et al. (2010)provide a survey on the effectiveness of capital controls prior to2009. In contrast to the above studies, which do not find apersistent effect of controls on the volume of flows, across-country study, IMF (2007), suggests that episodes of capitalinflow surges with tighter controls were associated with lower netprivate inflows. Also, Magu, Reinhart, and Rogoff (2011) find thatcertain country-specific characteristics need to exist for capitalcontrols to be effective and, thus, not surprisingly, some capitalcontrols were effective and some not. Return to text

5.  In addition, other studies, such as IMF (2007), have looked at theeffect of foreign exchange intervention on the ability to actuallymoderate real exchange rate appreciations in the face of apersistent surge in capital flows, rather than at the direct effecton capital flows themselves. Return totext

6.  We will discuss later in the methodology section our rationale forfocusing on these EME regions. Return totext

7.  "Banking and other flows'' include bank loans, trade credits,flows to deposit-taking corporations, and flows related toinvestments in financial derivatives. Return to text

8.  Gross banking flows are not available for India and Malaysia, andgross portfolio flows are discontinued for Malaysia in2009:Q4. Return to text

9.   This changing view of capital controlshas also been accompanied by a growing theoretical literature tomore rigorously model the gains and costs of capital-accountrestrictions. Korinek (2011); Jeanne, Subramanian, and Williamson(2012)-in Chapter 2; and Jeanne (2012) review this literature.Using one such theoretical model calibrated to the Argentineeconomy, Bianchi (2011) computes the optimal tax on one-yearforeign currency debt and finds that it could fluctuate between 0and 22 percent, depending on conditions. Return to text

10.   This suggests that the relationshipbetween the U.S. policy rate and capital flows to EMEs is capturingnot just the effect of U.S. monetary policies, but of AE monetarypolicies more broadly. Return totext

11.   For the older literature on "suddenstops" and their effects on balance of payments and real exchangerates, see, for example, Calvo (1998) and Calvo et al. (2004).Also, Reinhart and Reinhart (2009) study capital flow "bonanzas,"using a dataset covering 181 countries over the period 1980-2007. Return to text

12.   IMF (2011a) also use gross inflows,applying the same model irrespective of the size of flows over theperiod 1990:Q1 to 2010:Q2, but ommitting two quarters during thecrisis (2008:Q4 and 2009:Q1).  Return totext

13.   Papaioannou (2009) also findsinstitutional improvements to signficantly increase bankinginflows.  Return to text

14.   To ensure that the quarterlyvolatility of nominal GDP does not affect our results, we have alsonormalized the net capital flows by the country-specific quadratictrend of nominal GDP computed over the sample period. The resultsare largely similar to the core results. Return to text

15.   The aggregate of advanced economiesincludes Australia, Canada, the euro area, Japan, Sweden, theUnited Kingdom, and the United States. Return to text

16.   For robustness, discussed in theAppendix, as an alternative to VIX we also use Credit Suisse'sGlobal Risk Appetite Index (GRAI). Return to text

17.   These determinants can, of course, becorrelated to some extent. For example, for the pre-crisis period,using a recursive VAR, Bruno and Shin (2013a) find that a higherFederal Funds rate was accompanied by an increase in risk-aversion,as measured by VIX.  Return totext

18.   Although this measure applies to bothresidents and non-residents, it may still affect capital inflows,since the short-term bills issued by Bank Indonesia (SBIs) were afavorite destination for carry trade investors. Return to text

19.   Notably, many of these measures havebeen characterized by EME authorities as macroprudential steps topromote financial stability rather than capital controls aiming torestrict the inflows. However, some of the measures have targetedonly foreign investors, not domestic. In addition, measures thatare not specifically aimed at foreign investors may still restrictthe inflows indirectly, such as the restrictions applying todomestic borrowers rather than to foreign lenders, and thereforeare included in our database. Return totext

20.   The measures introduced in the lastmonth of every quarter were assigned to the followingquarter. Return to text

21.   Finally, the IOF on foreigninvestment in equities and certain types of corporate bonds waseliminated in December 2011 (which is assigned to 2012:Q1), butsubsequently the IOF on external borrowing by banks and firms wasextended twice in 2012:Q2 to cover longer tenors. Return to text

22.   In Malloy (2013), the motivation isto explain what determines intervention, whereas in our paper weuse the intervention data as an explanatory variable for capitalflows. Return to text

23.   The net asset purchases are obtainedas the change in the end-of-quarter total holdings of agency debtsecurities, mortgage-backed securities, and U.S. Treasurysecurities expressed in billions of U.S. dollars. For assetholdings, see http://www.federalreserve.gov/datadownload/, under "Factors Affecting Reserve Balances (H.4.1).''  Return to text

24.   We also attempted to estimate thesame model over the crisis period, but it did not give significantresults, perhaps due to the small sample of only four quarters and12 EMEs. Using a broader sample consisting of both advancedeconomies and EMEs, Milesi-Ferretti and Tille (2011) identify thestylized facts and main drivers of the collapse of internationalcapital flows during the global financial crisis. See, also,Ceterolli and Golberg (2010) for a discussion of the role of globalbanks in transmission of the 2007-2009 crisis to EMEs. Return to text

25.   The dating of the crisis period here,from 2008:Q3 to 2009:Q2, is taken to be exogenously given. Whilethis seems reasonable based on events affecting EMEs during theglobal financial crisis, it is possible that endogenizing thecrisis period could result in these exact dates being off by aquarter or two. One way to empirically discover the exactstructural break point is through Indicator Impulse Saturationanalysis, a technique discussed in Hendry (1999) and Johansen andNielsen (2009), inter alia. In future work, we intend toendogenously determine the break dates for the beginning and end ofthe crisis using such techniques. Returnto text

26.   Note that even though the variablesare statistically significant, the R-squared is moderate, indicatedthat some of the variation in capital inflows still remainsunexplained by the variables included. One variable that is oftensuggested as an important determinant of EME capital flows iscommodity prices (see, for example, Byrne and Fiess, 2011). But wehave not included this variable here, as the effects of commodityprices on flows are likely to differ for commodity exporters andcommodity importers, of which we have a mixture in our sample ofEMEs. Return to text

27.   Obviously, the direction of causationcan be an important issue in this argument. One counterargument isthat capital flows may themselves magnifiy economic cycles in EMEs.To the extent that this holds and causation runs from capital flowsto cyclical changes in EME output, the correlation between the twomay still be a source of concern. In much of the recent work on theempirical determinants of capital flows, including this paper, itis assumed that causality runs primarily from growth prospects tocapital flows. However, in some earlier empirical work, for exampleCardarelli, Elekdag, and Kose (2009), which uses data on netinflows to 52 countries over the period 1987 to 2007, it is arguedthat although capital inflows tend to be associated with anaccleration of GDP initially, subsequently growth can dropsignificantly. Kose et al (2009) and Jeanne, Subramanian, andWilliamson (2012)-in Chapter 3-more broadly survey the empiricalevidence on the growth benefits of capital account liberalizationand do not find in the literature any robust benefits. Kose,Prasad, and Taylor (2011) argue that it has been difficult toempirically identify such benefits because the indirect benefits offinancial integration may be more important than the traditionalfinancing channels usually emphasized.  Return to text

28.   Pradhan et al. (2011) discuss how theproperties of capital flows have changed between the pre- andpost-crisis periods. Return totext

29.   Arias et al. (2012) also considerstructural breaks between the pre- and post-crisis in thedeterminants of net private capital flows to EMEs, but using annualdata that ends in 2010. Return totext

30.   Note that our measures of capitalcontrols are indicator variables and do not account for theintensity of each control measure introduced. A useful extensionwould be to construct a more comprehensive measure of capitalcontrols in which a judgment would be made on the intensity basedon the specific details of each measure. Return to text

31.   Since the number of capital controlsin place is a variable that has an upward trend over thepost-crisis period, it is important to note that once a time-trendis included separately, this variable still has a statisticallysignificant, negative effect on capital flows. Thus, the result isnot spurious. Return to text

32.   Of course, capital controls areendogenous; in particular, it has been argued that such controlsare more likely to be imposed at times of heavy capital inflows.However, this would bias against finding a negative effects ofcontrols on flows, and thus does not detract from our results.Also, the endogeneity is partially addressed by the use of laggedvalues of capital control restrictions. But it could be argued thatif news about imposition of controls is leaked in advance,investors may choose to bring in capital in advance of theimposition of controls, and subsequently flows might be seen toslow. To address such circumstances would require a fuller model inwhich capital controls were endogenously determined. Return to text

33.   Some country-specific case studiesfind singnificant changes in the composition of capital flowsfollowing the introduction of capital controls since the globalfinancial crisis. See, for example, IMF (2011a) and, for the caseof Brazil, Forbes et al. (2012). In addition, Gallagher (2011) alsofocuses on some of the more recent capital controls but considerstheir effects on interest rates, exchange rates and asset prices inBrazil, Korea, and Taiwan, rather than directly on capital inflows.Some have also argued that the recent capital controls imposed bycountries lead to spillover effects in terms of increased flows toother countries. For example, Lambert, Ramos-Tallada, and Rebillard(2011), and Forbes et al. (2012), find that increases in Brazil'scapital recent tax on foreign investment (the IOF tax) wereassociated with re-allocations of capital flows to other EMEs inLatin America.  Return to text

34.   A more satisfactory framework wouldbe one that simultaneously models FX intervention at the same timeas studying its effects on future flows, which we leave for futureresearch. Return to text

35.   An alternative interpretation couldbe that a larger war chest of precautionary reserves in a countryboosts investor confidence in that country. Return to text

36.   If we estimate LSAP effects withoutthe crisis period observations, both with the variables used intable 7 as well as other variables related to LSAPs that are usedlater in table 8, the effects of capital flows from LSAPs arestatistically insignificant, although still economicallymeaningful. Also, removing the crisis period observations resultsin a higher sensitivity of post-crisis flows to growthdifferentials and risk-aversion in the post-crisis period thanimplied by the results in table 7 (or table 8 shown later). Return to text

37.   In the first-stage regression, thecoefficient on the one-quarter ahead LSAP purchases is negative andstatistically significant at the the 1% level, with about 10% ofthe variation in yields explained by future LSAPs. Return to text

38.  The views expressed here are solely the responsibility of the authors and should not be interpretedas representing the views of the Board of Governors of the Federal Reserve System or any other personassociated with the Federal Reserve System. Return to text

39.  By and large, these results are consistent with the importance of the EME's own growth performanceas well as of risk aversion and U.S. interest rates that previous studies, such as IMF (2011a), and Ghosh etal. (2012) found using sample periods that ended earlier and used much less of the post-crisis period than isincluded in our study. Return to text

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