Board of Governors of the Federal Reserve System 

International Finance Discussion Papers 

Number 1081 

June 2013 

Capital Flows to Emerging Market Economies: 

A Brave New World? 

Shaghil Ahmed 

Andrei Zlate 

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www.ssrn.com.
Capital Flows to Emerging Market

Economies: A Brave New World?

Shaghil Ahmed Andrei Zlate

Board of Governors of the Federal Reserve System

June 2013

Abstract

We examine the determinants of net private capital ináows to emerging market

economies. These ináows are computed from quarterly balance-of-payments data from

2002:Q1 to 2012:Q2. Our main Öndings are: First, growth and interest rate di§erentials

between EMEs and advanced economies and global risk appetite are statistically and

economically important determinants of net private capital ináows. Second, there have

been signiÖcant changes in the behavior of net ináows from the period before the recent

global Önancial crisis to the post-crisis period, especially for portfolio ináows, partly

explained by the greater sensitivity of such áows to interest rate di§erentials and risk

aversion. Third, capital control measures introduced in recent years do appear to have

discouraged both total and portfolio ináows. Fourth, in the pre-crisis period, there is

some evidence that greater foreign exchange intervention to curb currency appreciation

pressures brought more capital ináows down the line, but we cannot identify such an

e§ect in the post-crisis period. Finally, we do not Önd statistically signiÖcant positive

e§ects of unconventional U.S. monetary expansion on total net EME ináows, although

there does seem to be a change in composition toward portfolio áows. Even for portfolio

áows, U.S. unconventional policy is only one among several important factors.

JEL classiÖcation: F3, E5.

Key words: emerging market economies, capital áows, capital controls, foreign

exchange intervention, unconventional U.S. monetary policy.

Shaghil Ahmed (shaghil.ahmed@frb.gov) is an Assistant Director and Andrei Zlate (andrei.zlate@frb.gov) is an Economist in the International Finance Division of the Board of Governors of

the Federal Reserve System, Washington, DC 20551. We would like to thank Joseph Byrne, Neil Ericsson, Steven Kamin, Patrice Robitaille, Frank Warnock, and participants at the fourth BIS-CCA research

conference held at the Central Bank of Chile for their very helpful comments, as well as Andrew Brooks,

Quoctrung Bui, and Zina Saijid for excellent research assistance. We are immensely grateful to Matt Malloy

for providing his foreign exchange intervention data to us. The views in this paper are solely the responsibility of the authors and should not be interpreted as representing the views of the Board of Governors of

the Federal Reserve System or any other person associated with the Federal Reserve System.
1 Introduction

According to economic theory, free movement of capital across national borders is beneÖcial

to all countries, as it leads to an e¢ cient allocation of resources that raises productivity and

economic growth everywhere. In practice, however, as now appears to be well recognized,

large capital áows can also create substantial challenges for policymakers. These challenges

have recently come to the forefront again for emerging market economies (EMEs). After

tanking during the global Önancial crisis of 2008-09, net private capital áows to EMEs

surged in the aftermath of the crisis and have been volatile since then, raising a number of

concerns in recipient economies.1 To the extent that the volatility is driven by the Öckleness

of international investors, it creates a risk of Önancial instability. Large ináows can also make

more di¢ cult the pursuit of appropriate macroeconomic policies to maintain solid economic

growth without rising ináation. If, in response, authorities raise policy rates while allowing

their currencies to appreciate, this leads to a loss of international competitiveness which

could hurt export and growth performance. But if they slow the pace of monetary tightening

to deter ináows, or if they resist currency appreciation pressures through intervention, the

ability to follow appropriate independent monetary policies is compromised. Such a course

of action could result in excessive liquidity and economic overheating, creating vulnerability

to boom-bust cycles. And Önally, if they resort to capital controls, not only is it an open

question how e§ective these may prove based on the past historical experience, but the use of

such controls also risks creating economic distortions that could weigh on economic activity

over the longer term.

EMEs appear to have employed a mix of policy responses to try and address these concerns. In response to the sharp rebound in capital áows after the global Önancial crisis,

policymakers allowed some currency appreciation but also intervened in foreign exchange

markets to partially stem currency appreciation pressures; several of them introduced some

capital controls and macroprudential measures; and they eased somewhat on policy rate

increases needed to stabilize their economies. With advanced economies providing powerful monetary stimulus to revive their sluggish economies and the EMEs facing a plethora

of capital ináows amid strong recoveries, policy tensions arose between these two groups

of economies. Several EMEs argued that the advanced-economy policies, including unconventional monetary expansion in the United States through large-scale asset purchases, were

1This paper, and the related literature we discuss, deals with private capital áows to EMEs. Even with

strong private net capital ináows into EMEs in the pre- and post-global Önancial crisis periods, it is worth

noting that total capital has áown "uphill" from the EMEs to the advanced economies because outáows

through o¢ cial channels (reserves accumulation) have been bigger. The role the ináux of total capital into

the United States played in lowering long-term U.S. yields in the runup to the global crisis has also been an

important subject of discussion. See, for example, Bernanke (2005, 2007) and Bernanke et al. (2011).

1
primarily responsible for the excessive áows of capital to their economies and creating adverse

spillover e§ects.

In light of these developments, concerns and policy tensions, our paper considers a number

of important questions related to the behavior of private capital áows to EMEs in recent

years and the policy responses they have triggered in the recipient economies: (1) What

are the main drivers of private capital áows into EMEs? (2) Has there been a sea-change

in their behavior from before the global Önancial crisis to after? (3) Have the latest round

of capital control measures introduced in several EMEs since the crisis proved e§ective in

slowing down these ináows? (4) To what extent are capital ináows into EMEs exacerbated

in the Örst place by policies that allow only limited áexibility of the exchange rate? (5) How

much has unconventional monetary policy easing in the United States spurred capital áows

into EMEs? Despite a substantial amount of recent work on aspects of these issues, the

answers to these questions are not settled. Our paper attempts to shed some further light.

The answer to the Örst question would seem to be crucial in informing the debate about

the appropriate policy responses to capital ináows by EMEs. It would be particularly relevant

whether such ináows were primarily a result of factors such as international investorsírisk

appetite, or of economic fundamentals of the recipient countries, including their growth

prospects.

The existing literature does not generally favor one determinant over another. Among

the more recent studies, Byrne and Fiess (2011) Önd U.S. interest rates to be a crucial

determinant of at least the common component of global capital áows to EMEs.2 Similarly,

using a panel-data approach, IMF (2011a) Önds loose policy in the advanced economies to be

an important determinant, but so also are the improved fundamentals and growth prospects

of EMEs. Ghosh et al. (2012) identify episodes of capital ináow surges and Önd a variety of

factors to be important in increasing the likelihood of a surge to EMEs, including lower U.S.

interest rates, greater global risk appetite, and a particular EMEís own attractiveness as an

investment destination.3 Focusing on e§ects of Federal Reserve balance sheet changes on net

áows to emerging market-dedicated funds, Fratzscher et al. (2012) Önd that unconventional

monetary policies in the United States have exerted sizable e§ects on net ináows. But

they also conclude that the e§ects of U.S. unconventional policies have been relatively small

compared to other factors. On the other hand, Forbes and Warnock (2012), focusing on

2There is an earlier literature focusing on heavy capital ináows to EMEs in the late 1980s and early 1990s.

See, for example, Calvo, Leiderman, and Reinhart (1996), who found cyclical movements in world interest

rates to be important. See also Taylor and Sarno (1997) who focused on the determinants of large portfolio

áows from the United States to Latin America and Asia and found global and country-speciÖc factors to be

equally important.

3See, also, IMF (2011b).

2
gross áows, Önd no signiÖcant role for changes in global interest rates or in global liquidity

(as measured by the money supplies of key advanced economies) in a§ecting surges or stops

of foreign ináows; however, like other studies, they do Önd global risk aversion to be an

important and robust factor. Their results, though, are not purely for áows to EMEs, but

focus on cross-border ináows into a large sample of countries that includes both advanced

and emerging economies. Consistent with the general Öndings in the literature, our results

also point to several factors being important in driving EME capital ináows, namely growth

and policy rate di§erentials as well as global risk appetite. Given this, one contribution

of our work is to try to gauge the importance of the di§erent factors for the variability of

capital ináows.

Turning to the e§ectiveness of capital controls, results based on the historical experience

prior to 2009 generally suggest that capital controls have been more successful in altering the

composition of áows to a country than in changing the aggregate volume, except perhaps in

the very short run. (See, for example, Cardoso and Goldfajn, 1998; Cardenas and Barrera,

1997; Montiel and Reinhart, 1999; De Gregorio et al., 2000; Clements and Kamil, 2009; Ostry

et al., 2010; and Qureshi et al, 2011).4In a more recent paper, Forbes and Warnock (2012)

look at a variety of capital account restrictions and Önd virtually no e§ect of such restrictions

on cross-border áows. Their sample period goes through 2009, but there is relatively little

empirical evidence on the e§ectiveness or otherwise of the cyclical types of capital controls

that several EME have introduced since 2009 in the aftermath of the global Önancial crisis,

which we focus on.

With respect to the question of the role of limited exchange rate áexibility in creating a

vicious circle of capital ináows and currency appreciation pressures, some previous studies

have also considered the role of exchange rate regimes. For example, the Ghosh et al. (2012)

study mentioned earlier Önds that while having a more áexible exchange rate regime does

not statistically signiÖcantly a§ect the likelihood of a surge in capital áows, conditional on

4Among individual country studies, De Gregorio et al. (2000) focus on Chile over the period 1991-98;

Cardenas and Barrera (1997) and Clements and Kamil (2009) focus on Colombia over the periods 1993-98

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 index measuring the incidence and intensity of capital account

restrictions for 15 EMEs over the period 1990-96, and Binici, Hutchison, and Schindler (2009) use a measure

of capital account restrictions from the IMFsí AREAER database for 74 countries. Miniane (2004) and

Pasricha (2012) examine properties of capital control measures based on the IMFís AREAER classiÖcation

of capital account restrictions. More broadly, Ostry et al. (2010) provide a survey on the e§ectiveness of

capital controls prior to 2009. In contrast to the above studies, which do not Önd a persistent e§ect of

controls on the volume of áows, a cross-country study, IMF (2007), suggests that episodes of capital ináow

surges with tighter controls were associated with lower net private ináows. Also, Magu, Reinhart, and Rogo§

(2011) Önd that certain country-speciÖc characteristics need to exist for capital controls to be e§ective and,

thus, not surprisingly, some capital controls were e§ective and some not.

3
having a surge, it does diminish the magnitude of the surge. The magnitude of the surge

is also positively related to their measure of currency undervaluation.5In this paper, we

use a direct measure of foreign exchange intervention that has been carefully constructed by

Malloy (2013) to examine its importance for EME capital áows in both the pre-crisis and

post-crisis period.

Finally, regarding the impact of recent advanced-economy monetary policies on EME

capital áows, despite much debate on this topic, there have not been many empirical studies

that systematically look at this channel, including isolating the impact of unconventional

tools. Most discussions of the impact of monetary expansion in advanced economies are

inferred from studies of the e§ect of long-term U.S. interest rates (or other proxy for global

interest rates) on the EME capital áows mostly in the pre-crisis period, and often do not

cover the period of the recent unconventional monetary policy as part of their sample period.

One important exception is the Fratzcher et al. (2012) study discussed above, which focuses

directly on the Federal Reserveís asset purchase announcements and actual balance sheet

changes. The e§ect measured, though, is on áows to EME-dedicated funds, which form

only a small part of total capital ináows to these economies. In our paper, unlike in the

existing literature, we isolate changes in long-term U.S. interest rates that can be directly

attributed to unconventional policies, and then examine the e§ect of such changes on EME

balance-of-payments (BOP) capital áows.

The remainder of this paper is organized as follows. As background, section 2 provides the

main properties of capital áows to EMEs over the past decade or so and the policy responses

they have elicited in recent years. Section 3 presents the empirical methodology we utilize to

answer the Öve questions posed in this paper, compares this methodology to those of others,

and describes the data used in the paper. Section 4 presents our main results, interprets

them, and brieáy points to some robustness exercises we have done. Section 5 concludes.

2 Main Features of Capital Flows to EMEs and Policy

Responses

Figure 1 (top panel) shows the total net private capital ináows into major emerging Asian

and Latin American economies since 2002, along with their components by type of investment.6 For several years prior to the global Önancial crisis, these economies received sizable

5

In addition, other studies, such as IMF (2007), have looked at the e§ect of foreign exchange intervention

on the ability to actually moderate real exchange rate appreciations in the face of a persistent surge in capital

áows, rather than at the direct e§ect on capital áows themselves.

6We will discuss later in the methodology section our rationale for focusing on these EME regions.

4
net ináows of private capital. These net ináows turned sharply negative (i.e. to net outáows)

at the onset of the crisis. They then surged in the second half of 2009 and 2010 as strong

economic recoveries took hold in these economies. But net ináows dried up again in the

second half of 2011 with the intensiÖcation of the European crisis and the associated rise

in global risk aversion, before picking up again as the easing of Önancial stresses in Europe

appeared to improve investor sentiment. Looking at components of the net ináows, foreign

direct investment (FDI, the green bars) has been relatively stable over the years, with most

of the volatility concentrated in portfolio áows (the blue bars) and banking and other áows

(the red bars).7

The middle and bottom panels of Ögure 1 present the gross ináows and the gross outáows,

separately. Note that India and Malaysia are excluded in these panels because they report

only some of the components of gross áows by investment type.8 However, since these two

countriesíáows are relatively small, the di§erence between gross ináows in the middle panel

and the gross outáows in the bottom panel comes fairly close to the net ináows reported in

the top panel. Interestingly, gross outáows mimic a pattern similar to gross ináows ñ that

is, when foreign investors are increasing their holding of EME assets, EME investors are also

increasing their holdings of foreign assets. Yet, because these similar movements in gross

outáows are generally lower in magnitude, the behavior of net ináows is similar to that of

gross ináows with a fairly high correlation. The issue of using net ináows versus gross ináows

is a topic of debate in the literature, and we will return to this question in our methodology

section.

Figure 2 shows the cumulative net ináows since 2002, which abstracting from valuation

changes, can give a sense of how the outstanding amounts of these investments have evolved.

A noteworthy feature of the cumulative áows is that the pre-crisis runup in áows was especially concentrated in banking and other investments (the red line), whereas the subsequent

collapse during the crisis occurred in both portfolio áows and banking áows. Also, the postcrisis recovery was dominated by portfolio áows (the blue line). Finally, cumulative net

ináows of FDI have been much bigger in magnitude than cumulative net ináows of portfolio

or banking and other investments.

Next we turn to the policy responses in EMEs that these capital áows have elicited. First,

as can be seen from Ögure 3, EME policymakers in both emerging Asia and Latin America

allowed their currencies to appreciate some in response to the sharp rebound in capital

ináows after the global Önancial crisis, which resulted in less monetary stimulus than would

7ìBanking and other áowsî include bank loans, trade credits, áows to deposit-taking corporations, and

áows related to investments in Önancial derivatives.

8Gross banking áows are not available for India and Malaysia, and gross portfolio áows are discontinued

for Malaysia in 2009:Q4.

5
have occurred under a Öxed exchange rate regime. However, EME policymakers did not let

exchange rates adjust completely freely. They leaned against currency appreciation through

intervention sales of domestic currency in the foreign exchange market, thereby accumulating

signiÖcant amounts of foreign exchange reserves, especially in the case of emerging Asia, as

shown in Ögure 4.

Intervention generally compromises the ability to follow independent monetary policies.

Indeed, EME policymakers appear to have tempered somewhat the policy rate increases that

their strong post-crisis recoveries seemed to warrant, for fear that policy rate increases might

attract even more ináows and thwart their attempts to stabilize their economies. Figure 5

graphs the aggregate output gaps and real policy rate of a select group of EMEs. The Ögure

illustrates that following their sharp recoveries and amid overheating pressures in 2009 and

2010, authorities started reversing the earlier policy rate increases only with a signiÖcant

lag. EMEs have also used more macroprudential measures in recent years to strengthen

their Önancial systems and target speciÖc sectors, such as property markets, that may be

especially susceptible to asset bubbles.

Finally, a number of countries also employed capital controls seeking to slow capital

ináows and currency appreciation pressures. Our paper constructs a database of these recent

measures, which we will introduce later. For now, table 1 illustrates the control measures

by country, the type of áows being targeted to be restricted, and the type of measure used.

Capital controls had long been viewed with disfavor in the o¢ cial international community.

But in recent years, there has been a reassessment in both academic and policy circles of

the role of controls in reducing risks associated with capital áows. This reassessment has

been led by the IMF, which now supports the use of controls in certain, relatively limited,

circumstances: when the domestic currency is not undervalued, when the level of reserves

is already adequate, and when the economy is in danger of overheating, so that monetary

easing to alleviate capital ináows would be undesirable (see, for example, IMF 2010, 2011a,

2012; Ostry et al., 2011). In laying down these conditions, the IMF emphasizes that controls

should not be used to substitute for necessary macroeconomic policy adjustments.9

9This changing view of capital controls has also been accompanied by a growing theoretical literature

to more rigorously model the gains and costs of capital-account restrictions. Korinek (2011); Jeanne, Subramanian, and Williamson (2012)-in Chapter 2; and Jeanne (2012) review this literature. Using one such

theoretical model calibrated to the Argentine economy, Bianchi (2011) computes the optimal tax on one-year

foreign currency debt and Önds that it could áuctuate between 0 and 22 percent, depending on conditions.

6
3 Methodology

3.1 Empirical model

We model net private capital ináows to major EMEs in the emerging Asia and Latin America

using quarterly panel data since 2002. We will present estimation results for total net ináows

and portfolio net ináows; we were less successful in modeling foreign direct investment and

banking and other áows individually. The start date of 2002 allows us to compare the period

before the global Önancial crisis, when áows were also strong, to the surge in capital áows

after the crisis. SpeciÖcally, the general empirical model, variants of which we estimate, can

be written as:

NP Iit

Yit

= 0 +

Xn1

i=1

iDi + 

0Xit + 
1RAt + 
2CCit + "it (1)

The left hand side represents the ratio of net private ináows (NP I) ñ either total or

portfolio only ñto country i during time period t as a fraction of the countryís nominal GDP

(Y ), and n is the number of cross-sections (countries) in the panel. These áows as a share of

GDP are modeled as a function of Öxed e§ects (Di = 1 if an observation pertains to country

i, 0 otherwise), a vector of variables that are likely to ináuence return di§erentials (X) (that

are discussed in more detail below), a measure of global risk aversion (RA) that does not

vary across countries and thus has no i subscript, and a variable capturing the number of

capital control measures (CC). The ís, the vector , 
1, and 
2represent parameters to be

estimated, and "it is the unexplained portion of the variation in capital ináows for country

i during period t.

The most important return di§erentials driving áows of net foreign investment to the

EMEs are generally found to be those between the EMEs and the advanced economies. In

addition, returns to foreign investors will be positively ináuenced by expected appreciation

of the currency of the country in which they are investing. Our stance here is that expected

appreciation is di¢ cult to measure directly, but that intervention activities systematically

aimed at keeping currencies from appreciating increase the expected rate of currency appreciation down the line, and thus are likely to induce capital ináows. Accordingly, return

7
di§erentials in our empirical work are assumed to be related to the following variables:

Xit =

0

BBBB@

X1it

X2it

X3it

X4it

1

CCCCA

=

0

BBBBBB@

git  g

AE

t

Rit  RUS

t

X

8

k=1

INT Vi;tk=Yit

USLSAP St

1

CCCCCCA

(2)

where gi and g

AE represent, respectively, real GDP growth in country i and in an aggregate of the advanced economies; Ri and RUS represent the monetary policy rates in country i

and in the United States, respectively; INT Vi;tk measures foreign exchange intervention undertaken by country i, k quarters ago, with positive values indicating intervention to contain

currency appreciation pressures (leading to accumulation of foreign reserves), and negative

values indicting intervention to curb currency depreciation pressures (leading to decumulation of foreign reserves). Thus, the Örst three variables assumed to a§ect return di§erentials

are the economic growth di§erential between a given EME and an aggregate of advanced

economies, the policy rate di§erential between a given EME and the United States, and

the amount of intervention undertaken on net over the past 8 quarters as a share of GDP.

Intervention is expressed as a share of GDP because the dependent variable also expresses

net capital private ináows as a share of GDP. Note that we have used a policy di§erential

with the United States only, rather than with the AE aggregate, because most discussions

of the impact of AE policies on EME capital áows focus primarily on U.S. policies, and U.S.

interest rates are also used generally as a proxy for global interest rates in the empirical

work. However, in practice, it makes little di§erence if the U.S. policy rate is substituted by

an aggregate AE policy rate.10 In addition to these three variables, in the post-crisis period

when the lower bound of zero on the U.S. policy rate has been binding, return di§erentials

are also generally expected to be ináuenced by unconventional U.S. monetary expansion.

Accordingly, we also include a variable designed to capture the e§ects of U.S. Large-Scale

Asset Purchases (LSAPs), USLSAP S.

Based on (1) and (2), the empirical model can be expressed as:

NP Iit

Yit

= 0 +

Xn1

i=1

iDi + 1(git  g

AE

t

) + 2(Rit  R

US

t

) + 3

 X

8

k=1

INT Vi;tk=Yit!

+4USLSAP St + 
1RAt + 
2CCit + "it (3)

10This suggests that the relationship between the U.S. policy rate and capital áows to EMEs is capturing

not just the e§ect of U.S. monetary policies, but of AE monetary policies more broadly.

8
3.2 Comparison with earlier methodologies

Much of the previous literature on the determinants of capital áows 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 áows are di§erent from normal times and may have di§erent determinants.11 While this seems to be a

reasonable strategy, it has the downside that it does not easily allow us to see how much

of the unusual áows is a result of outsized movements in the explanatory variables that

ináuence these áows in normal times as well, and how much truly cannot be explained by

models that apply during normal times. Moreover, with the periods of unusual áows being,

by deÖnition, much less common than periods of normal áows, it is di¢ cult to identify how

the determinants of capital áows may have changed over time when considering only surges

and stops. Yet one of the key questions with respect to recent EME capital áows is whether

the resilience of these economies through the global crisis has led to a new world in terms of

what is driving these áows. We, therefore, want to investigate how far we can get with the

more traditional approach of estimating the same model irrespective of the size of the áows,

but looking for structural breaks at di§erent times.

Another point of debate in the literature is whether focusing on gross capital ináows

(featuring actions of non-resident investors only) or net ináows (which also take into account

the action of domestic residents in foreign markets) is more appropriate, and whether it

makes any di§erence to the results. For example, in the Forbes and Warnock (2012) study,

the authors argue that the distinction is material because episodes of surges measured by

net ináows ñ the usual practice in the literature ñ result, in fact, both from cases of sharp

retrenchments by domestic investors of their investments abroad, as well as from cases of

genuine surges of investment into the country by foreign investors. As indicated earlier, we

do not identify surges or retrenchments, but instead look at investment áows during all times,

and our earlier discussion of the behavior of gross versus net áows for the economies we are

studying suggests that the pattern of gross vs. net capital ináows is similar. Conceptually,

whether to focus on net ináows or gross ináows would seem to depend on the particular

question at hand. Thus, net ináows may be more relevant for exchange rate appreciation

and general overheating concerns, whereas gross áows may be more relevant for Önancial

stability issues and the capacity of EME Önancial systems to e§ectively intermediate the

áows. Given the issues we are interested in, we report results on net ináows as our core

results, but as part of our robustness checks, we discuss in the Appendix how the results

11For the older literature on "sudden stops" and their e§ects on balance of payments and real exchange

rates, see, for example, Calvo (1998) and Calvo et al. (2004). Also, Reinhart and Reinhart (2009) study

capital áow "bonanzas," using a dataset covering 181 countries over the period 1980-2007.

9
di§er if instead we use gross ináows.12

The set of countries used also di§ers across studies of cross-border áows of capital. As

we mentioned earlier, Forbes and Warnock (2013) use a mixture of advanced and emerging

market economies, but for the set of issues at hand we would want to focus on the EMEs

only. Other papers discussed before (for example, Ghosh et al., 2012; Fratzcher et al.,

2012; Byrne and Fiess, 2011; and IMF, 2011a) use a mixture of EMEs. The issues we

are mainly interested in, however ñsuch as concerns about real exchange rate appreciation

pressures, spillover e§ects of advanced-economy expansionary policies, the e§ectiveness of

recent capital controls ñ would seem to apply with particular force to the emerging Asian

and Latin American EMEs. A very di§erent set of considerations and issues applies to

eastern European economies, for example. Even within the Asian EMEs, important world

Önancial hubs like Hong Kong and Singapore have much larger gross capital ináows and

outáows, a large portion of which may not be ináuenced by the same variables that are

relevant for other EMEs. Accordingly, in our benchmark results we focus our analysis on

emerging Asian and Latin American economies, excluding Hong Kong and Singapore. The

economies we include are some of the largest recipients of private capital ináows among

emerging markets. In our robustness results (reported in the Appendix), we also study what

implications that including other EMEs, such as those in eastern Europe, has for our results.

In discussing our methodology, we also want to raise the issue of whether to include Öxed

e§ects or not. It would seem natural to do so, but one relevant consideration is that there

are also long-lasting growth di§erentials between EMEs and AEs that arise from their longterm growth potentials being di§erent. To the extent that such di§erences are more or less

constant over time, but may di§er from country to country, they would likely show up in Öxed

e§ects and diminish the importance of the growth di§erential variable. So, one interpretation

of Öxed e§ects could be that they are capturing long-lasting growth di§erentials between

countries. On the other hand, anything else that is di§erent between countries that does not

vary over time but that a§ects capital áows to them would also show up in the Öxed e§ects.

Based on these considerations, we present both models that include and do not include Öxed

e§ects.

Finally, in contrast to our paper, some other studies approach the issue of the determinants of capital áows by Örst isolating the common component of such áows across countries.

Byrne and Fiess (2011) do this in the context of emerging markets, by Örst identifying the

common component of EME capital áows, and then by studying whether this common component has a stochastic trend and what are its determinants. They also Önd a signiÖcant

12 IMF (2011a) also use gross ináows, applying the same model irrespective of the size of áows over the

period 1990:Q1 to 2010:Q2, but ommitting two quarters during the crisis (2008:Q4 and 2009:Q1).

10
role for human capital and the quality of institutions in driving capital áows.13

3.3 Data and measurement

Our core results are based on a balanced, quarterly panel data set that covers 12 EMEs

from emerging Asia and Latin America over the period 2002:Q1 to 2012:Q2. This sample

period covers not only the global wave of capital áows 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 rationale for focusing on EMEs from these regions. The EMEs

included are seven Asian economies (India, Indonesia, Korea, Malaysia, the Philippines,

Taiwan and Thailand) and Öve Latin American ones (Argentina, Brazil, Chile, Colombia

and Mexico). The basic sample excludes China, for which quarterly balance of payments

(BOP) data are not available prior to 2010; as discussed earlier, it also excludes Hong Kong

and Singapore, whose capital áows are not determined by the usual EME considerations,

given their status as Önancial centers. However, for the robustness checks, details of which

are in the Appendix, we use an extended sample of 28 EMEs from Asia (including China,

Hong Kong and Singapore), Latin America, and emerging Europe.

3.3.1 Capital áows and macroeconomic indicators

To construct the dependent variables, we use quarterly BOP data on net private capital

ináows expressed in nominal U.S. dollars and normalized by the quarterly nominal GDP of

the recipient economy. In separate speciÖcations, our dependent variables are the total net

áows and, alternatively, the portfolio net áows, each normalized by GDP.14

Turning to explanatory variables, the economic growth di§erential is measured as the

di§erence between four-quarter real GDP growth rates in each EME and an aggregate of

advanced economies.15 As shown in Figure 6 (top panel), aggregate real GDP growth in

EMEs (the red line) has consistently outpaced that in the advanced economies (the blue

line), and the growth di§erential (the orange bars) has áuctuated over the sample period.

Note that the growth di§erential widened in late-2009 and early-2010, reáecting the faster

pace of recovery from the crisis in the EMEs. However, as the EMEs slowed more recently,

the growth di§erential narrowed, although it remains sizeable.

13Papaioannou (2009) also Önds institutional improvements to signÖcantly increase banking ináows.

14To ensure that the quarterly volatility of nominal GDP does not a§ect our results, we have also normalized the net capital áows by the country-speciÖc quadratic trend of nominal GDP computed over the sample

period. The results are largely similar to the core results.

15The aggregate of advanced economies includes Australia, Canada, the euro area, Japan, Sweden, the

United Kingdom, and the United States.

11
The policy interest rate di§erential is computed as the di§erence between the nominal

policy rate for each EME and the U.S. Federal Funds rate. As shown in Figure 6 (middle

panel), the interest rate di§erential (the orange bars) has been positive, but áuctuated notably over the sample period. During the post-crisis recovery, the di§ering cyclical positions

of the EMEs and advanced economies called for di§erent monetary policy settings, and drove

up the interest rate di§erential. However, over the past several quarters, several EMEs have

been lowering policy rates, leading to some narrowing of the interest rate di§erentials.

As an indicator of global risk appetite or the lack thereof, we use the quarterly average

of the Volatility Index (VIX) computed by the Chicago Board Options. This is a measure

of the implied volatility of the S&P 500 index, and serves in our regressions as a proxy for

the combination of perceived risk and risk aversion. Indeed, Figure 6 (bottom panel) shows

that the áows to emerging market-dedicated funds (the red line) have been correlated with

the VIX index (the blue line, plotted on an inverted scale so that a movement in the upper

direction represents more appetite for risk and less risk aversion). Thus, capital áows to

EMEs plunged during the investor panic after Lehman Brothers in 2008, and again as the

European situation worsened in the second half of 2011 and in May 2012.16

Summary statistics on these explanatory variables are provided in table 2.17

3.3.2 Capital control measures

We construct a novel database for the new measures attempting to control capital ináows

introduced since the global Önancial crisis by the EMEs in our sample. We have compiled

these measures from local press releases and news bulletins since 2009. We have already

mentioned table 1, which illustrates these measures by country, according to the type of

ináows targeted and the type of measures used. To give a bit more detail here, among

the measures restricting portfolio ináows, taxes on investments by foreigners apply either to

the total volume of ináows (Brazil), or to the foreign investorsíincome from holding local

government bonds (in Korea and Thailand). Restrictions on asset holdings include a minimum holding requirement in Indonesia on the short-term bills issued by the central bank.18

To restrict banking ináows, countries have used taxes on short-term external borrowing or

limits on banksíexposure to foreign exchange derivatives, which seek in part to reduce the

short-term external debt that banks would use to hedge these derivatives. Finally, a number

16For robustness, discussed in the Appendix, as an alternative to VIX we also use Credit Suisseís Global

Risk Appetite Index (GRAI).

17These determinants can, of course, be correlated to some extent. For example, for the pre-crisis period,

using a recursive VAR, Bruno and Shin (2013a) Önd that a higher Federal Funds rate was accompanied by

an increase in risk-aversion, as measured by VIX.

18Although this measure applies to both residents and non-residents, it may still a§ect capital ináows, since

the short-term bills issued by Bank Indonesia (SBIs) were a favorite destination for carry trade investors.

12
of EMEs have increased the required reserves on banksíliabilities denominated in foreign

currencies.19

Keeping track of the measures to control capital ináows introduced by the economies

in our sample since 2009 ñ with Öve of the 12 EMEs having introduced such measures

ñ we construct two types of variables, shown in Figure 7. First, we use the cumulative

number of measures in place in any given quarter (the blue/solid lines). Second, we also

use the number of new measures introduced in any given quarter (the red/dashed lines),

which is the Örst di§erence of the number of measures in place.20 As an example, in Brazil,

authorities introduced new measures in 2009:Q4 (when the IOF tax was reinstated on foreign

investment in both equity and Öxed income) and again in 2010:Q4 (when the IOF on Öxed

income and mutual fund investments was raised twice, and was also extended to derivatives).

The IOF on mutual fund investments was lowered in late 2010, but authorities then raised

the unremunerated reserve requirements on banksíshort dollar positions, and imposed and

raised the IOF on banksíshort-term external loans in 2011:Q2 and 2011:Q3.21

3.3.3 Foreign exchange intervention

To study the e§ect of foreign exchange (FX) intervention on capital áows, we use data on

central bank FX intervention that are constructed by Malloy (2013). He compiles the degree

of intervention either from published reports provided by certain EMEs on their intervention

activities or, if such reports are not available, from monthly changes in central bank reserves

adjusted for exchange rate valuation e§ects. Positive values reáect purchases of foreign

currency and thus intervention to prevent currency appreciation. The data are available for

nine of the 12 EMEs in our core sample (Argentina, Chile and Malaysia are excluded).22

3.3.4 Large scale asset purchases (LSAPs)

We use several measures to assess the e§ect of unconventional U.S. monetary policy on

capital áows to EMEs. First, we use indicator variables to assess whether the behavior of

19Notably, many of these measures have been characterized by EME authorities as macroprudential steps

to promote Önancial stability rather than capital controls aiming to restrict the ináows. However, some of the

measures have targeted only foreign investors, not domestic. In addition, measures that are not speciÖcally

aimed at foreign investors may still restrict the ináows indirectly, such as the restrictions applying to domestic

borrowers rather than to foreign lenders, and therefore are included in our database.

20The measures introduced in the last month of every quarter were assigned to the following quarter.

21Finally, the IOF on foreign investment in equities and certain types of corporate bonds was eliminated

in December 2011 (which is assigned to 2012:Q1), but subsequently the IOF on external borrowing by banks

and Örms was extended twice in 2012:Q2 to cover longer tenors.

22 In Malloy (2013), the motivation is to explain what determines intervention, whereas in our paper we

use the intervention data as an explanatory variable for capital áows.

13
áows is unusual during the initial announcements and the implementation periods of the

Örst two rounds of large-scale asset purchases (LSAP) by the Federal Reserve. The indicator

variable is equal to 1 for quarters when the programs were Örst announced or when the

amount of purchases was extended, using the standard announcement dates documented by

the literature (see Gagnon et al., 2011, Krishnamurthy and Vissing-Jorgensen, 2011, and

Bauer, 2012). The ìimplementationîindicator variable is equal to 1 for the duration of each

program. Second, we use the yields on 10-year U.S. treasury bonds to try to capture the

e§ect of unconventional monetary easing. Third, we use net asset purchases by the Federal

Reserve from 2003:Q1 to 2012:Q2 as an instrumental variable to try to isolate more directly

the change in Treasury yields that could be attributed to unconventional U.S. monetary

policy.23

4 Core Results

4.1 The basic model

We Örst estimate a basic model without the foreign exchange intervention and capital control

variables, separately for the pre-crisis and post-crisis periods. The intervention data are

only available for a subset of our countries, and our database does not cover cyclical capital

controls before the crisis. Since one of our goals is to compare the pre-crisis to the post-crisis

áows, we start o§ with a model with the same variables over the two periods.24 The empirical

models focus on explaining both total and portfolio net capital ináows. However, we do not

estimate the model separately for the FDI or the banking and other áows components. FDI

áows have been relatively stable, and banking áows are ináuenced by many additional factors,

such as advanced economy regulations, leverage, and banking sector equity (see Brookings,

2012 and Bruno and Shin, 2013b).

Table 3 presents the results of the basic model with total net ináows and portfolio net

ináows, both expressed as a percent of GDP, as the alternative dependent variables. As

described earlier, the real GDP growth di§erentials, the policy rate di§erentials (both ex23The net asset purchases are obtained as the change in the end-of-quarter total holdings of agency debt

securities, mortgage-backed securities, and U.S. Treasury securities expressed in billions of U.S. dollars.

For asset holdings, see http://www.federalreserve.gov/datadownload/, under ìFactors A§ecting Reserve

Balances (H.4.1).î

24We also attempted to estimate the same model over the crisis period, but it did not give signiÖcant

results, perhaps due to the small sample of only four quarters and 12 EMEs. Using a broader sample

consisting of both advanced economies and EMEs, Milesi-Ferretti and Tille (2011) identify the stylized facts

and main drivers of the collapse of international capital áows during the global Önancial crisis. See, also,

Ceterolli and Golberg (2010) for a discussion of the role of global banks in transmission of the 2007-2009

crisis to EMEs.

14
pressed in percentage points), and global risk aversion (as measured by the VIX index) are

the explanatory variables. The pre-crisis sample period is 2002:Q1 to 2008:Q2, ending just

before the collapse of Lehman Brothers, and the post-crisis period is 2009:Q3 to 2012:Q2,

with the start date of this period corresponding to the quarter by which áows had deÖnitively

recovered from their weakness during the crisis.25 Both simple OLS estimates and estimates

with Öxed e§ects (FE) are provided.

In general, the explanatory variables come in statistically signiÖcant and with the expected sign, and the magnitudes of the estimated e§ects appear to be economically signiÖcant as well.26 In both the pre-crisis and post-crisis period, the main determinants of total

net ináows (columns 1-4) are the growth di§erentials and policy rate di§erentials, whereas

risk aversion does not come in statistically signiÖcant. A one percentage point increase in

real GDP growth di§erentials is associated with additional total net private ináows of 0.3

to 0.5 percent of GDP, with the e§ects about equal for the pre- and post-crisis periods. A

one percentage point increase in the policy rate di§erential, when statistically signiÖcant, is

associated with additional total net ináows of 0.2 to 0.7 percent of GDP, with the lower end

of the range applying to the pre-crisis period and the upper end of the range applying to the

post-crisis period.

The story of the determinants of portfolio net ináows is somewhat di§erent (columns

5-8). Unlike in the case of total net ináows, global risk aversion plays an important part in

explaining portfolio áows. As we would expect, greater global risk aversion, measured as an

increase in the VIX index, has a negative e§ect on net portfolio ináows, and the e§ect is

generally statistically signiÖcant. Policy interest rate di§erentials still matter for the models

without FE, with a one percentage-point increase in this di§erential raising net portfolio

ináows by 0.16 percent of GDP in the pre-crisis period and by about twice as much, 0.34

percent of GDP, in the post-crisis period. Once FE are included, the importance of the

policy rate di§erential diminishes in terms of statistical signiÖcance. Growth di§erentials

appear to be much less important for portfolio ináows than they were found to be for total

25The dating of the crisis period here, from 2008:Q3 to 2009:Q2, is taken to be exogenously given. While

this seems reasonable based on events a§ecting EMEs during the global Önancial crisis, it is possible that

endogenizing the crisis period could result in these exact dates being o§ by a quarter or two. One way to

empirically discover the exact structural break point is through Indicator Impulse Saturation analysis, a

technique discussed in Hendry (1999) and Johansen and Nielsen (2009), inter alia. In future work, we intend

to endogenously determine the break dates for the beginning and end of the crisis using such techniques.

26Note that even though the variables are statistically signiÖcant, the R-squared is moderate, indicated that

some of the variation in capital ináows still remains unexplained by the variables included. One variable that

is often suggested as an important determinant of EME capital áows is commodity prices (see, for example,

Byrne and Fiess, 2011). But we have not included this variable here, as the e§ects of commodity prices on

áows are likely to di§er for commodity exporters and commodity importers, of which we have a mixture in

our sample of EMEs.

15
ináows, especially in the FE model. The diminished signiÖcance of growth and interest

rate di§erentials when FE are included is consistent with the idea that these Öxed e§ects

may partly be capturing the long-standing growth potential and the long-run interest rate

di§erentials between EMEs and AEs.

The previous literature often divides variables driving the capital áows to EMEs into

the so-called "pull" and "push" factors. The variables related to the EMEs themselves are

regarded as factors "pulling" áows into these economies, while the rest of the world variables

are considered factors "pushing" capital áows into these economies. The usual interpretation

seems to be that "push" brings in the problematic kind of áows, while "pull" brings in the

acceptable kind. We are not especially fond of this distinction. For example, whether growth

di§erentials widen because foreign growth is low or EME growth is high, in both cases it is

economic fundamentals at work driving the áows, which should not be a cause for alarm.27

In any case, the F-statisics reported at the bottom of table 3 suggest that the null hypothesis

ñ according to which the EME and AE growth e§ects and the EME and U.S. policy rate

e§ects, respectively, are jointly equal in magnitude but of opposite signs ñcannot be rejected.

As such, in what follows we proceed with the model expressed in growth and policy rate

di§erentials. However, to compare our results to those from other studies, the robustness

results in the Appendix present estimates for which the growth and policy di§erentials are

separated into the individual variables that make up the di§erential.

In general, our results so far support the previous literature (discussed earlier) that Önds,

on balance, a variety of factors to be important in ináuencing capital áows to EMEs.

4.1.1 How important are the di§erent drivers?

The coe¢ cients given in table 3 by themselves do not directly tell us the economic importance

of the di§erent variables implied by the estimated model. One way to gauge the economic

importance of a particular variable is to compare the Ötted value from the full model with

the model prediction under the counterfactual that keeps the variable of interest at its initial

27Obviously, the direction of causation can be an important issue in this argument. One counterargument

is that capital áows may themselves magniÖy economic cycles in EMEs. To the extent that this holds and

causation runs from capital áows to cyclical changes in EME output, the correlation between the two may

still be a source of concern. In much of the recent work on the empirical determinants of capital áows,

including this paper, it is assumed that causality runs primarily from growth prospects to capital áows.

However, in some earlier empirical work, for example Cardarelli, Elekdag, and Kose (2009), which uses data

on net ináows to 52 countries over the period 1987 to 2007, it is argued that although capital ináows tend to

be associated with an accleration of GDP initially, subsequently growth can drop signiÖcantly. Kose et al

(2009) and Jeanne, Subramanian, and Williamson (2012)ñin Chapter 3ñmore broadly survey the empirical

evidence on the growth beneÖts of capital account liberalization and do not Önd in the literature any robust

beneÖts. Kose, Prasad, and Taylor (2011) argue that it has been di¢ cult to empirically identify such beneÖts

because the indirect beneÖts of Önancial integration may be more important than the traditional Önancing

channels usually emphasized.

16
value, rather than allowing it to evolve as it did in reality. Figure 8 reports the results of

this exercise for the total net ináows model, for both the pre-crisis period and the post-crisis

periods, using the FE model. For the pre-crisis period, the Ögure shows that if the policy rate

di§erential had been kept constant at its initial value, it would have made little di§erence to

the predicted value of the total net capital ináows, suggesting that policy rate di§erentials

were not an economically important driving force behind the total net ináows. In contrast,

if the growth di§erential or VIX variables were kept constant, this makes a substantial

di§erence to the predicted values, suggesting that these two variables were economically

more signiÖcant. In the post-crisis period, all three variables appear to matter quite a bit,

with their economic importance roughly equal.

Figure 9 presents the corresponding results for the model with net portfolio ináows. In

both periods, global risk aversion appears to the most important factor, while the growth and

policy rate di§erentials appear to matter relatively less, especially in the pre-crisis period.

4.1.2 How di§erent is the post-crisis period from the pre-crisis period?

Alarm bells were ringing particularly loud with respect to surges of capital áows to EMEs

in the late 2009 and 2010 period, with some arguing that this was another particularly

acute example of the volatility of capital áows problem. Others, however, were arguing that,

after having proved their relative resilience to the global Önancial crisis, the EMEs were

entering a brave new world where capital áows may be permanently higher, largely driven

by macroeconomic fundamentals.28 With our sample period going up to 2012:Q2, our data

set allows us to examine more systematically if and how the post-crisis period di§ers from

the pre-crisis period.29

We begin by asking if the post-crisis behavior of net ináows would be considered unusual

relative to what the FE models estimated over the pre-crisis period would predict, given

the actual evolution of the determining variables. Figure 10 presents the results, with the

áows converted into billions of U.S. dollars (from shares of GDP) and cumulated to provide

a clearer picture of their evolution. For the total net ináows model, shown in the left panel,

after the crisis, the actual cumulative net ináows (the green line) have been growing at a

consistently faster pace than the pre-crisis model would have predicted (the orange line).

This can be seen by the slope of the green line being greater than the slope of the orange line

in the post-crisis period. Initially, the higher-than-predicted growth rate was just making

up for the greater-than-expected loss of áows that occurred during the crisis, but although

28Pradhan et al. (2011) discuss how the properties of capital áows have changed between the pre- and

post-crisis periods.

29Arias et al. (2012) also consider structural breaks between the pre- and post-crisis in the determinants

of net private capital áows to EMEs, but using annual data that ends in 2010.

17
these losses had been overcome by around late-2010, cumulative áows continued to rise at a

faster pace. Thus, there is some evidence of acceleration of total net ináows relative to what

the pre-crisis model would predict.

The evidence of acceleration relative to the pre-crisis model prediction (using the FE

model) is much stronger for portfolio áows. Interestingly, for cumulative portfolio áows, the

model is able to account for the fall during the crisis period. Risk aversion is an important

variable in the pre-crisis model, and it also rose sharply during the crisis, which accounts for

this result. However, the pre-crisis period model would have predicted cumulative áows to

remain subdued in the post-crisis period, whereas actual cumulative áows took o§.

In sum, total cumulative net ináows have been somewhat higher in the post-crisis period

than the pre-crisis model would have been predicted, but the sea-change appears to be in

the behavior of cumulative net portfolio ináows. One possibility might be that áows have

simply become less able to be explained by the variables in the model, but the R2 values

from the FE regressions do not support that. On the contrary, the Öts of both the total

ináows model and the portfolio ináows models have increased in the post-crisis period.

Another possibility is that the sensitivities to the determining variables 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 3 earlier in such a

way that the hypothesis that the e§ects of the explanatory variables have changed in the

post-crisis period can be easily tested. This is done by introducing interaction terms of the

explanatory variables with a post-crisis dummy variable. The Örst three rows reproduce the

estimates of the pre-crisis period in table 3; the next three rows represent the di§erence

between e§ects in the post-crisis period and those in the pre-crisis period. (If we add these

e§ects to the corresponding e§ects in the Örst three rows, we will get the total e§ect for the

post-crisis period reported in table 3.)

Consider Örst the structural break tests for the total net ináows model and the di§erences

in the post-crisis period. The policy rate di§erential has much bigger e§ects in the post-crisis

period compared to the pre-crisis period, although the di§erence is statistically signiÖcant

only for the OLS model (column 2). For the FE model, which was used in Ögure 10, while a

percentage point increase in the policy rate di§erential in the pre-crisis period would enhance

net total ináows by a negligible amount, in the post-crisis period, the e§ect would be 0.7

percent of GDP. This appears to be the main reason behind áows being stronger than the

pre-crisis model would predict.

For the portfolio áows model, the sensitivity to policy rate di§erentials increases statistically signiÖcantly in the post-crisis period (column 4), again from a negligible e§ect in the

pre-crisis period to a 0.6 percent of GDP e§ect in the post-crisis period. The sensitivity

18
to risk aversion also goes up in magnitude (by about 70 percent) for the post-crisis period.

The di§erence from the pre-crisis period is statistically insigniÖcant, although economically

large.

On balance, we would conclude that there have been some structural changes in the

sensitivities of áows to policy rate di§erentials and to risk aversion that do make the postcrisis period di§erent from the pre-crisis period, with the implications for portfolio áows for

the two periods being especially stark. But the changes are not always precisely enough

determined to be statistically signiÖcant.

4.2 The extended model

4.2.1 Capital controls

Table 5 presents the results of adding the capital control variables we have constructed for

the post-crisis period to the basic model. Recall that these variables are, alternatively, the

number of capital control measures in place every quarter and the contemporaneous and

lagged number of new capital control measures introduced every quarter.30

The results suggest that the new capital control measures introduced since 2009 have

exerted a signiÖcant dampening e§ect on ináows. SpeciÖcally, the number of capital control

measures in place variable has a negative and statistically signiÖcant coe¢ cient for both

total áows (columns 1-2) and portfolio áows (columns 5-6).31 In addition, the number of

new measures introduced every quarter also have negative and statistically signiÖcant e§ects

on capital ináows, although these e§ects occur with a bit of a lag (columns 3-4 and 7-8).32

The introduction of these capital control variables does not take away from the importance

of the growth and interest rate di§erentials as well as VIX that were reported earlier in

table 3.33 Note that the capital controls did not prevent a surge of áows in the post-crisis

30Note that our measures of capital controls are indicator variables and do not account for the intensity of

each control measure introduced. A useful extension would be to construct a more comprehensive measure

of capital controls in which a judgment would be made on the intensity based on the speciÖc details of each

measure.

31Since the number of capital controls in place is a variable that has an upward trend over the postcrisis period, it is important to note that once a time-trend is included separately, this variable still has a

statistically signiÖcant, negative e§ect on capital áows. Thus, the result is not spurious.

32Of course, capital controls are endogenous; in particular, it has been argued that such controls are more

likely to be imposed at times of heavy capital ináows. However, this would bias against Önding a negative

e§ects of controls on áows, and thus does not detract from our results. Also, the endogeneity is partially

addressed by the use of lagged values of capital control restrictions. But it could be argued that if news

about imposition of controls is leaked in advance, investors may choose to bring in capital in advance of the

imposition of controls, and subsequently áows might be seen to slow. To address such circumstances would

require a fuller model in which capital controls were endogenously determined.

33Some country-speciÖc case studies Önd singniÖcant changes in the composition of capital áows following

the introduction of capital controls since the global Önancial crisis. See, for example, IMF (2011a) and, for

19
period, but the results suggest that áows would have been even higher in the absence of

these controls.

The lagged relation between new capital controls and capital áows is consistent with the

Öndings in existing literature suggesting that investors take time to adjust their portfolios

(see Forbes et al., 2012). In addition, since our database only includes the original capital

control measures ñ and not the subsequent measures introduced to close loopholes ñ the

lagged relation between controls and áows also suggests a weaker e§ect initially, but which

becomes stronger as loopholes are e§ectively closed over time.

4.2.2 Foreign exchange intervention

Table 6 reports the results for the e§ect of foreign exchange (FX) intervention by EME central banks on net capital ináows in the pre-crisis period. Recall that our variable measures

the cumulative intervention undertaken over the previous two years (i.e. quarters t  1 to

t8). The use of intervention over the previous two years helps to overcome the endogeneity

problem that might arise due to EMEs intervening contemporaneously in response to strong

capital ináows.34 Our results indicate that lagged FX purchases had a positive and statistically signiÖcant e§ect on capital ináows during the pre-crisis period, for both total and

portfolio net áows. SpeciÖcally, $1 billion of intervention brought in about $0.2 billion of

portfolio net ináows and about $0.45 billion of total net ináows. The results are consistent

with the view that the undervaluation of some EME currencies resulting from FX purchases

generates greater expectation of future currency appreciation, thereby increasing expected

return di§erentials in favor of EMEs and enhancing capital áows to these economies.35

For the post-crisis period (not reported), we could not identify any strong e§ect that

intervention brought in signiÖcantly more ináows down the road. We attribute this to

several factors. First, the crisis period was unusual, and the use of lagged FX intervention

over the past two years means that intervention from the crisis period would be used to

inform about áows during the post-crisis period. But in the crisis period, intervention

was either low or skewed toward FX sales to prevent currency depreciations, while the net

the case of Brazil, Forbes et al. (2012). In addition, Gallagher (2011) also focuses on some of the more

recent capital controls but considers their e§ects on interest rates, exchange rates and asset prices in Brazil,

Korea, and Taiwan, rather than directly on capital ináows. Some have also argued that the recent capital

controls imposed by countries lead to spillover e§ects in terms of increased áows to other countries. For

example, Lambert, Ramos-Tallada, and Rebillard (2011), and Forbes et al. (2012), Önd that increases in

Brazilís capital recent tax on foreign investment (the IOF tax) were associated with re-allocations of capital

áows to other EMEs in Latin America.

34A more satisfactory framework would be one that simultaneously models FX intervention at the same

time as studying its e§ects on future áows, which we leave for future research.

35An alternative interpretation could be that a larger war chest of precautionary reserves in a country

boosts investor conÖdence in that country.

20
ináows to EMEs rebounded quite quickly after the crisis, which tends to create a negative

correlation between the two variables. Second, if to address this issue we cut the start of

the post-crisis sample period by two years, this leaves too few observations even with a

panel setting, to get meaningful estimates. Third, the data suggest signiÖcant correlation

between FX intervention and some of the other explanatory variables in the post-crisis period,

such as capital controls, making it di¢ cult to isolate the e§ect of intervention by itself.

Notably, as shown in column 5 of table 6, even after taking into account a time trend in the

number of capital controls in place and Öxed e§ects, FX intervention in the past to stem

currency appreciation pressures tends to be followed by the imposition of capital controls,

with this e§ect being statistically signiÖcant. This result is consistent with the notion that

FX intervention encouraged capital ináows to EMEs, in turn forcing countries to introduce

capital controls to discourage these ináows. But it is also consistent with the idea that

in response to expectations of large capital ináows, countries use a variety of measures,

including Örst direct FX intervention followed by capital controls.

4.2.3 Unconventional U.S. monetary policy

After policy interest rates had reached the zero lower bound and with their economic recoveries still fragile, a number of AE central banks, including the Federal Reserve, resorted to

unconventional monetary expansion in e§orts to continue to boost economic activity. It is

important to emphasize that these unconventional monetary policies are just another form

of monetary easing, made necessary because of hitting the zero lower bound on the policy rate; these policies work much through the same channels, by a§ecting interest rates

in the economy to which private spending is sensitive. Indeed, there is some evidence that

such unconventional policies in the U.S. lowered yields on U.S. long-term Treasury bonds

and similar securities (see DíAmico and King, 2013, DíAmico et al., 2012, and Gagnon et

al., 2011). In turn, it has been suggested that lower yields on longer-term U.S. securities

may have encouraged capital áows to EMEs (see Fratzcher et., 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 LSAP indicator variables that were

mentioned earlier and are shown in Ögure 11. These indicator variables are equal to 1 for

the quarters in which LSAPs are initially announced and the quarters during which LSAP

programs are still in place. In addition to this variable, the models include the earlier growth

di§erential, policy rate di§erential, and risk aversion variables (but with interaction terms

for the crisis- and post-crisis periods), as well as capital controls in place. Note that the crisis

period has been included in these regressions, unlike those reported earlier. This is because

the Örst round of LSAPs began during the crisis, and the variation of LSAPs over the sample

21
this provides seems to be necessary to determine their e§ects on capital áows more precisely.

Turing to the speciÖc results in table 7, as we found before, the sensitivity of capital áows

to policy rate di§erentials appears to be higher during the post-crisis period. Interestingly,

for the crisis period, the interaction coe¢ cient on the growth di§erential is negative and

about the same in magnitude as the growth di§erential coe¢ cient for the pre-crisis period,

suggesting that the growth di§erentials ceased to be a determinant of capital áows during

the crisis period. With respect to unconventional U.S. monetary policy, the coe¢ cients on

the indicator variables for LSAP announcements and implementation are not statistically

signiÖcant for the total net ináows (columns 1-4), but are positive and statistically signiÖcant

for the portfolio net ináows (columns 5-8).36

These results suggest that LSAPs changed the composition of EME net capital ináows

toward portfolio áows, an issue which we now investigate further. To do so, we Örst directly

include the 10-year Treasury bond yield among the explanatory variables, along with the

other variables (see columns 1-2 and 5-6 of table 8). Again, we do not Önd the Treasury

yields to have a statistically signiÖcant e§ect on the total net ináows, but the coe¢ cient of

the yield variable in the portfolio investment equation is statistically signiÖcant and negative.

During the crisis period, the e§ect of Treasury yields on portfolio áows appears larger, as the

slope interaction coe¢ cient is negative and statistically signiÖcant. This suggests that the

Örst LSAP program initiated during the crisis ñwhich coincided with net capital outáows

from the EMEs ñ helped to contain some of the portfolio outáows from EMEs. During

the post-crisis period, the e§ect of U.S. Treasury yields on portfolio investment equation is

still negative; the positive slope interaction term indicates that the e§ect is smaller than in

the pre-crisis period, but this interaction term is not statistically signiÖcant. The results

are consistent with the existing literature showing that U.S. Treasury yields have a§ected

capital áows to EMEs in signiÖcant ways (see, for example, IMF, 2011a). However, we Önd

no evidence that the e§ect of Treasury yields has been more pronounced in the post-crisis

period than in the pre-crisis period.

U.S. Treasury yields, of course, are also a§ected by factors other than U.S. monetary

policy actions. In an attempt to isolate more directly the e§ects of unconventional monetary

policy on Treasury yields, we use the LSAPs undertaken by the Federal Reserve as an

instrument to compute the change in the U.S. 10-year bond yield that could be attributed

to the unconventional U.S. monetary policy. SpeciÖcally, we Örst regress the yields (in

36 If we estimate LSAP e§ects without the crisis period observations, both with the variables used in table

7 as well as other variables related to LSAPs that are used later in table 8, the e§ects of capital áows

from LSAPs are statistically insigniÖcant, although still economically meaningful. Also, removing the crisis

period observations results in a higher sensitivity of post-crisis áows to growth di§erentials and risk-aversion

in the post-crisis period than implied by the results in table 7 (or table 8 shown later).

22
percentage points) on asset purchases one quarter ahead (in billions of U.S. dollars) over

the interval from 2003:Q1 to 2012:Q2. (These two variables are shown in Ögure 12.) The

one-quarter ahead value of asset purchases, rather than the contemporaneous value, Öts

better, which perhaps is not surprising given that LSAPs are anticipated to some degree

and announcements precede the actual purchases.37 Next, we use the di§erence between the

actual yield and what the yield would have been without LSAPs as representing the e§ect of

LSAPs on the yield. As can be seen from columns 3-4 of table 8, total net EME capital ináows

do not appear to be statistically signiÖcantly a§ected by the yield changes related to LSAPs,

but portfolio áows (columns 7-8) are negatively and statistically signiÖcantly a§ected, once

again suggesting that LSAPs have a§ected the composition of áows. SpeciÖcally, a 10 basis

point-reduction in the Treasury bond yields related to LSAPs is associated with enhanced

net portfolio capital áows to EMEs of about 0.2 percent of the recipientsíGDP. The results

on the other variables are pretty similar to those reported in table 7.

4.2.4 Robustness checks

To facilitate an easier comparison with other studies in this literature, we examined the robustness of our results to several alternative speciÖcations. These include separating out the

EME and advanced-economy growth di§erentials into the individual growth rates and policy

rates, adding smaller countries in emerging Asia and Latin America, adding emerging European countries as well and allowing regional e§ects, using Credit Suisseís global risk appetite

index (GRAI) instead of VIX, and focusing on gross ináows rather than net ináows. Most

of the results were fairly robust qualitatively, but some important quantitative di§erences

could be observed. These robustness results are discussed in detail in the Appendix to this

paper.

5 Conclusions

We conclude by giving the answers to the questions we posed that are suggested by our

empirical work.

First, consistent with the evidence presented in previous studies, we Önd net capital áows

to EMEs to be determined in the expected manner and statistically signiÖcantly by a number

of di§erent factors, including growth di§erentials, policy rate di§erentials, and global risk

aversion. In terms of the economic importance of these factors, in the post-crisis period all

37 In the Örst-stage regression, the coe¢ cient on the one-quarter ahead LSAP purchases is negative and

statistically signiÖcant at the the 1% level, with about 10% of the variation in yields explained by future

LSAPs.

23
three appear to be equally important for both total net ináows and portfolio net ináows,

whereas in the pre-crisis period growth di§erentials were relatively more important for total

ináows while risk aversion was relatively more important for portfolio ináows.

Second, we Önd that there have been some important and signiÖcant changes in the behavior of capital áows to EMEs from before the crisis to after. If we apply the pre-crisis

model to the post-crisis behavior of the determining variables, the model somewhat underpredicts total net capital ináows, but vastly underpredicts portfolio net ináows. However,

these results are not due to an increase in inherent instability of the áows, but due to changes

in the sensitivity of the áows to some of the explanatory variables. Primarily, the sensitivity

of portfolio áows to policy rate di§erentials and to risk aversion appears to have increased

during the post-crisis period.

Third, using a novel data set that we constructed of capital control measures that several

EMEs have used in recent years, we Önd that these measures appear to have had some

e§ect in dampening capital ináows to these EMEs. While some case studies reach similar

conclusions, we are not aware of any previous cross-country study that looks at these e§ects

for the latest capital controls introduced since mid-2009.

Fourth, our results from the pre-crisis period strongly suggest that when countries step

up their foreign currency intervention to counter currency appreciation pressures, this intervention tends to be followed by stronger ináows of capital. This is consistent with the

idea that such interventions create expectations of future currency appreciations that induce

more capital ináows. However, we cannot identify such an e§ect in the post-crisis period.

Some preliminary results suggest that this may be because of the correlation of the intervention variable with other important determinants of áows, such as capital controls, in the

post-crisis period.

Finally, we do not Önd statistically signiÖcant e§ects of unconventional U.S. monetary

policy expansion on total net ináows of capital into EMEs. The evidence suggests that such

policies have a§ected only the composition of áows toward portfolio áows. Moreover, the

inclusion of variables related to unconventional U.S. monetary policies does not drive out or

detract from the importance of other determinants of EME áows. Thus, even looking at just

portfolio áows, unconventional U.S. monetary policy appears to be only one among several

important factors.

24
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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 consist 

of the non-residents’ purchases of domestic assets net of sales. Gross outflows are BOP assets, and consist of the 

residents’ purchases of foreign assets net of sales. Net inflows represent the difference between gross inflows and 

outflows. Panels (b) and (c) do not include India and Malaysia, for which some gross inflow components are not 

available. Note that a gross outflow is reported in panel (c) with the plus sign, in contrast with the usual BOP practice. 

 -200

 -150

 -100

 -50

 0

 50

 100

 150

 200

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(a) Net flows

Billions of U.S. dollars

Direct investment

Portfolio investment

Bank lending and other investment

Total

Countries include: Argentina, Brazil, Chile, Colombia, India, Indonesia, South Korea, Malaysia, Mexico, the Philippines, Taiwan, and Thailand

 -200

 -150

 -100

 -50

 0

 50

 100

 150

 200

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(c) Gross outflows

Billions of U.S. dollars

Direct investment

Portfolio investment

Bank lending and other investment

Total

Countries include: Argentina, Brazil, Chile, Colombia, Indonesia, South Korea, Mexico the Philippines, Taiwan, and Thailand

 -200

 -150

 -100

 -50

 0

 50

 100

 150

 200

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(b) Gross inflows

Billions of U.S. dollars

Direct investment

Portfolio investment

Bank lending and other investment

Total

Countries include: Argentina, Brazil, Chile, Colombia, Indonesia, South Korea, Mexico, the Philippines, Taiwan, and Thailand

30
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. 

 -100

 0

 100

 200

 300

 400

 500

 600

 700

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Billions of U.S. dollars

Direct investment

Portfolio investment

Banking lending and other investment

Countries include: Argentina, Brazil, Chile, Colombia, India, Indonesia, South Korea, Malaysia, Mexico, the Philippines, Taiwan, and Thailand

 90

 95

 100

 105

 110

 115

 120

2006 2007 2008 2009 2010 2011 2012 2013

Jan. 2006 = 100

Emerging Asia

ex. China*

EME Appreciation Latin America**

*Emerging Asia includes: India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

**Latin America includes: Argentina, Brazil, Chile, Colombia, and Mexico

31
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 real 

GDP from its potential level, where the potential level is the Hodrick-Prescott trend of log-real GDP over 

1994:Q4-2012:Q2. The aggregate is weighted in proportion to each country’s share in U.S. exports.

 -100

 0

 100

 200

 300

 400

 500

 600

 700

2006 2007 2008 2009 2010 2011 2012 2013

Billions of U.S. Dollars

Emerging Asia

ex.China*

Latin America**

*Emerging Asia includes: India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

**Latin America includes: Argentina, Brazil, Chile, Colombia, and Mexico

 -4

 -3

 -2

 -1

 0

 1

 2

 3

 4

 5

2004 2005 2006 2007 2008 2009 2010 2011 2012

Percent

Output Gap Real Policy Rate**

*India, Indonesia, Korea, Malaysia, Thailand, Taiwan, Brazil, Chile, Colombia, Mexico.

**Deflated by 5-10 year ahead inflation expectations.

32
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 nominal 

policy interest rates; Emerging Portfolio Fund Research for flows to EME-dedicated funds; Bloomberg for 

VIX. 

 -6

 -4

 -2

 0

 2

 4

 6

 8

 10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(a) Real GDP

Four-quarter percent change

Differential Emerging market

economies*

Advanced

economies**

India, Indonesia, Korea, Malaysia, the Philippines, Taiwan, Thailand, Argentina, Brazil, Chile, Colombia, Mexico.

**Australia, Canada, Euro Area, Sweden, Japan, U.K., U.S.

 60

 50

 40

 30

 20

 10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-25 

-20 

-15 

-10 

-5 

0 

5 

10 

15 

20 

25 

(c) VIX

Billions of U.S. dollars* VIX index, inverted scale*

Flows to

EME-dedicated funds

VIX

Higher perceived risk

Sep 15, 2008 May 1, 2010 August 1, 2011 May 6, 2012

*3-month moving average.

Note: Sept 15, 2008, Lehman bankruptcy; May 1, 2010, increased concerns over Greece; August 1, 2011, increased concerns over Italy and Spain;

May 6, 2012, increased concerns over Spanish banks, outcome of Greek election.

 -1

 0

 1

 2

 3

 4

 5

 6

 7

 8

 9

 10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(b) Policy interest rate

Percent

Differential

Emerging market

economies*

United

States

*India, Indonesia, Korea, Malaysia, the Philippines, Taiwan, Thailand, Argentina, Brazil, Chile, Colombia, Mexico.

33
Figure 7: Number of capital control measures introduced in EMEs since 2009 

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

 

 -2

 0

 2

 4

 6

 8

 10

 12

2009 2010 2011 2012

1. Brazil

Number of measures

 -1

 0

 1

 2

 3

 4

 5

 6

 7

 8

 9

 10

2009 2010 2011 2012

3. Korea

Number of measures

 -1

 0

 1

 2

 3

 4

 5

 6

 7

 8

2009 2010 2011 2012

2. Indonesia

Number of measures

2009 2010 2011 2012

5. Thailand

Number of measures

0

1

 -1

 0

 1

 2

 3

 4

 5

2009 2010 2011 2012

4. Taiwan

Number of measures

Measures in place Measures introduced each quarter

34
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, estimated 

separately for the periods 2002:Q1-2008:Q2 and 2009:Q2 to 2012:Q2. The counterfactuals are the fitted 

values obtained under the assumption that a particular determinant was equal to its initial value for each 

interval.

 

0 15 30 45

USD billion

2002q1 2003q1 2004q1 2005q1 2006q1 2007q1 2008q1

Fitted vs. counterfactual ex-growth

40 60 80100

2010q1 2011q1 2012q1

Fitted vs. counterfactual ex-growth

0 15 30 45

USD billion

2002q1 2003q1 2004q1 2005q1 2006q1 2007q1 2008q1

Fitted vs. counterfactual ex-policy rate

40 6080100

2010q1 2011q1 2012q1

Fitted vs. counterfactual ex-policy rate

0 15 30 45

USD billion

2002q1 2003q1 2004q1 2005q1 2006q1 2007q1 2008q1

Fitted vs. counterfactual ex-VIX

40 60 80 100

2010q1 2011q1 2012q1

Fitted vs. counterfactual ex-VIX

Fitted value Counterfactual

35
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, estimated 

separately for the periods 2002:Q1-2008:Q2 and 2009:Q2 to 2012:Q2. The counterfactuals are the fitted 

values obtained under the assumption that a particular determinant was equal to its initial value for each 

interval. 

 -10-5 0 5 10 USD billion

2002q1 2003q1 2004q1 2005q1 2006q1 2007q1 2008q1

Fitted vs. counterfactual ex-growth

0 20 40 60 80

2010q1 2011q1 2012q1

Fitted vs. counterfactual ex-growth

-10-5 0 5 10

USD billion

2002q1 2003q1 2004q1 2005q1 2006q1 2007q1 2008q1

Fitted vs. counterfactual ex-policy rate

0 20 40 60 80

2010q1 2011q1 2012q1

Fitted vs. counterfactual ex-policy rate

-10-5 0 5 10

USD billion

2002q1 2003q1 2004q1 2005q1 2006q1 2007q1 2008q1

Fitted vs. counterfactual ex-VIX

0 20 40 60 80

2010q1 2011q1 2012q1

Fitted vs. counterfactual ex-VIX

Fitted value Counterfactual

36
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 the 

period 2002:Q1 to 2008:Q2. 

 

0 200 400 600 800 1000 1200

USD billion

2002q1 2004q1 2006q1 2008q1 2010q1 2012q1

Total net inflows, cumulative

0 200 400 600 800 1000 1200

USD billion

2002q1 2004q1 2006q1 2008q1 2010q1 2012q1

Portfolio net inflows, cumulative

Actual flows Model prediction

Estimation period

37
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 for 

QE2, when the corresponding programs were announced or extended. The “implementation” variable equals 1 for 

2008: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 asset 

purchases are obtained as the change in the end-of-quarter total holdings of agency debt securities, mortgage-backed 

securities, and U.S. Treasury securities by the Federal Reserve.

 -1

 0

 1

 2

 3

 4

2008 2009 2010 2011 2012

Percentage points

LSAP initial announcements LSAP implementation

QE1 (2008q4-2010q1) QE2 (2010q3-2011q2)

U.S. Treasury 10y yield

 -200

 0

 200

 400

 600

 800

2008 2009 2010 2011 2012

0 

1 

2 

3 

4 Percentage points USD Billions

U.S. Treasury 10y yield (left) LSAP Purchases (right)

QE1 (2008q4-2010q1) QE2 (2010q3-2011q2)

38
Table 1: Capital control measures introduced in EMEs since 2009 

Restrictions on portfolio flows Restrictions on banking flows 

Country 

Tax on 

foreign 

investments 

Restrictions by 

asset type or 

maturity 

Tax on 

 short-term 

external borrowing

Quantitative 

limits on banks’ 

FX exposure 

Required 

reserves on 

FX liabilities 

Brazil 

Oct, Nov 09R

, 

Oct, Dec 10R

, 

Jul, Dec 2011R

Mar-AprJul-Aug 11, 

Mar- Jun-Dec 12 

Jan, Jul 11, 

Dec 12 

Indonesia Mar, Jun 10, 

Apr 11 Jun, Dec 10 Dec 10R

South Korea Nov 10R

, 

Jan 12R Jul 11 Apr 11 

Nov 09D, Jan 10, 

Jun 10D, Jun 11D, 

Nov 12D

Taiwan Nov 09R

, 

Nov 10R Dec 10D Jan, Dec 10R

Thailand Oct 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.

39
Table 2: Summary statistics 

Period/Variable Obs. Mean Std. Dev. Min Max

 % %-points % %

Pre-crisis period (2002q1-2008q2) 

tot_ngdp 312 0.55 5.73 -32.81 18.50

port_ngdp 312 -0.33 4.30 -17.08 16.49

growth_diff_ae 312 2.95 2.76 -16.12 9.11

growth_eme 312 5.19 2.92 -15.22 11.83

growth_ae 312 2.24 0.63 0.89 3.26

policy_rate_diff_us 312 2.94 4.60 -4.60 25.18

policy_rate_eme 312 5.82 4.39 0.49 26.44

policy_rate_us 312 2.87 1.61 1.00 5.26

treas_10yr_us 312 4.37 0.41 3.60 5.08

vix 312 18.39 6.33 11.03 35.07

interv_2y_ngdp 234 2.14 2.49 -1.75 12.11

Crisis period (2008q3-2009q2) 

tot_ngdp 48 -2.47 9.56 -38.96 17.21

port_ngdp 48 -1.97 6.01 -27.74 7.74

growth_diff_ae 48 3.62 3.88 -4.45 10.78

growth_eme 48 0.25 4.62 -9.59 8.09

growth_ae 48 -3.37 1.93 -5.14 -0.39

policy_rate_diff_us 48 4.58 3.41 -1.35 13.22

policy_rate_eme 48 5.30 3.49 0.53 13.75

policy_rate_us 48 0.71 0.74 0.18 1.96

treas_10yr_us 48 3.26 0.41 2.70 3.84

vix 48 40.41 12.78 25.07 58.54

interv_2y_ngdp 36 2.22 3.23 -5.07 9.93

Post-crisis period (2009q3-2012q2) 

tot_ngdp 144 1.87 4.74 -12.37 23.43

port_ngdp 144 1.07 4.43 -12.75 22.03

growth_diff_ae 144 3.90 2.92 -10.04 12.69

growth_eme 144 5.09 3.38 -8.79 13.65

growth_ae 144 1.20 1.81 -3.87 3.06

policy_rate_diff_us 144 3.78 2.68 0.11 12.19

policy_rate_eme 144 3.91 2.67 0.27 12.28

policy_rate_us 144 0.14 0.04 0.08 0.19

treas_10yr_us 144 2.89 0.65 1.81 3.70

vix 144 22.80 4.37 17.48 30.58

interv_2y_ngdp 108 3.11 3.50 -3.75 11.94

40
Table 3: Determinants of net private capital inflows: basic results* 

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net inflowInterval: 2002q1 – 2008q2 2009q3 – 2012q2 2002q1 – 2008q2 Model: OLS FE OLS FE OLS FE growth_diff_eme-ae 0.48*** 0.43*** 0.34*** 0.53*** 0.17* 0.045 

(0.12) (0.13) (0.13) (0.14) (0.091) (0.095) 

policy_rate_diff_eme-us 0.22*** 0.0047 0.63*** 0.70* 0.16*** -0.055 0

(0.073) (0.16) (0.14) (0.38) (0.055) (0.11) 

vix -0.060 -0.036 -0.12 -0.12 -0.095** -0.075** 

(0.051) (0.052) (0.084) (0.079) (0.038) (0.037) (

Constant -0.40 -2.59* 0.93 -0.66 0.43 -0.45 

(1.09) (1.53) (2.09) (2.28) (0.83) (1.09) 

Observations 312 312 144 144 312 312 R-squared 0.063 0.154 0.158 0.319 0.046 0.227 F-test 1 0.40 2.06 0.11 0.94 Prob > F 0.67 0.13 0.89 0.39 F-test 2 0.11 0.12 Prob > F 0.74 0.73 

Standard errors in parentheses 

*** p<0.01, ** p<0.05, * p<0.1 

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 porate are equal in magnitude but opposite in sign. Similarly, F-test 2 refers to the null hypothesis that the coefficients on EME g

equal but opposite in sign. For the post-crisis period, F-test 1 is not applicable, because the U.S. policy rate was zero, and henc

is driven entirely by changes in the EME policy rate. *Economies included are India, Indonesia, Malaysia, the Philippines, So

Thailand from emerging Asia, and Argentina, Brazil, Chile, Colombia, and Mexico from Latin America. 

41
Table 4: Structural break tests for the determinants of net inflows* 

 (1) (2) (3) (4) Dependent variable: Total net inflows/NGDP Portfolio net inflows/NGDP Interval: 2002q1 – 2012q2 2002q1 – 2012q2 Model: OLS FE OLS FE growth_diff_eme-ae 0.48*** 0.43*** 0.17* 0.045  (0.11) (0.12) (0.092) (0.094) policy_rate_diff_eme-us 0.22*** 0.0047 0.16*** -0.055 

(0.069) (0.15) (0.056) (0.11) 

Vix -0.060 -0.036 -0.095** -0.075** 

(0.048) (0.048) (0.039) (0.037) 

post-crisis * growth_diff _eme-ae -0.14 0.095 -0.11 0.15 

(0.19) (0.21) (0.15) (0.16) 

post-crisis * policy_diff_eme-us 0.41** 0.69 0.17 0.63* 

(0.18) (0.49) (0.15) (0.37) 

post-crisis * vix -0.061 -0.086 -0.030 -0.053 

(0.11) (0.11) (0.090) (0.082) 

post-crisis 1.33 -2.75 2.00 -2.45 

(2.69) (4.21) (2.19) (3.19) 

Constant -0.40 1.42 0.43 2.81 

(1.02) (2.32) (0.83) (1.76) 

Observations 456 456 456 456 R-squared 0.097 0.204 0.070 0.286 

Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 

Note: post-crisis is an indicator variable that equals 1 for the period 2009:Q3-2012:Q2. The fixed effects, when included (coluvary across the pre-crisis and post-crisis periods. *Economies included are the same as in table 3. 

42
Table 5: The effect of capital controls on net inflows* 

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net inflInterval: 2009q3 – 2012q2 2009q3 – 2Model: OLS FE OLS FE OLS FE growth_diff_eme-ae 0.23* 0.43*** 0.30** 0.50*** -0.029 0.090 

(0.13) (0.15) (0.13) (0.14) (0.13) (0.13) 

policy_diff_eme-us 0.84*** 0.84** 0.83*** 0.90** 0.51*** 0.72** 

(0.14) (0.39) (0.15) (0.40) (0.15) (0.35) 

Vix -0.13 -0.13* -0.12 -0.12 -0.13 -0.13* 

(0.080) (0.078) (0.082) (0.079) (0.081) (0.070) 

capital_controls_in_place -0.54*** -0.44** -0.44*** -0.45** 

(0.15) (0.21) (0.15) (0.19) 

new_capital_controls -0.43 -0.37 

(0.50) (0.53) 

l_new_capital_controls -0.43 -0.36 

(0.51) (0.55) 

l2_new_capital_controls -0.97* -0.79 

(0.52) (0.56) 

l3_new_capital_controls -1.26** -1.04* 

(0.53) (0.55) 

Constant 1.54 -0.00087 1.04 -0.51 2.93 2.86 

(2.01) (2.27) (2.04) (2.27) (2.02) (2.05) 

Observations 144 144 144 144 144 144 R-squared 0.234 0.342 0.226 0.345 0.113 0.385 

Standard errors in parentheses 

*** p<0.01, ** p<0.05, * p<0.1 

Note: capital_controls_in_place is the number of capital control measures introduced since 2009 that are in place in any given quarter. number of new capital control measures introduced in a given quarter (l, l2, l3 indicate lagged values). *Economies included are the s

43
Table 6: The effect of foreign exchange intervention on net inflows* 

(1) (2) (3) (4) (5) 

Dependent variable: Total net inflows/NGDP Portfolio net inflows/NGDP No. of capital 

in plac

Interval: 2002q1 – 2008q2 2002q1 – 2008q2 2009q3 – 2Model: OLS FE OLS FE FE growth_diff_eme-ae 0.32* 0.22 0.16 0.0044 

(0.17) (0.21) (0.11) (0.13) 

policy_diff_eme-us 0.11 0.062 0.11* 0.053 

(0.082) (0.16) (0.055) (0.10) 

vix -0.061 -0.043 -0.071** -0.053 

(0.051) (0.051) (0.034) (0.033) 

fx_intervention 0.085 0.45** -0.13 0.20* 0.20** 

(0.15) (0.18) (0.10) (0.12) (0.095

trend 0.35**

 (0.048

Constant 0.94 -3.60** 0.81 -3.89*** -71.3**

(1.22) (1.82) (0.82) (1.17) (9.79) 

Observations 234 234 234 234 108 R-squared 0.024 0.127 0.056 0.220 0.731 

Standard errors in parentheses 

*** p<0.01, ** p<0.05, * p<0.1 

Note: fx_intervention is the extent of net foreign exchange intervention, expressed in U.S. dollars, cumulated over the p

lagged t-1 to t-9), expressed as a percent of contemporaneous quarterly nominal GDP expressed in the same units. Sinhand side are also normalized by the same nominal GDP, the coefficient on fx_intervention in columns (1)-(4) has the i

effect on capital flows in billions of dollars of a $1 billion net FX intervention over the previous two years. Data on in

provided by Matt Malloy—see Malloy (2013) for a description. *Economies included are the same as in table 3. 

44
Table 7: Behavior of net flows to EMEs during LSAP events* 

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net inflModel: OLS FE OLS FE OLS FE Interval: 2002q1 – 2012q2 2002q1 – 2d_lsap_announcements 1.09 1.10 1.51* 1.44* 

(1.12) (1.07) (0.87) (0.82) 

d_lsap_implementation 1.02 0.96 

(0.88) (0.85) 

growth_diff_eme-ae 0.46*** 0.47*** 0.48*** 0.48*** 0.17* 0.094 

(0.12) (0.13) (0.12) (0.13) (0.094) (0.097) 

policy_rate_diff_eme-us 0.21*** 0.12 0.22*** 0.13 0.16*** 0.045 

(0.074) (0.13) (0.074) (0.13) (0.058) (0.10) 

vix -0.073 -0.063 -0.063 -0.054 -0.093** -0.086** 

(0.047) (0.046) (0.048) (0.046) (0.037) (0.035) 

crisis * growth_diff_eme-ae -0.46* -0.42* -0.49** -0.44* -0.36* -0.41** 

(0.24) (0.23) (0.24) (0.23) (0.19) (0.18) 

crisis * policy_diff_eme-us 0.65** 0.54** 0.65** 0.54** 0.18 0.24 

(0.26) (0.26) (0.26) (0.26) (0.21) (0.20) 

crisis * vix -0.099* -0.093* -0.11** -0.100** -0.0014 -0.00069 

(0.051) (0.048) (0.052) (0.050) (0.039) (0.037) 

post-crisis * growth_diff_eme-ae -0.20 -0.12 -0.27 -0.18 -0.16 -0.060 

(0.20) (0.19) (0.21) (0.20) (0.15) (0.15) 

post-crisis * policy_diff_eme-us 0.65*** 0.54** 0.63*** 0.52** 0.38** 0.26 

(0.20) (0.21) (0.21) (0.21) (0.16) (0.16) 

post-crisis * vix -0.0047 -0.0092 -0.010 -0.014 0.044 0.048 

(0.053) (0.052) (0.054) (0.052) (0.041) (0.040) 

capital_controls_in_place -0.52*** -0.38* -0.50** -0.36* -0.42*** -0.34** 

(0.20) (0.20) (0.20) (0.20) (0.15) (0.16) 

Constant -0.068 -1.41 -0.32 -1.61 0.38 0.31 

(0.97) (1.28) (0.99) (1.29) (0.76) (0.99) 

Observations 504 504 504 504 504 504 R-squared 0.139 0.234 0.140 0.234 0.095 0.216 

Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 

Note: d_lsap_announcements is an indicator variable equal to 1 for the quarters in which the initial announcements of LSAPs, so-c

decisions to continue them were made (2008:Q4, 2009:Q1, 2010:Q3 and 2010:Q4). d_lsap_implementation is equal to 1 for the 

“QE2” programs (2008:Q4-2010:Q1 and 2010:Q3-2011:Q2). *Economies included are the same as in table 3. 

45
Table 8: Effects of LSAP purchases on net inflows through the 10-year U.S. Treasury bond yi

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net inflowModel: OLS FE OLS FE OLS FE Interval: 2002q1 – 2012q2 2002q1 – 201treas_10yr_us -0.38 -0.53 -0.64 -0.86** 

(0.57) (0.58) (0.44) (0.44) 

treas_10yr_us * crisis -0.057 0.011 -1.36** -1.23** 

(0.76) (0.72) (0.59) (0.55) 

treas_10yr_us * post-crisis 0.63 0.62 0.66 0.70 

(0.64) (0.61) (0.49) (0.47) 

lsap_purchases_effect -1.63 -1.60 

(1.64) (1.57) 

growth_diff_ae 0.47*** 0.47*** 0.26 0.24 0.16* 0.062 

(0.12) (0.13) (0.16) (0.18) (0.095) (0.098) 

policy_rate_diff_us 0.21*** 0.088 0.19** 0.12 0.16*** -0.0097 

(0.075) (0.14) (0.080) (0.14) (0.058) (0.11) 

Vix -0.066 -0.055 -0.036 -0.030 -0.11*** -0.099***  (0.050) (0.049) (0.056) (0.054) (0.039) (0.037) crisis * growth_diff -0.49* -0.45* -0.28 -0.27 -0.25 -0.30 

(0.25) (0.25) (0.26) (0.25) (0.20) (0.19) 

crisis * policy_diff 0.65** 0.52** 0.68** 0.62** 0.24 0.28 

(0.27) (0.26) (0.26) (0.26) (0.21) (0.20) 

crisis * vix -0.091 -0.091 -0.14** -0.14** 0.095* 0.082 

(0.071) (0.068) (0.060) (0.058) (0.055) (0.052) 

post-crisis * growth_diff -0.27 -0.17 -0.024 0.068 -0.20 -0.083 

(0.22) (0.21) (0.23) (0.23) (0.17) (0.16) 

post-crisis * policy_diff 0.62*** 0.49** 0.67*** 0.57*** 0.34** 0.19 

(0.21) (0.22) (0.21) (0.21) (0.16) (0.17) 

post-crisis * vix -0.082 -0.091 -0.042 -0.050 -0.048 -0.058 

(0.095) (0.091) (0.058) (0.057) (0.074) (0.069) 

no_meas_ext -0.53*** -0.40* -0.51*** -0.34* -0.44*** -0.39** 

(0.20) (0.21) (0.20) (0.20) (0.15) (0.16) 

Constant 1.38 0.62 -0.040 -0.29 3.55 4.31** 

(2.78) (2.80) (1.08) (2.16) (2.16) (2.14) 

Observations 504 504 468 468 504 504 R-squared 0.140 0.235 0.127 0.233 0.106 0.227 

Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 

Note: lsap_purchases_effect is the difference between the actual 10-year U.S. Treasury bond yield and an estimate of what the yield wTo construct this effect, we regress the 10-year U.S. Treasury bond yields on Fed purchases one quarter ahead over the period 2003the fitted value the estimated constant and error terms. *Economies included are the same as in table 3. 

46
Capital Flows to Emerging Market Economies:

A Brave New World?1

Shaghil Ahmed and Andrei Zlate

Board of Governors of the Federal Reserve System

Appendix

June 2013

This appendix explores the robustness of our main results from the paper to several alternative speciÖcations. These include: (1) decomposing the growth and policy rate di§erentials

into separate emerging market economy (EME) and advanced-economy (AE) variables; (2)

adding smaller countries in emerging Asia and Latin America; (3) adding emerging European countries as well and allowing for regional e§ects; (4) using Credit Suisseís global risk

appetite index (GRAI) instead of VIX; and (5) focusing on gross ináows rather than net

ináows.

A Robustness

A.1 Decomposing di§erentials into EME and rest-of-the world

variables

To compare our results to others in the literature, we have separated the growth and policy

rate di§erentials into their relative counterparts, namely the growth of EMEs separated from

the growth of their AE trading partners, and the policy rates of EME separated from the

U.S. policy rate. The results are presented in table A1. First, they show that the coe¢ cients

are generally of the expected sign, positive on EME growth and EME policy rates, and

negative on AE growth and the U.S. policy rate. They are also roughly equal in magnitude

in several cases, suggesting the di§erential models may be a fairly reasonable approximation

to the more general models. Second, considering statistical signiÖcance, the EME variables

and sometimes also the AE/U.S. variables are signiÖcant for total ináows (columns 1-4).

For portfolio ináows, the signiÖcance of EME variables declines, and the AE variables are

no longer signiÖcant (columns 5-8). Note, though, that since the AE growth and the U.S.

1The views expressed here are solely the responsibility of the authors and should not be interpreted

as representing the views of the Board of Governors of the Federal Reserve System or any other person

associated with the Federal Reserve System.

i
policy rate do not di§er across the cross-sections in the panel, it is a taller order for them to

come out statistically signiÖcant. Finally, of course, we cannot estimate the e§ect of the U.S.

policy rate in the post-crisis period because of a lack of variation in this variable given the

the zero lower bound; hence, in the post-crisis period, the policy rate di§erentials entirely

reáect changes in the EME policy rates.2

A.2 Sensitivity to adding other countries from Asia and Latin

America

Additional economies are included from emerging Asia (Hong Kong, Singapore, and China

starting 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, including

the unavailability of quarterly Chinese data before 2010, the sample becomes an unbalanced

panel. Overall, our core results are fairly robust to adding these additional economies from

emerging Asia and Latin America, although there are some important di§erences. In the

results for 17 EMEs reported in table A2 (with all the additional countries from above

added, except the international Önancial centers Hong Kong and Singapore), generally the

growth and policy interest rate di§erentials still a§ect capital áows positively and global

risk aversion negatively, as in the results reported in table 3 of the paper. However, one

exception is that for pre-crisis total net ináows, the policy rate di§erential switches in sign

and is not statistically signiÖcant. In addition, when the Asian Önancial centers Hong Kong

and Singapore are added to the sample (see table A3), for the portfolio áows model, the e§ect

of growth di§erentials switches sign to become negative for the post-crisis period and actually

is statistically signiÖcantly negative. This reinforces our argument made earlier that áows

to these international Önancial sectors may not be determined by the same considerations

as those for other EMEs.

A.3 Regional e§ects and adding countries from emerging Europe

One interesting question is whether the sensitivity of capital áows to their main drivers

di§ers across regions. To address this question, we add countries from emerging Europe to

the sample, in addition to those from Asia and Latin America reported above, excluding

Hong Kong and Singapore. The following economies from emerging Europe are added to the

2By and large, these results are consistent with the importance of the EMEsíown growth performance

as well as of risk aversion and U.S. interest rates that previous studies, such as IMF (2011a), and Ghosh et

al. (2012) found using sample periods that ended earlier and used much less of the post-crisis period than is

included in our study.

ii
sample: Croatia, Czech Republic, Hungary, Kazakhstan, Latvia, Poland, Romania, Russia

and Ukraine, which takes the sample to 26 EMEs. We also add interaction terms for the

growth and policy rate di§erentials as well as VIX with regional dummy variables for Latin

America and emerging Europe to see if the e§ects of these variables di§er across regions.

With emerging Asia as the baseline, the coe¢ cients on these interaction terms measure how

di§erent the e§ects are for Latin America and Eastern Europe, respectively, compared to

Asia. The results for the Asia e§ects, reported in the top three rows of table A4, reinforce our

core results from table 3 of the main paper that growth di§erentials, policy rate di§erentials,

and risk aversion all matter. In particular, risk aversion is now statistically signiÖcant for

emerging Asia for both sub-periods and both speciÖcations. But di§erences across regions

are clearly visible. In particular, policy rate di§erentials appeared to matter signiÖcantly

less in Latin America than in Asia in the pre-crisis period. And, for total net ináows, risk

aversion is also less important for Latin America for both periods. For emerging Europe,

risk aversion also appears to be play a signiÖcantly smaller role than in Asia in driving total

net ináows.

A.4 Alternative measure of global risk aversion

As an alternative to VIX, we use Credit Suisseís Global Risk Appetite Index (GRAI) as a

measure of global appetite for risk. GRAI is obtained as the coe¢ cient from regressing the

stock returns from a number of AEs and EMEs (computed over six-month intervals) on stock

price volatility of the preceding 18 months. A tighter link between past stock price volatility

and future stock returns is assumed to signal greater willingness to take more risk and, thus

an increase in the GRAI indicates an increase in global risk appetite. Indeed, the results in

table A5 show that GRAI is positively related to the EME capital áows and is statistically

signiÖcant in nearly the same speciÖcations as in table 3 of the paper, while the results for

other determinants are also preserved.

A.5 Gross vs. net capital áows

We examine whether the results based on gross capital ináows to EMEs support our previous

Öndings for net capital ináows. Due to the data limitations discussed earlier, when looking

at gross ináows, we had to drop India and Malaysia from our sample of 12 core EMEs.

The results for gross ináows, shown in table A6 of the appendix, are somewhat di§erent

from those on net ináows reported in table 3 of the paper. In particular, there is still some

evidence of the importance of growth di§erentials for total gross capital ináows, but not as

much for policy rate di§erentials. However, the evidence for the importance of risk aversion

iii
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 the

model with gross ináows. All else equal, the number of measures in place and the number of

new measures still dampen gross ináows of capital, both for total ináows and for portfolio

ináows. And, in the speciÖcation with capital controls, the e§ects of growth di§erentials

and policy rate di§erentials on gross ináows are qualitatively fairly similar to the e§ects on

net ináows reported in Table 5, although not quite as strong. Overall, the magnitude of the

e§ects are di§erent but the main conclusions still go through with the models that utilize

gross ináows.

References

[1] International Monetary Fund, 2011a. Recent experiences in managing capital ináowó

Cross-cutting themes and possible guidelines. IMF paper, February.

[2] Ghosh, Atish R., Jun Kim, Mahvash Qureshi, and Juan Zalduendo, 2012. Surges. IMF

Working Paper WP/12/22.

iv
Table A1: Determinants of net inflows decomposed by EMEs and advanced economy factors, 12 

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net inflowInterval: 2002q1 – 2008q2 2009q3 – 2012q2 2002q1 – 2008q2 Model: OLS FE OLS FE OLS FE growth_eme 0.49*** 0.40*** 0.34*** 0.53*** 0.17* 0.028 

(0.12) (0.13) (0.13) (0.14) (0.092) (0.096) 

growth_ae -0.71 -0.76 -0.41* -0.60** 0.048 0.12 -

(0.63) (0.61) (0.24) (0.24) (0.48) (0.44) 

policy_rate_eme 0.20*** -0.21 0.64*** 0.77* 0.16*** -0.15 0

(0.076) (0.19) (0.14) (0.40) (0.057) (0.14) 

policy_rate_us -0.38* -0.28 -0.19 -0.097 

(0.22) (0.22) (0.17) (0.16) 

vix -0.090 -0.086 -0.13 -0.13 -0.086* -0.084* 

(0.063) (0.061) (0.086) (0.081) (0.048) (0.044) (

Constant 1.19 0.37 1.00 -1.72 -0.15 0.049 

(2.40) (2.52) (2.18) (4.63) (1.82) (1.82) 

Observations 312 312 144 144 312 312 R-squared 0.066 0.165 0.161 0.322 0.047 0.232 

Standard errors in parentheses 

*** p<0.01, ** p<0.05, * p<0.1 

* Economies included are those included in table 3 of the paper: India, Indonesia, Malaysia, the Philippines, South Korea, Taiw

emerging Asia, and Argentina, Brazil, Chile, Colombia, and Mexico from Latin America. 

v
Table A2: Determinants of net inflows, 17 EMEs from emerging Asia and Latin America* 

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net inflowInterval: 2002q1 – 2008q2 2009q3 – 2012q2 2002q1 – 2008q2 Model: OLS FE OLS FE OLS FE growth_diff_eme-ae 0.23*** 0.16* 0.33*** 0.31** 0.061 0.0058  (0.079) (0.083) (0.11) (0.13) (0.053) (0.057) policy_rate_diff_eme-us -0.028 -0.049 0.24** 0.45 0.088** -0.063 

(0.064) (0.11) (0.10) (0.33) (0.043) (0.078) 

vix -0.0082 -0.012 -0.094 -0.096 -0.074** -0.057* 

(0.052) (0.048) (0.078) (0.072) (0.035) (0.033) 

Constant 0.079 8.52*** 1.86 -5.58 0.44 0.60 

(1.08) (1.93) (1.94) (5.20) (0.72) (1.33) 

Observations 372 372 202 202 372 372 R-squared 0.030 0.268 0.062 0.269 0.023 0.218 

Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1. 

*Economies included are those in table 3 of the paper plus China (with data starting in 2010:Q1), Costa Rica, Peru, Uruguay, and Venezuela. (Hong Kong and Singapore) are excluded. 

Table A3: Determinants of net inflows, 19 EMEs from emerging Asia and Latin America including fina

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net inflowInterval: 2002q1 – 2008q2 2009q3 – 2012q2 2002q1 – 2008q2 Model: OLS FE OLS FE OLS FE growth_diff_eme-ae 0.23** 0.15* 0.21 0.31** 0.022 -0.038 

(0.094) (0.088) (0.13) (0.15) (0.11) (0.11) 

policy_rate_diff_eme-us 0.14* -0.055 0.27** 0.48 0.31*** -0.0014 0

(0.076) (0.12) (0.13) (0.45) (0.089) (0.15) 

vix -0.019 0.0062 -0.13 -0.13 -0.20*** -0.15*** 

(0.059) (0.049) (0.10) (0.092) (0.069) (0.059) 

Constant -1.59 8.26*** 2.82 0.69 0.30 2.26 

(1.25) (2.10) (2.52) (2.84) (1.47) (2.53) 

Observations 424 424 226 226 424 424 R-squared 0.017 0.400 0.030 0.276 0.043 0.382 

Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1. 

*Economies included are those in table A2 plus the international financial centers (Hong Kong and Singapore). 

vi
Table A4: Determinants of net inflows, 26 EMEs*

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net Interval: 2002q1 – 2008q2 2009q3 – 2012q2 2002q1 – 2008q2 Model: OLS FE OLS FE OLS FE growth_diff_eme-ae 0.20 0.17 0.46*** 0.49** 0.16 0.0036 

(0.26) (0.30) (0.17) (0.22) (0.16) (0.19) 

policy_rate_diff_eme-us 0.44** 0.80** 0.41 -0.21 0.45*** 0.41* 

(0.20) (0.35) (0.29) (0.80) (0.12) (0.22) 

vix -0.26*** -0.14* -0.30*** -0.27** -0.14*** -0.14*** 

(0.063) (0.075) (0.083) (0.12) (0.038) (0.047) 

growth_diff_eme-ae * d_latam -0.15 -0.017 -0.40* -0.54* -0.16 0.0039 

(0.27) (0.32) (0.24) (0.30) (0.16) (0.20) 

policy_rate_diff_eme-us * d_latam -0.63*** -1.00*** -0.43 0.96 -0.38*** -0.55** 

(0.22) (0.38) (0.31) (0.90) (0.13) (0.24) 

vix * d_latam 0.14** 0.23** 0.24*** 0.34** -0.0081 0.15** 

(0.066) (0.11) (0.077) (0.16) (0.039) (0.069) 

growth_diff_eme-ae * d_emeurope 0.039 -0.023 -0.70*** -0.65** -0.44** 0.090 

(0.29) (0.36) (0.21) (0.27) (0.17) (0.23) 

policy_rate_diff_eme-us * d_emeurope -0.71*** -1.07*** -0.54 -0.26 -0.35** -0.20 

(0.23) (0.39) (0.33) (1.05) (0.14) (0.24) 

vix * d_emeurope 0.40*** 0.029 0.23*** 0.047 0.088** 0.017 

(0.069) (0.10) (0.073) (0.16) (0.042) (0.064) 

Constant 4.09*** 8.23** 4.50** -13.9** 1.37** -1.36 

(0.98) (3.54) (1.75) (6.65) (0.59) (2.22) 

Observations 593 593 310 310 593 593 R-squared 0.180 0.398 0.082 0.296 0.075 0.251 

Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1. 

*Economies included are those in table A2 plus Croatia, Czech Republic, Hungary, Kazakhstan, Latvia, Poland, Romania, Russia, and Ukraine. 

vii
Table A5: Determinants of net inflows with GRAI as risk variable, 12 EMEs* 

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total net inflows/NGDP Portfolio net inflowInterval: 2002q1 – 2008q2 2009q3 – 2012q2 2002q1 – 2008q2 Model: OLS FE OLS FE OLS FE growth_diff_eme-ae 0.49*** 0.43*** 0.30** 0.49*** 0.19** 0.054 

(0.12) (0.13) (0.13) (0.14) (0.091) (0.095) 

policy_rate_diff_eme-us 0.21*** -0.010 0.66*** 0.92** 0.16*** -0.080 

(0.073) (0.15) (0.14) (0.42) (0.055) (0.11) 

grai 0.12 0.071 0.25 0.25 0.21** 0.16* 

(0.12) (0.12) (0.16) (0.16) (0.094) (0.088) 

Constant -1.67*** -3.39*** -1.77** -3.34** -1.61*** -2.09** 

(0.59) (1.15) (0.86) (1.42) (0.45) (0.83) 

Observations 312 312 144 144 312 312 R-squared 0.061 0.153 0.161 0.319 0.042 0.225 

Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 

*Economies included are those in table 3 of the paper. 

Table A6: Determinants of gross inflows, 10 EMEs* 

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total gross inflows/NGDP Portfolio gross inflowInterval: 2002q1 – 2008q2 2009q3 – 2012q2 2002q1 – 2008q2 Model: OLS FE OLS FE OLS FE growth_diff_eme-ae 0.069 0.11 0.19 0.34** -0.031 -0.048 

(0.12) (0.12) (0.15) (0.14) (0.082) (0.080) 

policy_rate_diff_eme-us -0.17** -0.22 0.15 -0.47 -0.073 -0.13 

(0.069) (0.15) (0.15) (0.41) (0.047) (0.094) 

vix -0.18*** -0.17*** -0.25** -0.24*** -0.10*** -0.097*** -

(0.051) (0.050) (0.097) (0.081) (0.035) (0.032) 

Constant 7.88*** 9.52*** 9.63*** 6.22*** 3.51*** 4.56*** 5

(1.09) (2.31) (2.39) (2.27) (0.74) (1.49) 

Observations 260 260 120 120 260 260 R-squared 0.085 0.223 0.071 0.402 0.048 0.261 

Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 

*Economies included are those in table 3 of the paper minus India and Malaysia, for which gross inflows are only partially available. 

viii
Table A7: The effect of capital controls on gross inflows, 10 EMEs* 

(1) (2) (3) (4) (5) (6) 

Dependent variable: Total gross inflows/NGDP Portfolio gross infInterval: 2009q3 – 2012q2 2009q3 – 20Model: OLS FE OLS FE OLS FE growth_diff_eme-ae 0.088 0.30** 0.19 0.32** 0.037 0.087 

(0.14) (0.15) (0.15) (0.14) (0.091) (0.098) 

policy_diff_eme-us 0.41** -0.39 0.40** -0.47 0.20** 0.22 

(0.16) (0.43) (0.17) (0.44) (0.10) (0.29) 

vix -0.26*** -0.25*** -0.25*** -0.24*** -0.15** -0.15*** 

(0.091) (0.081) (0.094) (0.083) (0.058) (0.055) 

capital_controls_in_place -0.61*** -0.15 -0.32*** -0.46*** 

(0.16) (0.20) (0.099) (0.14) 

new_capital_controls -0.66 0.063 

(0.53) (0.51) 

l_new_capital_controls -0.69 0.23 

(0.54) (0.53) 

l2_new_capital_controls -0.93* 0.029 

(0.55) (0.54) 

l3_new_capital_controls -1.19** -0.34 

(0.55) (0.53) 

Constant 10.4*** 6.48*** 9.71*** 6.26*** 5.48*** 3.54** 

(2.26) (2.30) (2.32) (2.32) (1.44) (1.55) 

Observations 120 120 120 120 120 120 R-squared 0.180 0.405 0.157 0.406 0.136 0.297 

Standard errors in parentheses 

*** p<0.01, ** p<0.05, * p<0.1 

Note: capital_controls_in_place is the number of capital control measures introduced since 2009 that are in place in any given quarnumber of new capital control measures introduced in a given quarter (l, l2, l3 indicate lagged values). *Economies included are thos

and Malaysia, for which gross inflows are only partially available. 

ix