This ameliorates bias due to compositional and selection effects which are present in aggregated capital flows data which are typically the focus of inquiry in the literature.

The remainder of this paper is structured as follows. Section II provides a brief overview of the literature. Section III documents external issuance trends to answer Question 1. Section IV discusses the data. Section V lays out the methodology to address Questions 2, 3, and 4 and section VI discusses the empirical results. Section VII concludes.

# **II. Literature Overview**

# **_Global liquidity_**

The pronounced simultaneous resurgence in capital flows to EMDEs seen since 2009-10 is not a new phenomenon. An extensive literature dating to the 1990s (e.g. Calvo et al (1993)) has emphasized the importance of global push factors, notably real interest rates and growth in advanced economies. Indeed, capital flows to EMDEs have long tended to exhibit strong comovements suggesting that common drivers in the global environment are at play—both across types of flows (with the exception of FDI flows) and across geographical regions. This observation is corroborated by Koepke (2015), who, while summarizing relevant empirical literature, concludes that global push factors matter relatively more than country pull factors for portfolio flows. He finds that country pull factors matter more for banking flows.

Bekaert, Hoerova and Lo Duca (2013) show that a lower Federal Funds rate triggers a subsequent reduction in measures of uncertainty and risk aversion, proxied, for example, by the VIX index, which measures the 30-day ahead expected volatility derived from S&P 500 index options (Figure 16). And Forbes and Warnock (2012) show that a lower VIX is associated with a surge in capital flows. Rey (2013) finds that capital inflows are negatively correlated with the VIX even at a geographically disaggregated level, and that this pattern holds even when conditioned by other global factors such as the real interest rate and world growth rate.

Bruno and Shin (2015a, 2015b) highlight banks as a channel of transmission. Bruno and Shin (2015a) provide and empirically test a model of risk-taking through currency appreciation. They show that the leverage cycle of international banks is associated with higher cross-border bank flows. This triggers currency appreciation in the recipient countries which strengthens local balance sheets allowing banks to lend more. In a VAR framework, Bruno and Shin (2015b) find that a lower VIX entices globally active banks to take on additional leverage, arguably because they target a certain value-at-risk (VaR) measure which mechanically allows for higher leverage when uncertainty measures fall (e.g. Adrian and Shin (2010)). They also find that the U.S. Dollar depreciates as VIX decreases, which results in a loosening of Dollar lending conditions in international funding markets. Rey (2013) and Bruno and Shin (2015b) also provide evidence that higher leverage leads to a subsequent fall in risk aversion measures, giving rise to a positive feedback loop. The mechanism is as follows: when balance sheets expand in response to lower uncertainty (VIX) through increased collateralized lending and borrowing by financial intermediaries, the newly released funding resources chase available assets for purchase. If this leads to a generalized increases in asset prices in the financial system, it then affects future risk appetite (leads to a fall in risk aversion).

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