where ω i captures country-specific effects, and ν it is the error term while the matrix **c** contains the coefficients of the determinants of capital inflows (summarized in the matrix **X** ).<sup>13</sup>

# **4.2 Sources of Data for the Regression Analysis**

Our set of explanatory variables is divided in two groups: pull vs. push factors. The criteria to define surges in inflows are described in subsection 3.1 and the sources of the data on capital inflows are described in subsection 3.2. It has been argued that foreign capital may increasingly flow into the domestic economy as long as the country exhibits attractive domestic conditions. Capital inflows will be “ _pulled_ ” by profitable investment opportunities in the domestic economy and better country creditworthiness. Sustained gross inflows are attributed to good economic fundamentals and sound domestic policies (Fernandez-Arias, 1996). In contrast, others have argued that inflows are mostly “ _pushed_ ” by external factors —and, particularly, monetary and fiscal policies in industrial countries (Elekdag and Wu, 2011; Fratzscher, 2012). In this case, surges in inflows to the domestic economy are partly influenced by lower interest rates in industrial countries (Calvo, Leiderman, and Reinhart, 1993).

_Pull Factors_ . This set of control variables comprises domestic factors that make the recipient economy attractive to foreign investors. It includes outcome and policy variables that capture macroeconomic performance (growth in real GDP, inflation, exchange rate flexibility, and the current account balance), developments in the domestic financial sector (as captured by the evolution of the domestic credit and the exchange rate), international integration (i.e. trade and financial), among others.

Macroeconomic performance is captured by a multiple set of indicators. A barometer of the performance in real economic activity is the growth rate of real GDP. The data on quarterly GDP (in local currency at constant prices) is collected from various sources —DataStream, Haver Analytics and national statistical institutions and central banks. We use the seasonally adjusted data on quarterly GDP —and, more specifically, the annual growth rate in real GDP.<sup>14</sup> We next include some indicators of the macroeconomic policy framework. The inflation rate —as proxy of monetary stability— is measured by the (year-over-year) percentage change of the consumer price index (CPI) where the data is from the IMF’s International Financial Statistics (IFS). The flexibility of the exchange rate arrangements, on the other hand, is proxied by the _coarse_ classification of exchange rate regimes developed by Reinhart and Rogoff (2004) and updated by Ilzetzki, Reinhart and Rogoff (2009). This coarse indicator goes from 1 to 6, and higher values indicate a more flexible exchange rate arrangement (with 1 signaling hard pegs and 6 pure floats). We also include the current account balance —as a proxy for external imbalances. It is

> 13 Analogously, all control variables are lagged to avoid reverse causality problems.

> 14 If the source provides only the non-seasonally adjusted real GDP, we use the non-parametric X-12 ARIMA Census approach to adjust for seasonal components.

16