weekly information of portfolio investment flows with worldwide coverage for more than 14,000 equity funds and 7000 bond funds.<sup>3</sup> He finds that ‘ _push_ ’ factors —as captured by indicators of global liquidity and risk— are the main drivers of capital inflows during crisis and recovery periods. He also shows that ‘ _pull’ factors_ (as captured by quality of institutions and macroeconomic fundamentals) help explain inflow of capital in emerging markets during the post-crisis recovery period. His estimates explains that there is cross-country heterogeneity in the impact of push factors on capital inflows, and this heterogeneity is mainly driven by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals.

The second strand of the literature investigates the theoretical prediction of the neoclassical theory –that is, foreign capital would flow from rich to poor countries due to diminishing returns to capital. In a seminal paper, Lucas (1990) found that the data failed to confirm this theoretical prediction, and this empirical regularity was called the “ _Lucas paradox._ ” Alfaro, Kalemli-Ozcan and Volosovych (2008) conduct a comprehensive test of the “ _Lucas paradox_ ” using annual data on net inflows for 81 countries over the period 1970-2000.<sup>4</sup> They examine two different groups of explanations that may reverse the Lucas paradox: a) differences in fundamentals affecting the economy’s structure of production (say, technological differences, missing inputs, institutional structure and quality of government policies), and b) international capital market imperfections (say, sovereign risk and asymmetric information). They robustly find that institutional quality is the driving force that resolves the Lucas paradox. Their estimates show, for example, that improving Peru’s quality of institutions to that of Australia will quadruple the amount of foreign investment.

Franken and van Wijnbergen (2010) investigate the drivers of capital flows to resolve the “ _Lucas paradox_ ” for low income countries (LICs). They use annual data on net inflows (overall and by type) from 1981 to 2006. LICs are among the group of countries where the share of FDI in total gross inflows is the largest. They show that (net) private capital —and, more specifically, net FDI— will flow to poorer countries if they are integrated to international trade, they have natural resources and experience debt relief episodes.

The third strand of the empirical literature reviews the determinants of massive inflows of capital. In a seminal paper, Reinhart and Reinhart (2009) conduct a comprehensive study of capital flow bonanzas using annual information of net capital inflows for 181 countries from 1980 to 2007. They find that bonanzas are more frequent as countries have lifted restrictions on international capital flows. These episodes are also persistent and may typically end up in an

> 3 The amount of assets under management of these mutual funds is approximately US$ 8 trillion.

> 4 According to Lucas (1990), differences in income per capita —to the extent that they reflect differences in capital per capita— would be a good predictor of the direction of foreign capital throughout the world. If there is perfect capital mobility, theory predicts that capital should flow to poorer countries (that is, negative correlation between capital inflows and income differentials). However, this is not found empirically.

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