Estimating the Determinants of Capital Flows to Emerging Market Economies: A Maximum Likelihood Disequilibrium Approach

27 Pages Posted: 22 Dec 2008

See all articles by Guillermo Felices

Guillermo Felices

Bank of England - Monetary Analysis

Bjorn Orskaug

affiliation not provided to SSRN

Date Written: November 24, 2008

Abstract

This paper studies the determinants of capital flows defined as gross external bond and syndicated loan issuance to a group of emerging market economies (EMEs) since 1992. We follow the previous literature by estimating an explicit disequilibrium demand and supply model of capital flows using maximum likelihood techniques. We use the estimated supply and demand determinants to calculate time-varying probabilities of international supply-side rationing, estimating the model for the asset class as a whole. We then explore applications to individual EMEs including Brazil, Chile, China, Colombia, Korea, Mexico, Poland and Thailand using a longer time period than in previous work. For our selection of EMEs taken together, the main determinants of the supply of capital from the rest of the world are credit ratings, EME spreads, world growth and US high-yield spreads. On the demand side, the EME equity index has a positive effect on capital flows, while EME spreads and commodity prices have a negative one. The applications to individual countries show similar signs. Finally, we calculate the probability of capital crunch for EMEs in aggregate and for some countries individually.

Keywords: Capital flows, disequilibrium, emerging markets, rationing

JEL Classification: F320, F340, O190

Suggested Citation

Felices, Guillermo and Orskaug, Bjorn, Estimating the Determinants of Capital Flows to Emerging Market Economies: A Maximum Likelihood Disequilibrium Approach (November 24, 2008). Bank of England Working Paper No. 354, Available at SSRN: https://ssrn.com/abstract=1319274 or http://dx.doi.org/10.2139/ssrn.1319274

Guillermo Felices (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Bjorn Orskaug

affiliation not provided to SSRN ( email )

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