Joining the Club? Procyclicality of Private Capital Inflows in Lower Income Developing Economies

Posted: 27 Feb 2021

See all articles by Juliana Araujo

Juliana Araujo

International Monetary Fund (IMF)

Antonio C. David

World Bank - Policy Research Department; International Monetary Fund (IMF)

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department

Carlos van Hombeeck

Bank of England

Date Written: February 1, 2017

Abstract

Using a newly developed dataset this paper examines the cyclicality of private capital inflows to low-income developing countries (LIDCs). The empirical analysis shows that capital inflows to LIDCs are procyclical, yet considerably less procyclical than flows to more advanced economies. The analysis also suggests that flows to LIDCs are more persistent than flows to emerging markets (EMs). There is also evidence that changes in risk aversion are a significant correlate of private capital inflows with the expected sign, but LIDCs seem to be less sensitive to changes in global risk aversion than EMs. A host of robustness checks to alternative estimation methods and control variables confirm the baseline results. In terms of policy implications, these findings suggest that private capital inflows are likely to become more procyclical as LIDCs move along the development path, which could render the conduct of countercyclical monetary and fiscal policies more challenging in these economies.

Keywords: Capital flows,Cyclicality,Low-income developing countries

JEL Classification: F21, F32, F41, O11

Suggested Citation

Araujo, Juliana and David, Antonio C. and Papageorgiou, Chris and van Hombeeck, Carlos Eduardo, Joining the Club? Procyclicality of Private Capital Inflows in Lower Income Developing Economies (February 1, 2017). Journal of International Money and Finance, Vol. 70, 2017, Available at SSRN: https://ssrn.com/abstract=3754468

Juliana Araujo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Antonio C. David (Contact Author)

World Bank - Policy Research Department ( email )

1818 H Street
Washington, DC 20433
United States

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Carlos Eduardo Van Hombeeck

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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