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Capital Flows, Country Risk and Contagion (2002)
| Citations: | 2 - 0 self |
BibTeX
@MISC{Fiess02capitalflows,,
author = {Norbert Fiess and World Bank and Thank Santiago Herrera and Ronnie Macdonald and William Maloney and Dilip Ratah and Raskmi Shankar For},
title = {Capital Flows, Country Risk and Contagion},
year = {2002}
}
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Abstract
It has been widely recognized that both country-specific and global factors matter in explaining capital flows. In this paper we present an empirical framework that allows us to disentangle the relative weight of country-specific and global factors in determining capital flows. In essence, our approach first separates the common component of emerging country spreads from their country-specific component. The pure country risk and global risk components are then used as explanatory variables to account for the observed pattern of capital flows using multivariate cointegration analyses. We are able to identify the relative weight of global and country-specific factors in explaining capital flows to Argentina, Brazil, Mexico and Venezuela in the 1990s. When further decomposing country risk into its determinants, we find that within a small system it is possible to jointly identify the determinants of capital flows and sovereign bond spreads. We find that capital flows are driven by country risk and global factors ("contagion" and U.S. Long-term interest rates), while country risk is determined by the primary balanceto -GDP ratio (-) and the ratio of public debt to GDP (+).
Keyphrases
capital flow country risk relative weight global factor common component country-specific factor observed pattern empirical framework pure country risk country spread global risk component global factor matter primary balanceto gdp ratio multivariate cointegration analysis sovereign bond spread explanatory variable u.s. long-term interest rate decomposing country risk small system public debt country-specific component
