Capital Inflows to Emerging Markets
Participants in an NBER project on "Capital Inflows to Emerging Markets," organized by Sebastian Edwards of NBER and the University of California, Los Angeles, gathered in Cambridge on February 20 and 21 to hear the following reports:
Sebastian Edwards, "Capital Flows, Real Exchange Rates, and Capital Controls: Latin American Experiences"
Discussant: Jose de Gregorio, University of Chile
Paul R. Krugman, NBER and MIT, "Fire-Sale FDI"
Discussant: Aaron Tornell, NBER and Harvard University
Enrique Mendoza, Duke University, and Guillermo Calvo, University of Maryland, "Contagion, Globalization, and the Volatility of Capital Flows"
Discussant: Rudiger Dornbusch, NBER and MIT
Stijn Claessens, Daniel Oks, and Rossana Polastri, The World Bank, "Capital Flows to Central and Eastern Europe and the Former Soviet Union"
Discussant: Michael P. Dooley, NBER and University of California, Santa Cruz
Philippe Bachetta, Studienzentrum, Gerzensee, and Eric Van Wincoop, Federal Reserve Bank of New York, "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility"
Discussant: Carmen Reinhardt, University of Maryland
Geert Bekaert, NBER and Stanford University, and Campbell R. Harvey, NBER and Duke University, "Capital Flows and the Behavior of Emerging Market Equity Returns"
Discussant: James Conklin, Lehman Brothers
Holger C. Wolf, NBER and New York University, "Is There a Curse of Location? Spatial Determinants of Capital Flows to Emerging Markets"
Discussant: Miguel Savastano, International Monetary Fund
Barry Eichengreen, NBER and International Monetary Fund, and Ashoka Mody, University of Pennsylvania, "What Explains the Falling Spreads on Emerging-Market Debt: Fundamentals or Irrational Exuberance?"
Discussant: Sylvia Maxfield, Yale University
Takatoshi Ito, NBER and Hitotsubashi University, "Capital Flows in Asia"
Discussants: David Folkerts-Landau, International Monetary Fund, and Dani Rodrik, NBER and Harvard University
Edwards discusses Latin America's experience during the last 25 years regarding the effects of capital flows on real exchange rates and international competitiveness, and then focuses on the role of capital controls as a device for isolating emerging economies from the volatility of international capital markets. His empirical analysis of Chile's recent experiences with capital controls, and comparisons to Colombia's and Mexico's recent experiences, is particularly important because many analysts have praised the Chilean practice of imposing reserve requirements on capital inflows to reduce the vulnerability associated with the volatility of capital flows.
Krugman draws attention to and stimulates discussion of the phenomenon of fire-sale foreign direct investment (FDI). which is likely to become a major economic and political issue in the coming years. He indicates the ways this phenomenon might emerge in the context of alternative crisis models. Finally, he examines the welfare implications of crisis-induced sales of domestic assets to foreign firms and asks how those implications depend on the diagnosis of the crisis itself.
Mendoza shows that globalization of securities markets exacerbates the volatility of capital flows by strengthening the incentives that promote contagion. His model includes imperfect information: country-specific information can be acquired at a fixed cost, and portfolio managers bear certain variable costs that depend on portfolio performance. Using historical data from equity markets and country credit ratings. he shows that contagion can induce large capital outflows from emerging markets. Further, globalization has a large magnifying effect on contagion.
Claessens, Oks, and Polastri observe that private capital flows to Central and Eastern Europe and the former Soviet Union have increased sharply. From 1992-6, FDI was the most important capital flow, but recently flows of short-term debt have become more important. …