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Emerging Economies' Vulnerability to Changes in Capital Flows: The Role of Global and Local Factors

May 26, 2021
Yoshihiko Norimasa*1
Kazuki Ueda*2
Tomohiro Watanabe*3

Abstract

This study uses panel quantile regression to examine the risk of capital outflows in times of stress (capital flows-at-risk, CFaR) for 16 emerging economies. Our analysis shows that changes in financial conditions in advanced economies and in the monetary policy stance of the United States affect the risk of large capital outflows for some countries. In particular, we find that tighter financial conditions in advanced economies during a phase when the U.S. monetary policy stance is changing significantly affect emerging economies' CFaR. Further, using government debt as a measure of emerging economies' structural vulnerability, we find that an increase in government debt substantially raises the risk of capital outflows in times of stress. Moreover, while in the case of debt investment, CFaR tend to be greater the higher the level of government debt, in the case of other investment (consisting mainly of bank lending), CFaR tend to increase when financial conditions in advanced economies deteriorate.

JEL classification
E52, F32, F34, F37

Keywords
Risk of Capital Outflows (CFaR: Capital Flows-at-Risk), Global Factors, Local Factors, Panel Quantile Regression, Relative Entropy

The authors thank the staff of the Bank of Japan, in particular Yushi Endo, Ichiro Fukunaga, Naoya Kato, Teppei Nagano, Jouchi Nakajima, Koji Takahashi, Naomi Takeda, Yoichi Ueno for their valuable help and comments. All remaining errors are our own. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  1. *1International Department, Bank of Japan
    E-mail : yoshihiko.norimasa@boj.or.jp
  2. *2International Department, Bank of Japan
    E-mail : kazuki.ueda@boj.or.jp
  3. *3International Department, Bank of Japan (currently at Nippon Life Insurance Company)
    E-mail : watanabe52628@nissay.co.jp

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