Publication: Capital Flows, Country Risk, and Contagion
Date
2003-01
ISSN
Published
2003-01
Author(s)
Fiess, Norbert
Abstract
It has been widely recognized that both
country-specific and global factors matter in explaining
capital flows. The author presents an empirical framework
that disentangles the relative weight of country-specific
and global factors in determining capital flows. In essence,
his 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. The author is 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, the author finds 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 balance-to-GDP ratio (-) and the ratio of public
debt to GDP (+).
Link to Data Set
Citation
“Fiess, Norbert. 2003. Capital Flows, Country Risk, and Contagion. Policy Research Working Paper;No. 2943. © World Bank, Washington, DC. http://hdl.handle.net/10986/19179 License: CC BY 3.0 IGO.”
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