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The Causes and consequences of international capital flows: an empirical investigation

Taşdemir, Fatma
During the recent decades, capital flows (CF) tended to substantially increase in advanced (AE), emerging market (EME) and developing economies (DE). CF have been found as amongst the main determinants of growth, business cycles in EME and DE (EMDE). We aim to investigate the main causes and consequences of CF in EME and EMDE. To this end, we first present some stylized facts for CF and their main components in AE, EME, DE and EMDE. The main determinants of capital inflows (CIF) in EME, is investigated in the context of the conventional equations which stresses the importance of main pull (GROWTH) and push (international financial conditions, GFC) augmented with structural domestic conditions (SDC). Considering the potential endogeneity of SDC, we employ a two-step system GMM procedure. The literature often maintains that, the impacts of the main pull and push factors are invariant to the exchange rate regimes (ERR). We investigate whether ERR matters and provides endogeneous thresholds for the impacts of the main factors in explaining CIF in EME. The literature provides mixed results for the consequences CIF to EMDE. The conventional literature postulates that CIF are contractionary against the policy makers perception that they are expansionary. We investigate the consequences of CIF by considering the conventional growth equations augmented with GFC and SDC. We also discuss the commonly used growth modelling strategies in the literature and note that they may be misleading as they do not consider simultaneity bias and the inclusion of a fixed cross-country initial income variable leading to an identification problem. We also consider the integration and co-integration properties of variables which these also lead the unbalanced specification of the conventional literature. This study considers all these problems and provides the results using the recent advances in panel data econometrics including FM-OLS and PARDL equilibrium correction mechanisms.