HKS Faculty Research Working Paper Series
HKS Working Paper No. RWP15-025
May 2015
Abstract
Capital flows have been the subject of key policy concern since the Brady plan launched
the emerging markets asset class. Their massive volume, coupled with their volatile and
procyclical nature, is often associated with a variety of financial and real risks: excess
exchange rate volatility (gradual overvaluation and sharp corrections), dollar liquidity
crunches, distressed asset sales, and crisis propensity.
These risks have changed over time. Emerging market crises in the 1990s and 2000s
were inherently driven by financial dollarization and balance sheet effects, the latter
were intimately related with capital inflows in the form of growing foreign liability
positions. But, now that financial dollarization has receded in the emerging market word
(either through debt deleveraging or international reserve accumulation), the focus
shifted to the macroeconomic effects of cross market flows, including extended periods
of exchange rate misalignment and the amplification of business cycles in a context of
large and persistent terms-of-trade shocks and global liquidity swings. Hence, the
difficulty of evaluating capital flows based on data mostly from the 1990s and early
2000s. Hence, also, the emphasis on the recent empirical literature that revisits the
issue with fresh data and an open mind.
Citation
Levy Yeyati, Eduardo, and Jimena Zúñiga. "Varieties of Capital Flows: What Do We Know." HKS Faculty Research Working Paper Series RWP15-025, May 2015.