17 November 2019

Determinants of capital flows to emerging economies: The case of Mexico

Options Winter 2019/20: Capital flows to Mexico began increasing with the recovery of global markets mid-2009 and are still continuing. IIASA researchers looked into the determinants of different types of capital flows to the country.

Arturoosorno | Dreamstime

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According to an IIASA-led study, there are two sets of factors that encourage investors to direct resources to emerging economies, namely global (push) and domestic (pull) factors. The first, which includes foreign interest rates, international liquidity, and global risk conditions, are beyond the control of emerging economies, while internal or pull factors, such as the macroeconomic conditions in a particular country, provide information about the prevailing economic conditions in that country.

The authors note that in the last decade, episodes of increases in capital flows to Mexico began with the recovery of global markets mid-2009 and have continued until the present. This increase in capital flows to emerging economies has renewed interest in the determinants of capital flows.

The study looked into the determinants of different types of capital flows to Mexico, for the period during which the country started a flexible exchange rate regime (1995–2015), analyzing the impact and persistence of shocks to push and pull factors on each component of the financial account for the Mexican Balance of Payments. The authors conclude, among other results, that an increase in the foreign interest rate leads to lower portfolio investment for the country, and that an increase in overall risk generally decreases portfolio investment in private sector securities, while foreign investors respond to a higher extent to foreign interest rates and liquidity shocks compared to domestic investors.

By Luiza Toledo


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Last edited: 21 November 2019

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