Determinants of Capital Flows to Emerging Market Economies

Abstract

Theoretically, capital market integration allows people to share the country-specific risks by holding foreign assets, and contributes to economic growth especially for emerging market economies (hereafter EMEs) at their early stages of development. At the same time, there are also some problems caused by capital market integration. As we experienced during the global financial crisis (GFC), financial shocks originating from the center country can be rapidly transmitted to peripheral countries through the integrated financial market. Volatile cross-border capital inflows and outflows impede efforts to maintain financial stability, which eventually stunts economic growth by incurring financial crises.