Essays on Capital Flows in Emerging Markets
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This dissertation comprises two essays. The first essay uses a formal statistical model to identify episodes of extreme movements in capital flows in emerging markets. In particular, I employ a three state Markov switching model to characterize periods of extreme, high, and low net capital flows for a sample of 36 emerging markets using quarterly data on net private capital flows from 1980:Q1 to 2014:Q4. The model identifies 8% percent of the total sample as periods of extreme net inflows (\surges") and 3 percent of the total sample as extreme net outflows (\flights"). Compared to the literature, the model identifies fewer episodes as extreme, and the number of episodes varies substantially across countries. The second essay focus on the dynamic analysis of the effects of these extreme capital flows (surges and flights) on emerging markets' outcomes. The impact of surges and flights on emerging market's outcomes is still an open debate in the international finance literature. Using the surges and flights identified in my first essay, I revisit the question of impact of these extreme flows in capital on emerging markets' aggregate output, current account balance, real and nominal exchange rates. I deal with the potential bias issues from non random assignment of surges and flights using a propensity score method for time series data in a local projection framework and estimate the average effects of the extreme flows on country's outcomes. The results indicate that surges are contractionary in the medium horizon whereas the flights do not have any significant effect on output. The results also show a deterioration in current account balance. There is an appreciation of nominal exchange rate but there is no effect on real exchange rate.