Abstract
In this paper, we analyse the impact and persistence of shocks to global (push) and domestic (pull) factors on each component of the financial account for the Mexican Balance of Payments, at the highest degree of disaggregation, including investment by foreign residents in Mexican public and private sector securities, as well as investment by domestic residents in foreign securities. To this end, we estimate impulse response functions from vector autoregressive models for the period 1995–2015. We find that an increase in the foreign interest rate leads to lower portfolio investment. An increase in global risk generates lower portfolio investment, particularly in private sector securities. Foreign investors respond to a higher extent to foreign interest rate and liquidity shocks compared to domestic investors.
Highlights
The rise in capital flows to emerging economies (EMEs) after the global financial crisis of 2008–2009 has renewed the interest about the determinants of capital flows
Recent increases in capital flows can be explained by several factors
We studied the determinants of the dynamics for each component of the financial account for Mexico
Summary
The rise in capital flows to emerging economies (EMEs) after the global financial crisis of 2008–2009 has renewed the interest about the determinants of capital flows. Analysing the determinants of capital flows at a high level of disaggregation is important because different components of the financial account might be driven by different types of factors. The global financial crisis was followed by a period of low interest rates in advanced economies and increased liquidity in international markets. This in turn increased capital flows to EMEs in general and Mexico in particular, as international investors were searching for high yields in those economies. Examine the dynamic impact on capital flows of different shocks on capital flows In this way, we analyse the impulse response functions (IRF) of each component of the financial account to domestic and foreign shocks. The last Section concludes and discusses areas for future research
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