Abstract
This paper empirically explores the determinants of stop episodes driven by bond flows using quarterly data from 38 economies over the period 1995–2011. Drastic bond-led stop episodes may greatly destabilize domestic financial markets and lead to financial crisis, threatening the sustainability of the financial system. Using the complementary log–log regression method, we found that bond-led stop episodes were associated with contagion and domestic factors rather than global factors. The results of our estimation showed that the probability of bond-led stop episodes was higher in countries with larger financial markets or with more overvalued real exchange rates. The main policy implications of our results, particularly for emerging economies, are that bond-led stop episodes were less likely to occur in countries with higher levels of institutional quality, lower capital account restrictions, or more flexible exchange-rate regimes. Finally, we found that capital control played a relatively greater role in predicting bond-led stops in emerging economies than did exchange-rate regimes.
Highlights
Over the last three decades, the frequent occurrence of extreme cross-border capital flows has been a source of concern for macroeconomic and financial stability in emerging economies (EMEs)
As a complementary work aiming to fill the gaps in previous literature, this paper investigates the factors relevant to stop episodes driven by bond flows and draws policy implications from them
This paper empirically examined the determinants of bond-led stop episodes initiated by foreign investors
Summary
Over the last three decades, the frequent occurrence of extreme cross-border capital flows has been a source of concern for macroeconomic and financial stability in emerging economies (EMEs). The existing literature has examined the causes of extreme capital flow episodes as well as ways of identifying and measuring such episodes. Extreme episodes imply sharp increases (surges) or decreases (stops) in capital flows. Recent studies have identified extreme capital flow episodes and compared heterogeneity across country groups. Most of them have analyzed extreme events in aggregate capital flows without distinguishing between types of flows. The causes of and policy responses to extreme events may differ depending on the specific components of aggregate capital flows. Pagliari and Hannan [1] and Hannan [2] have shown that the determinants of capital flow volatility differ across financial account instruments
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