TY  - JOUR
AU  - Bacchetta, Philippe
AU  - van Wincoop, Eric
TI  - Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6530
PY  - 1998
Y2  - April 1998
DO  - 10.3386/w6530
UR  - http://www.nber.org/papers/w6530
L1  - http://www.nber.org/papers/w6530.pdf
N1  - Author contact info:
Philippe Bacchetta
Faculty of Business and Economics
University of Lausanne
Intranef 523
CH-1015 Lausanne
Switzerland
E-Mail: philippe.bacchetta@unil.ch

Eric van Wincoop
Department of Economics
University of Virginia
P.O. Box 400182
Charlottesville, VA  22904-4182
Tel: 434/924-3997
Fax: 434/982-2904
E-Mail: vanwincoop@virginia.edu
M1  - published as Philippe Bacchetta, Eric van Wincoop. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," in Sebastian Edwards, editor, "Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies" University of Chicago Press (2000)

AB  - The paper analyzes the impact of financial liberalizations and reforms in emerging markets on the dynamics of capital flows to these markets, using a simple model of international investors' behavior.  We first show that the gradual nature of liberalizations, combined with the cost of absorbing large inflows in emerging economies, leads to rich dynamics of capital flows and often implies an initial period of overshooting as portfolios adjust.  Asset prices will overshoot as well.  Second, we show that if investors have incomplete information about new emerging markets, and learn over time, there can be high volatility of capital flows as well as contagion.  Finally, we provide numerical estimates of long run capital inflows to emerging market economies and compare them to actual inflows. This gives a good indicator of upcoming crisis situations.
ER  -