【Abstract】

We examine if the sensitivity of private capital flows to global financial conditions varies across exchange rate regimes by focusing on 43 emerging market economies. We find that the flexible exchange rate regime stabilizes capital flows when the global risk aversion is low, particularly for gross liability flows; however, it fails to play such a role when the global risk aversion is high. We also show that larger covered interest parity deviations would amplify the impact of global risk aversion, which explains the failure of flexible exchange rate regimes during high global risk aversion periods.

【Keywords】

Global financial conditions, Capital flows, Emerging market economies, Exchange rate regimes, Covered interest rate parity

【Authors】

Lu Dong, Research Fellow of IMI, School of Finance, Renmin University of China

Liu Jialin, School of Finance, Renmin University of China

Zhou Hang, School of Banking and Finance, University of International Business and Economics