Global financial conditions, capital flows and the exchange rate regime in emerging market economies

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.

Automated summary

This study is important for understanding the impact of exchange rate regimes on private capital flows under global financial conditions. The findings show that flexible exchange rate regimes can stabilize capital flows when global risk aversion is low, but fail to do so when global risk aversion is high.