The Role of Push and Pull Factors in Driving Global Capital Flows

Abstract

The present study investigates the main drivers of the capital flows and explicitly models regional interactions. Using a structural VAR framework, the capital flows are analyzed into global “push” factors and country-specific “pull” factors. Evidence suggests that significant inter-regional as well as intra-regional differences exist in the factors that drive capital flows. In particular, the foreign push factors explain the flow of foreign direct investments to majority of Asia whereas, such flows to Latin American economies are mainly driven by the pull factors. This is in contrast to portfolio flow dynamics. The push factors dominate the portfolio flows to Latin American countries whereas, both the factors are equally important for the Asian portfolio flows. Furthermore, it is found that the Asian capital flows have a positive effect on the flow of capital to Latin American region and they explain large variation in the capital flows to that region but interestingly, the reverse is not the case.