Capital inflows to emerging countries and their sensitivity to the global financial cycle

We studied how the effect of global and domestic factors on capital flows towards emerging market economies has changed in the last 25 years. We find that both the global financial crisis and the so-called “taper tantrum” (TT) event, defined as the point in time when investors perceived the end of the US Federal Reserve's unconventional monetary policy, triggered changes in the sensitivity of capital inflows to their main drivers. In particular, we provide evidence that international investors devoted growing attention to global factors. Moreover, we show that the TT marked the beginning of a new phase, characterized by increased sensitivity to both global conditions and government borrowing by recipient countries.