Push Factors and Capital Flows to Emerging Markets : Why Knowing Your Lender Matters More Than Fundamentals

This paper analyzes the behavior of gross capital inflows across 34 emerging markets (EMs).We first confirm that aggregate inflows to EMs co-move considerably. We then report threefindings: (i) the aggregate co-movement conceals significant heterogeneity across asset typesas only bank-related and portfolio bond and equity inflows do co-move; (ii) while globalpush factors in advanced economies mostly explain the common dynamics, their relativeimportance varies by type of flow; and (iii) the sensitivity to common dynamics variessignificantly across borrower countries, with market structure characteristics (especially thecomposition of the foreign investor base and the level of liquidity) rather than borrowercountry's institutional fundamentals strongly affecting sensitivities. Countries relying moreon international funds and global banks are found to be more sensitive to push factors. Ourfindings suggest that EMs need to closely monitor their lenders and investors to assess theirinflow exposures to global push factors.