Exchange Rate Regimes as Thresholds: The Main Determinants of Capital Inflows in Emerging Market Economies

This study investigates whether the impacts of the main common push (global financial conditions, GFC) and country-specific pull (growth) factors on capital inflows are invariant to the prevailing exchange rate regimes (ERRs) in emerging market economies. Our results suggest that endogenously estimated ERR thresholds do matter especially for the impact of GFC. The impact of GFC is substantially high under more flexible ERRs for all capital inflow types except FDI. FDI inflows are basically determined by the pull factor across all ERRs. Portfolio inflows are mainly determined by GFC. The sensitivity of aggregate and other investment inflows to the pull factor seems to be much higher under more rigid ERRs. Our results are broadly in line with the literature suggesting that credible managed ERRs encourage capital inflows by allowing countries to import monetary policy credibility of the center country and to provide exchange rate guarantee