The Structure of Capital Flows under Monetary Macroeconomic Volatility: an Empirical Analysis

In the last decade we have seen a significant change in the composition of capital flows to developed as well as to developing countries. In this paper we investigate empirically the links between the volatility of monetary macroeconomic aggregates, as a measure of country specific measure of relative risk, and the structure of external liabilities in developed and developing countries. We estimate a “risk augmented gravity” equation a la Portes and Rey (2002) to show that the location of the country is irrelevant and that the main determinant of the composition of capital flows remains the state of the economy of the country. JEL Classification: F21, F34