Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence

The paper examines interest rates in nine Latin American and East Asian countries during the period 1987-1994. The goal is to discover why interest rate's have remained high, failing to converge to U.S. levels, despite capital market liberalization and a resurgence of portfolio capital inflows during the second half of this sample period. Related questions are whether portfolio capital flows are strong enough to equalize expected returns between these "emerging markets" and the U.S., and whether there is any scope left for the authorities to sterilize inflows. The conclusion of the study is that the\e largest single component of the gap in interest rates is expectations of depreciation of the local currencies against the dollar. Key to the analysis is the use of survey data on exchange rate forecasts by market participants. Indicative of integrated financial markets, we also find a big effect of U.S. interest rates on local interest rates, and a highly significant degree of capital flow offset to monetary policy.


Issue Date:
1995-06
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/233414
Total Pages:
54
JEL Codes:
F34
Series Statement:
Working Paper
C95-054




 Record created 2017-04-01, last modified 2017-08-29

Fulltext:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)