Effects of US Interest Rate Hikes and Global Risk on Daily Capital Flows in Emerging Market Countries

Author Name OGAWA Eiji (Faculty Fellow, RIETI) / SHIMIZU Junko (Gakushuin University) / LUO Pengfei (Hitotsubashi University)
Creation Date/NO. March 2019 19-E-019
Research Project Exchange Rates and International Currency
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The interest rate hikes in the United States and higher global risk aversion have increased capital outflows from emerging market countries in recent years. This paper attempts to investigate the effects of global risk and interest rate hikes in the United States on capital flows in emerging market countries on a daily basis during a period from 11 November 2015 to 2 October 2018. Vector Autoregressive (VAR) models are employed to obtain the following main empirical results. Firstly, we found that both a higher interest rate in the United States (both market rates and market expectations on future interest hikes) and a higher global risk aversion possibly decrease portfolio flows (both equity flows and debt flows) in most of the sampled emerging market countries, although not all of them are statistically significant. Secondly, exchange rate depreciation of emerging market country currencies against the US dollar and plunges in equity prices of emerging market countries significantly lead to portfolio outflows from most of the sampled countries, demonstrating the large driving power of emerging market portfolio flows. Thirdly, for all of the sampled countries, portfolio outflows (both equity flows and debt flows) tend to significantly lead to further outflows. Fourthly, we found that the portfolio outflows from emerging market countries significantly deteriorate their domestic equity prices and depreciate their home currencies against the US dollar. Finally, we found wide contagion effects of portfolio flows among emerging market countries.

It shows that portfolio outflows from emerging market countries will be reinforced and become more serious under the circumstances of global portfolio outflows from emerging market countries, and will be transmitted more severely among the emerging market countries with highly regional economic and financial nexuses.