Causes of capital flows in developing countries

This paper investigates the causes of capital flows in four developing coun tries: Mexico, Chile, Korea, and Malaysia. Using structural decomposition a nalysis, it finds that the recent resurgence in capital movements is largel y due to external reasons such as decreases in the world interest rate or r ecession in industrial countries. Domestic factors, including country speci fic productivity shocks and demand shocks, are relatively less important. A nother interesting finding is that the fundamental causes of capital flows differ little across the countries under study. These results suggest that developing countries need to pay attention to the financial arrangements as sociated with capital flows and to exchange rate policy as well as macroeco nomic fundamentals to avoid financial crises in a world of increased capita l mobility. (C) 2000 Elsevier Science Ltd. All rights reserved. JEL classif ication: F31; F33.