Determinants of International Capital Movements in Emerging Asian Economies

Abstract

Foreign resources are required not only to supplement the domestic savings but also provide the recipient country extra foreign exchange to buy imports essential for economic development. Thus, foreign resources are required for filling the saving-investment gap and foreign exchange gap. The present study attempts to explain the determinants of private capital inflows (CAPF) on some macro economic variables in emerging Asian economies using the time series data of CAPF, RGDP, INF, EXTDEBT, LIBOR, OPNNS, CAB for the period 1980 to 2012. The study also tries to analyse trends and composition of net capital flows in these economies for the said period besides analysing the country wise critical factors responsible for capital movements. In the present study, an attempt has been made to examine the long run relationship of CAPF with the selected independent. variables namely RGDP, INF, LIBOR, EXTDEBT, OPNNS, and CAB. The ADF unit root test has been carried out to test the stationarity of these variables as a first step. Secondly, to find out whether a long run relationship exists between the CAPF and the selected variables, co-integration test has been carried out through Johansen and Juselius method. Further, to find out ,the degree of responsiveness of the dependent variable to the selected independent variables the normalised co-integrating vector equations have also been estimated through Error Correction Mechanism (ECM). The empirical analysis shows that although interest rate seems to be the most important determinant to capital inflows but actually macro economic stability is the most important and critical factor for determining the capital inflows.