Capital Flows Volatility and Subsequent Financial Crises in EMEs : New Perspectives in the Changing Landscape of Economic Globalisation

Abstract

This thesis paper examines the impact of volatility of international capital flow on emerging market economies (EMEs). The paper addresses the relationship between short-term capital flow surges, such as portfolio investment and debt inflows, their volatility and impact on economic growth. The research is based on theoretical and empirical foundations for a selected number of EMEs, which experienced great capital flow volatility and crises in the past 3 decades. The main results of the paper illustrate that liberalization of short-term capital flows to the economies with weak financial regulation and capital controls as well as low quality of institutions can lead to economic crashes, financial crises, macroeconomic imbalances and raise financial stability risks.

Thesis paper also examines the domestic debt composition of EMEs and essentially determines how debt composition impacts the dynamics of capital flows and their volatility in EMEs, thus, causing macroeconomic disturbance or even financial crises. The main results of the paper showcase that volatility of capital flows could lead to financial instability and macroeconomic imbalances, thereby contradicting the very essence of the neoliberal policy agenda.

Therefore, key results of the research demonstrate that there is a need for more robust policies and capital controls to tackle large short-term capital inflows and outflows amid the rising volatility of short-term capital flows in EMEs.