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International Capital Mobility in Emerging Markets: New Evidence from Daily Data
Author(s) -
Kumhof Michael
Publication year - 2001
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00304
Subject(s) - economics , volatility (finance) , interest rate , interest rate parity , monetary economics , emerging markets , capital market , cointegration , financial economics , yield curve , econometrics , macroeconomics , finance
This paper analyzes daily covered interbank interest differentials for three emerging markets before and after the 1997/98 financial crises, and compares them with those of four developed economies. It examines descriptive statistics of covered differentials and the long‐run equilibrium (cointegrating) relationship between their interest rate and forward discount components. Mean differentials and their volatility were moderate before crises, but increased dramatically during crises. The main reasons are temporarily effective capital controls, large bank default risk premia, and capital market imperfections. The evidence for a cointegrating vector consistent with covered interest parity is strong, implying that, despite large short‐term deviations, covered interest parity does hold as an equilibrium relationship.