Determinants of Bond Flows to Emerging Markets: How Do They Change Over Time?

The recent episodes of capital flows to emerging market economies in the aftermath of the global financial crisis once again highlighted the importance of appropriate policy design to cope with strong and volatile capital flows, that are effective not only during surges but also during reversals, in order to ensure financial and macroeconomic stability in recipient countries. The design of such policies necessitates a good understanding of the determinants of capital flows to EMEs, as well as an exploration of how their relative importance changes over time. In this paper we investigate the time varying nature of the determinants of bond flows with a focus on the global financial crisis period. We estimate a time varying regression model using Bayesian estimation methods, where the posterior distribution is approximated by Gibbs sampling algorithm. Our findings suggest that the interest rate differential is the most significant pull factor of portfolio bond flows during the examined period, along with the inflation rate, while the growth rate does not seem to play a significant role. Among the push factors, global liquidity is the most important driver of bond flows. We find that it mattered the most, when unconventional monetary easing policies were first announced; and that its importance as a determinant of portfolio bond flows seems to decrease over time, starting with the Eurozone crisis, and diminishing with the tapering talk. Global risk appetite and the risk perception towards the emerging countries are also found to have relatively small and stable significant effects on bond flows.