Short-Term Capital Flows and Growth in Developed and Emerging Markets Pavlos

A lot of attention has been directed towards recent financial crises around the world. It seems that financial markets are prone to herding, panics, contagion and boom-bust cycles. Empirical studies have found that short-term flows increase financial fragility and also increase the probability of financial crises. This study takes a macro-oriented approach and shows that large and volatile short-term flows may be growth inhibiting for emerging markets. This is not the case though for rich countries, where short-term capital flows have no effect on growth. The results in this study indicate that opening up emerging markets capital accounts, which imply increased short-term capital flows, is not a clear-cut way to prosperity.