Political and Corporate Governance and Pro-Cyclicality in Capital Flows: Evidence from Emerging Market Countries

Authors


  • *We would like to thank Cecilia Calderon, Virgilio Galdo, Cesar Serra and Monica Yañez for their helpful research assistance, and two anonymous referees for their helpful comments. The views expressed in this document are the authors' and do not necessarily reflect those of the Inter-American Development Bank and the Central Bank of Chile. The usual caveats apply.

Ugo Panizza
B-0600, Research Department
Inter-American Development Bank
1300 New York Ave., NW
Washington
DC 20577
USA
ugop@iadb.org

Abstract

According to recent research, external factors are key determinants of capital flows to emerging market countries. They are among the causes of high capital flow volatility that, in turn, leads to high levels of macroeconomic volatility. We postulate that, along with political governance, corporate governance can play an important role in mitigating the effect of external factors and in reducing capital flow volatility. In particular, we show that by implementing better corporate governance, emerging market countries could reduce the sensitivity of capital flows to external shocks and, hence, reduce the volatility of their economies.

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