Openness and capital flow volatility: comparisons between transition economies and Latin America

Abstract

The transition economies of Eastern Europe, much like Latin America, have attracted a great deal of capital and thus become vulnerable to external crises. As a result, assessing the volatility of capital movements, and distinguishing between stable and transitory flows, is particularly important. This study looks at nine transition and six Latin American countries individually, modelling Foreign Direct Investment (FDI), portfolio and other inflows separately as functions of macroeconomic variables that include economic openness. Cointegration analysis shows that Latin American flows seem to experience more of a reduction in volatility due to increased openness, suggesting that this region enjoys more risk-sharing as a result of financial integration than do transition economies.