Autor: Vicondoa Alejandro(*), Fernández Andrés(**)


Institución: (*)Pontificia Universidad Catolica de Chile, (**)International Monetary Fund


Año: 2022


JEL: E31, E32, E43, E52, E58


Resumen:

This paper analyzes the joint dynamics of net capital flows and sovereign spreads in Emerging Economies. We document and deconstruct three empirical facts. First, the correlation between net capital flows and sovereign spreads in EMEs is -0.14. Second, the correlation of sovereign spreads across EMEs is 0.6. Third, the correlation of net capital flows across EMEs is 0.2. We quantify the role of credit supply/demand global/idiosyncratic shocks in explaining these facts by combining dynamic factors and a two-country small open economy model with correlated productivity and interest rate shocks. While common credit supply shocks explain 39% of sovereign spread fluctuations, they account for only 9% of changes in capital flows. Correlated TFP (common credit demand) shocks account for around half of the observed comovement in capital flows but they are not a significant driver of sovereign spread comovement.