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Macroeconomic Shocks and Latin American Capital In?ows: Evidence From a Structural VAR Model

Scott W. Hegerty

The BRC Academy Journal of Business

Volume 2

Number 1

Print ISSN: 2152-8721 Online ISSN: 2152-873X

Date: March 15, 2012

First Page 27

Last Page 50

Abstract

The “intertemporal approach” to the current account stresses the importance of separate savings and investment decisions that depend on whether the macroeconomic shocks facing a country are permanent or transitory. As a result, domestic and foreign monetary and income shocks can have drastically different effects on international capital flows. This study uses the structural Vector Autoregressive model of Ying and Kim (2001) to look at the effects of these shocks on flows to six Latin American countries over the past decade. It finds volatile non-FDI inflows to be considerably more sensitive to these determinants than is foreign direct investment. In addition, the relative strength of income shocks suggests that growth is instrumental in fomenting investor confidence.

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