ABSTRACT
Openness to cross-border capital flows is a double-edged sword. On the one hand, greater capital inflows facilitate growth by supplementing domestic resources and bringing in new technological knowhow. On the other hand, capital inflow surges and sudden stops and reversals are the proximate causes of many financial crises that have plagued many emerging economies since the 1990s. Given its importance, there has understandably been a burgeoning literature dealing with the determinants of cross-border capital flows. While the early literature (which was limited to using aggregate country data) focused on ‘push’ and ‘pull’ factors (for instance, see Calvo et al. 1996 and Dasgupta and Ratha 2000), the availability of bilateral capital flows data between countries has motivated a voluminous literature attempting to understand trends and determinants of capital flows between country pairs. Drawing on the more established trade literature (see Coe et al. 2007; Deardorff 1998; Evenett and Keller 2002; Feenstra et al. 2001; Helpman et al. 2008), most of the articles apply some version of the gravity model to various types of international capital flows.
