Reserve Accumulation and Sudden Stops: Evidence from Foreign Direct Investment Dynamics in Selected Emerging Economies

Abstract

Capital flows exert an exogenous impact on economies, however, there exists some level of ambiguity regarding these impacts in emerging economies. On the contrary, emerging economies often provide safe havens for surges in capital inflows in different forms of investments. After decades of loose, accommodative monetary policies and unconventional monetary policies encouraged investors from developed economies quest to seek higher yields and returns on investment portfolios allocated more direct capital towards emerging economies notwithstanding the risk on return exposure in some of these volatile economies. With the slow pace of global growth and continuous increments in interest rates, the possibility of sharp capital reversals and eventual outflow of investments is eminent and can cause balance-of-payment crises in recipient countries. As most research work demonstrates, the effects of profit repatriation and foreign exchange gaps are a few drawbacks to worry about. The paper presents a comprehensive study of these investment trends and capital flows in some selected emerging economies. Emphasis on China’s foreign reserve accumulation policy as a reference benchmark is discussed. The objective of this paper is to contribute to the behavior of foreign direct investment in the presence of reservation accumulation within an economy, especially among the selected emerging economies. The article employs a panel data set for the selected countries for analysis of these emerging economies via methods of panel regression, pooled OLS, LASSO regression and Kaplan-Meier curves. Quarterly data of national accounts from 2006-2019, including gross domestic product and unemployment rate are used in the analysis.