The Heterogenous Effects of Savings and Capital Inflows on Capital Outflows: A Quantile Regression Approach

Purpose - The paper aims to investigate the main driver of gross capital outflows in emerging market economies. Accordingly, it tests the following two hypotheses: first, capital outflows are mostly fueled by capital inflows, rather than by domestic savings, and second, the causal impact of capital inflows is stronger in the upper quantiles of capital outflows. Design/Methodology/Approach - We estimate the impacts of domestic private savings and gross capital inflows on gross capital outflows in 56 emerging market economies over 1990 - 2014 using Powell’s (2015) quantile regression methodology. Findings - According to the results, the response of capital outflows to capital inflows and domestic savings is similar if capital outflows are below the median. However, if they are above the median, the impact of external loans is stronger than that of savings. Furthermore, a country tends to borrow from foreign countries to purchase debts rather than equities in the short run. This is consistent with several stylized facts, such as pro-cyclical capital inflows and outflows, the high leverage ratio, and high probability of serial default and sudden stops during short-term booms. Research Implications - The results suggest capital flight is not a market-exiting behavior by domestic agents because they use borrowings rather than savings to increase foreign asset holdings. Therefore, it is unlikely that capital flight significantly decreases domestic agents’ domestic asset holdings.