Capital Flows to Emerging Markets: The Role of Information Transparency

Using annual capital flow data from 1990 to 2010 for 21 emerging markets, this study empirically investigates the impact of macroeconomic information transparency on capital flows, taking into account financial market uncertainty. The level of information transparency is measured using the country's compliance with the IMF's SDDS. The findings reveal that SDDS compliance mitigates the negative influence of the VIX index on both net and total gross inflows. However, the positive effect of SDDS compliance on capital inflows is observed only when the VIX index reaches a sufficiently high level. This relationship is primarily driven by other investment inflows, as it is the only type of capital flow significantly affected by the SDDS compliance in conjunction with VIX. The results suggest that although enhanced information transparency in emerging markets may not attract more foreign capital during normal periods, it provides stability by reducing the decline in other investment inflows during times of financial turmoil, ultimately contributing to the overall stability of total capital inflows.