Macroeconomics, politics, and policy: The determinants of capital flows to Latin America



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Since the “lost decade” of the 1980’s Latin America has attracted several forms of capital from abroad. Extensive studies about the effects of capital have found mixed results about their effects, but that these emerging markets are constantly seeking out foreign monies. Despite unresolved debates over these effects, policy makers desire to understand the determinants of capital inflows—specifically foreign direct investment (FDI), portfolio investment (PI), and remittances. Although determinants of FDI have been extensively studied, portfolio investment and remittances, which make up a combined three-fourths of capital inflows for many of these nations, have been mostly ignored. In this study, I investigate the different factors and dynamics that determine these three different forms of capital inflow. I argue that the factors (macroeconomic, political, and domestic) that help determine each of these types of capital inflows are different across inflow type. I find that PI remains the most unpredictable form of capital to the region, but that remittances and FDI demonstrate important similarities that policy makers should consider. My findings about remittances also have substantial implications for future research of migrants’ decision to remit as well as a states’ ability to stimulate these flows with implications for capital control policy.



Political economy, Remittances, Portfolio investment