Portfolio Capital Flows: Hot or Cold?

Abstract

A distinction is often made between and capital flows: the former are deemed unstable hot money and the latter are deemed stable cold money. Using time-series analysis of balance of payments data for five industrial and five developing countries, we find that in most cases the labels short-term and long-term do not provide any information about the time-series properties of the flow. In particular, flows are often as volatile as flows, and the time it takes for an unexpected shock to a flow to die out is similar across flows. Long-term flows are also at least as unpredictable as flows, and knowledge of the type of flow does not improve the ability to forecast the aggregate capital account. Copyright 1995 by Oxford University Press.