What Determines Capital Inflows?: An Empirical Analysis for Chile †

Abstract

This paper presents an empirical investigation of the determinants of short- and long-term net private capital inflows to Chile between 1985 and 1994. It is shown that the factors determining each type of flow are quite different in nature. Long-term flows tend to respond to structural (domestic) variables of the economy and are not sensitive to short-term arbitrage conditions or to policy measures aimed at affecting the interest rate gap. Short-term flows react strongly to arbitrage conditions, a combination of internal and external factors, and to policy variables, but are not sensitive to structural factors. In order to capture adequately the dynamic properties of these inflows, different regimes are taken into account. In particular, full sample stable specifications are strongly rejected in most cases, while threshold processes are preferred to Markov switching-regime models. The effects of selective capital controls on short-term inflows are derived by splitting short-term inflows into two series: one that is subject to these controls and one that is not. Significant differences are found between the two series.