DETERMINANTS OF

INTERNATIONAL CAPITAL
FLOWS
 International capital
flows
• International capital flows are recorded in
the non reserve capital account of the
balance of payments.
• The International Monetary Fund (1992)
defines capital flows as consisting of:
• (a) direct investment;
• (b) portfolio investment;
• (c) other long-term and short-term capital
flows; and
• (d) reserves and liabilities constituting
foreign authorities’ reserves.
•
• Capital flows are generally welcomed
in most countries as they assist in
the proper allocation of global
resources
• Massive capital in-flows may also
lead to excessive money supply
changes and consequent pressures
on prices
 Determinants
• GDP
• FX
• OPN
• DEF
• EXDT
• INF
 Gross Domestic Product
• The gross domestic product is the
amount of goods and services
produced in a year, in a country.
• important for most of the countries
i.e Australia, Indonesia India
Colombia and Chile
• Positive correlation with capital-
inflows
•
•
 Relationship of GDP with
international capital flow

Foreign
investmen
t
 Total external debt
• External debt is that part of the
total debt in a country that is owed
to creditors outside the country.
• Negative relationship with capital
flows
• Increase in indebtedness to outside
world leads to slowdown in capital
flows
Relationship of Exdt with capital flows
 Gross Fiscal Deficit
• The difference between total revenue
and total expenditure of the
government is termed as fiscal
deficit
• It is significant for only Australia and
Indonesia
• Positive and negative relationship
with net capital flows respectively
•
•
 Relationship of Def with capital
flows
• Positive relationship in Australia
• Increase in fiscal deficit cause
increase in net capital inflows
• Negative relationship in Indonesia
• Increase in fiscal deficit causes
deceleration in capital flows
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